Financial Inclusion and Acceleration of Agricultural Development

7/25/2019 Financial Inclusion and Acceleration of Agricultural Development

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FINANCIAL INCLUSION AND ACCELERATION OF AGRICULTURALDEVELOPMENT AN EMPIRICAL ANALYSIS

B.B. Barik1

IINTRODUCTION

Around 62% of Indias population depends on agriculture for a living. Agriculture

sector also provides employment to nearly 52 per cent of the work force. In contrast

to this the contribution of agriculture to the national GDP is 14.6% in 2011 against

15.7 % in 2008-09. The average productivity of major crops i.e., cereals has

remained 1600-1800 kgs/ha since 1995. The stagnation in agricultural productivity,

increase in cost of production, distortion in the market and poor infrastructure have

made the livelihood of farming population more difficult. A large number of poverty-

ridden farming households especially marginal and small farmers, tenant farmers,

oral lessees, share croppers and agricultural labourers etc. eke out living from a mix

of subsistence activities like animal husbandry especially of small ruminants, wage

labour, horticulture, foresting, plantation, logging etc.. The reasons of pervasive rural

poverty are low growth rate in agriculture, low productivity, failed crops,

unemployment and inadequate command over resources due to low income level,

low adoption of agricultural technology, inaccess to credit and even inequitable

access to credit. Agricultural growth is the panacea for rural poverty alleviation and

social transformation. In the advanced estimates of 2010-11 it was expected that the

agricultural sector is likely to grow at 5.4%. In order to achieve the five year plan

(2007-2012) target of average of 4% per annum the agriculture sector requires to

grow at 8.5% during the year 2011-12. Enhanced growth rate in agriculture will not

only improve the income and employment levels of farm households but also reduce

the level of poverty, address the hunger, malnutrition, promote rural prosperity and

mitigate rural distress.

In order to accelerate the higher growth rate in agriculture it is imperative to generate

and infuse new technologies and work for overcoming the technology fatigue. The

1Principal, B V Rural Institute, Agra


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committed public and private initiative requires for the generation and adoption of

new agricultural technology. As the agriculture is the biggest private enterprise in our

country the farmers have to invest their own resources for the intensive use of inputs

and package of practices. Due to resource constraints the farmers are compelled to

depend upon the institutional / non-institutional sources of credit for the use of critical

inputs and package of practices. But 45.9 million farm households in the country

which constitute 51.4 per cent of total households are deprived of access to credit

either from institutional or non-institutional sources. Only 27 per cent of farm

household have availed credit from formal financial institutions and out of these

around 9 per cent also have availed credit from formal institutions. These financially

excluded farm households should be covered under financial inclusion drive so that

they have unrestricted access to credit in addition to saving/deposit, payment

/settlement, insurance and remittance facilities. These financially included

households will not only be able to improve their agricultural productivity through

easy access to credit but also their dependence on non-institutional sources of credit

will be arrested. As a result they will be the effective partner of inclusive agricultural

development of the country.

It is also important to know how the financially included farmers have benefited

presently through improvement of their agricultural activities due to financial

inclusion. At the same time it is imperative to know in what way the financially

excluded farmers have been deprived of these benefits. In order to examine the

empirical reality of financial inclusion for agricultural development at the ground level

the farm households of Western U.P. are taken up for the study. With this backdrop

a comparative study between financially included and excluded farm households

was undertaken with the objectives to (i) analyse the socio-economic characteristics

of selected financially included and excluded farming households in the area of study

(ii) examine the credit availed from different formal and informal sources by the

financially included and excluded farm households, (iii) analyse the impact of

financial inclusion on agricultural productivity of selected financially included farm

families in comparison to financially excluded families and (iv) compare the


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agricultural income and employment of selected financially included farm families

with financially excluded families.

