More than El Nino, Govt policies could hit farm sector hard

The Indian agriculture sector has been growing at around three per cent of GDP over the last three decades indicating an averaging phenomenon to various factors that impact it on an annual basis.

The correlation to rainfall shortage and foodgrain output growth year-or-year shows a fall within 3 per cent except when there has been a back-to-back deficit in rainfall over consecutive years. This is partially due to an improving irrigated land acreage and increase in cropped area.

The gross-level data, however, does not provide the underlying pain faced by farmers. While the rainfall data only provide the average across regions, the spread of rainfall across the country has rarely been consistent, with some areas being flooded and others facing a dry spell. The spread of rains across months during the season has also been erratic with the advent of freak weather conditions of flash floods, cyclonic storms and hailstorms becoming frequent.

India is among the fortunate countries with large land acreage and a favourable year-round climate for cultivation. While this has enabled the country to be among the top four producers of most agricultural products, its performance on output productivity has always been poor comparison with its peers. In this aspect, the country faces the typical Indian curse of conflicting interest groups, sub-optimal policies, government focus on subsistence agriculture and poor infrastructure development, among other factors.

Among the weaknesses ailing the sector are our mediocre weather/monsoon prediction capabilities based on the last 10-year track record. In this background, this year’s prediction of El Nino setting in and the monsoon being below normal, the extent of impact, areas