II

METHODOLOGY

Selection of Sample Units and Collection of Data

Out of 26 districts of Western Uttar Pradesh two developed districts, Meerut and

Ghaziabad and two undeveloped district Agra and Firozabad were selected

randomly. Multistage stratified random sampling procedure were followed for the

selection of sample units. From the four selected districts two Blocks from each

district and four villages from each selected Block were selected randomly. From

these thirtytwo selected villages 223 financially included farming households

comprising marginal (less than 1 ha.), small (more than 1 and upto 2 ha.), medium

(more than 2 ha. and upto 4 ha.) and large (above 4 ha.) farmers having deposit

accounts in different financial institutions were selected randomly. In the same 32

villages 75 financially excluded farming households comprising marginal, small and

medium farmers who do not have deposit accounts in any of the formal financial

institutions were also selected randomly. In the selected thirtytwo villages most of the

landless households are financially excluded and all the large farmers are financially

included. In addition to secondary data the primary data pertaining to agricultural

year 2009-10 were collected with the help of pre-tested questionnaire-cum-schedule

by following the interview method through personal contact (Table No. 1).

III

RESULTS AND DISCUSSION

Socio-economic Profile :

Before the analysis of the impact of financial inclusion on agricultural development it

is necessary to have a picture of socio-economic characteristics of financially

included and excluded sample households. The size of the family of financially

included and excluded households varies from 6 to 7, 5 to 8 respectively. The overall

size of the family is around 6 in case of financially included and excluded households

(Table No. 2). Average size of operational land holding of financially included


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marginal (0.73 ha.), small (1.58 ha.), medium (2.76 ha.), large (6.22 ha.) farmers are

higher than respective categories of financially excluded farmers (0.34 ha., 1.26 ha.,

2.40 ha.). The overall operational holding (1.53 ha.) of financially included farmers is

higher than the financially excluded farmers (0.45 ha.). It shows that there is positive

relationship between size of operational holding and level of financial inclusion

(Table No. 3 and 4). Most of the four categories of farmers (89.7 per cent) have

deposit accounts in Commercial Banks and next comes the District Cooperative

Bank i.e. around 9.7 per cent. Only small farmers have their deposit accounts in

Regional Rural Banks and even their number is very negligible. It may be due to less

number of branches of RRBs in rural areas (Table No. 5).

Cropping Pattern

The table no. 6 shows that the financially included farmers have devoted their land to

high value crops like sugar cane, paddy and potato where as the financially excluded

farmers have devoted to their land to traditional/ subsistence crops. This can be

inferred that due to inaccess to credit from formal financial institutions or financial

exclusion they are unable to grow high value crops as these crops are input-

intensive crops and requires higher monetary resources. The cropping intensity of

financially excluded farmers (187.8 per cent) is higher than the financially included

farmers (158.7 per cent). Due to lower average size of operational holdings of the

financially excluded farmers they have utilized their land optimally more than the

financially included farmers in order to maximise their income through subsistence

crops.

Borrowings

The main agents of financial inclusion are Commercial Banks, RRBs and

Cooperative Banks. State Cooperative Agriculture and Rural Development Banks

(SCARDB) are also covered under financial inclusion. Commercial Banks and RRBs

provide only short-term loan or crop loan directly to farmers. District Cooperative

Banks do not provide short-term or crop loan directly to farmers. The Primary

Agricultural Cooperative Credit Society (PACS) directly provides crop loan (S.T.) to

farmers. These four financial institution provides term loans to farmers directly. The

District Cooperative Banks provide credit to farmers for agricultural development


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purposes like installation of tube-well, Engines operated by diesel, vehicles for

transportation, storage structure etc.. Framers of all categories have mainly

borrowed short-term loan from Commercial Banks and PACS. It is due to wider net

work of branches of Commercial Banks and PACS in rural areas. The four

categories of financially included farmers have borrowed S.T. and Term Loan from

the Commercial Banks. Both the S.T. and Term Loan disbursed by Commercial

Banks and RRBs are treated as production credit. The Non-KCC farmers borrowed

under crop loan is considered as S.T. loan and the KCC farmer availed production

credit under KCC scheme is considered as Term loan. The same way the farmers

have availed production credit from RRBs under KCC scheme is also considered as

term loan.

There is positive relationship between size of land holding and quantum of

production credit i.e. total of S.T. and Term loan. The purposes of borrowing of

production credit from Commercial Banks and PACS mainly confined to fertilizer,

seed and working capital. The purpose of term loan is confined to purchase of

livestock, installation of tubewell, other agricultural development and petty business

in case of District Cooperative Bank (Table No. 7, 8, 9, 10, 11). Financially included

marginal and small farmers have borrowed funds from non-institutional sources in

order to fulfill their requirement. Mostly they have borrowed for the purposes of other

agricultural requirement and repair of residential houses. It shows that there is

mismatch between supply and demand of agricultural credit. All categories of

financially excluded farmers have not borrowed from any of the non-institutional

sources. Growing subsistence crops by the financially excluded farmers and high

rate of interest charged by non-formal agencies might be the reason not to borrow

from the non-institutional sources (Table No. 12, 13).

Agricultural Productivity

An attempt is made to compare the productivity of major crops like Bajra, Sugarcane,

Paddy, Wheat, Mustard and Potato between financially included farms and excluded

farms. The overall per hectare productivity of Bajra, Sugarcane, Wheat and Potato of

financially included farms are higher than the financially excluded farms. The only


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exception is that the per hectare productivity of Paddy and Mustard of financially

excluded farms are higher than the included farms. Sugarcane, Wheat and Potato

are the input-intensive crops. The financially included farms were able to achieve the

higher yield in comparison to financially excluded farms due to adoption of better

package of practices including inputs. This is also verified from the comparison of

paid-out costs (Table No. 14). The achieving of higher yield by the financially

included farm households was possible due to unrestricted access to credit from the

formal financial institutions.

Income

All categories of farmers in the study area are mainly involved in crop and dairy

activities. Per household financially included household gross crop income, paid out

cost and farm business income increases with the increase in farm sizes. Per

household gross crop income, paid-out cost and farm business income varies from

81011 to 783433, 41498 to 428583, 39513 to 354851 respectively. The

same way there is positive relationship between per household gross dairy income ,

paid-out cost and farm business income and farm sizes. The per household gross

dairy income, paid-out cost and farm business income varies from 8710 to

30,000, 2632 to 9067, 6077 to 20933 respectively across the farm

categories. The per households total farm business income from agricultural

activities (crops, dairy and others) varies from 45731 to 375784 across the farm

categories (Table No. 15 ). Per capita farm business income of financially included

household from crops, dairy and total (income) varies from 6257 to 48389,

962 to 2855, 7242 to 51243 respectively across farm categories (Table

No.16).

Large farmers are absent in the study area in financial excluded category. Farm

business income from crop, dairy and total income of financially excluded

households varies from 11487 to 26631, 5638 to 11914, 17125 to

38545 respectively across the categories (Table No. 17). The per capita farm

business income of household from crop, dairy and total income varies from 1968

to 5001, 966 to 1489, 2935 to 5001 respectively across the farm

categories (Table No.18). Per financially included household and per capita gross


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income, paid-out cost and farm business income from crops, diary and total are

substantially more, even more than two times, than the financially excluded

households. Due to easy access to credit the financially included households were

able to use more desired yield-raising inputs than the financially excluded

households. This is the main reason of incurring more expenditure on paid-out costs

by the financially included farmers than the financially excluded farmers. As a result

the financially included households are able to earn higher agricultural income than

the financially excluded households.

Per hectare gross crop income, paid-out cost and farm business income of

financially included households varies from 110247 to 133315, 56474 to

72948, 53773 to 60367 respectively across the farm categories. There is

inverse relationship between per hectare gross crop income, paid-out cost and farm

business income and farm sizes in case of financially excluded households. Per

hectare gross crop income, paid-out cost and farm business income of financially

included of all categories of farmers are more than the financially excluded farmers.

From the paid-out cost of all categories of financially included farmers it proves that

they are technologically savvy due to access to credit from financial institution (Table

No. 19).

In addition to agricultural income the non-agricultural income is an important source

for marginal and small farmers as they want to supplement their low income from

agriculture. The main source of income from non-agricultural activities are hire

services, off farm activities, small business/trades, employment in secondary and

tertiary sector, allied sectors etc. The non- agricultural income of per financially

included households of each farm category is more than the financially excluded

households. The total disposable income from agriculture and non-agriculture of per

financially included household across the farm categories varies from 119629 to

378284 where as it varies from 25006 to 120688 without the large farmers in

case of financially excluded households. It shows that the level of per household

income of financially included is more than the financially excluded. This also

substantiates the outcome of financial inclusion (Table No.20, 22). Per capita


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disposable income of financially included marginal and small farmers from non-

agricultural activities are more than the counter part of financially excluded

household. The same way per capita disposable income from all sources of

financially included marginal, small and medium farmers are exceptionally more than

the each of the same categories of farmers in case of financially excluded

households (Table No.21, 23). Hence financial inclusion not only accelerates the

agricultural development but also enhances the income of the family.

Employment

Financial inclusion of farm households also accelerate the self and wage

employment opportunities in the agricultural sector. Financial inclusion also stimulate

the employment opportunities in agricultural wages and hire services activities. Farm

families are involved in agriculture, crop, dairy and others, agricultural wages, hire

services, off-farm and non-agricultural (Service and business/trade) activities. Self

employment of per person of the financially included families of all the four

categories of farmers varies from 140.67 to 166.44 person days where as it varies

from 132.49 to 167.50 person days except large farms in case of financially excluded

households. Per person self employment of financially included marginal and small

holders in agriculture are more than the respective categories in case of financially

excluded households. The per person self employment of financially included

marginal and small holders in agriculture are more than the respective categories in

case of financially excluded households. The per person self employment of

financially excluded medium household is higher than the financially included

household. The reason may be the selection of only one financially excluded

medium household in comparison to 45 selected financially included medium

households. Per person wage employment of financially excluded marginal and

small farms in agriculture are more than the respective categories of financially

included farms. The opportunity of wage employment arise due to agricultural

development (Table No!24, 25). All categories of farmers of financially included

households are engaged in hire-service activities where as only financially excluded

marginal households are engaged in hire services activities insignificantly. Financial


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inclusion of farming households not only promotes agricultural development but also

stimulates the activities of business/trade due to higher generation of agricultural

income. Financially included farmers of marginal, small and medium categories are

engaged in the activities of business and trade where as only the financially

excluded farmers of marginal household are engaged in these activities. Person

days of self-employment of financially included marginal farmers are more than the

financially excluded marginal farmers. (Table No. 26, 27, 28, 29).

IV

CONCLUSION AND SUGGESTIONS

The financially included farmers are in a advantageous position due to higher

agricultural productivity and use of yield-raising inputs like chemical fertilizers,

adequate and timely application of irrigation water etc. due to easy access to

institutional credit at a cheaper rate of interest. Despite the higher cropping intensity

of financially excluded farmers their per hectare agricultural income is lower than the

financially included farmers. The financially included farming households are in

favourable position as they have grown yield-raising, input-intensive high value

crops. Due to in-access to institutional sources of credit the financially excluded

farmers were unable to use the adequate quantity of yield-raising inputs and failed to

achieve the desired agricultural productivity. The most sufferers of financial exclusion

are marginal farmers. In order to achieve the inclusive and equitable growth in the

agricultural sector the strategic efforts are required urgently to bring all the

categories of financially excluded farmers especially marginal farmers under financial

inclusion net. It is no doubt that financial inclusion of farm households will accelerate

the agricultural productivity and development.

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Financial Inclusion and Acceleration of Agricultural Development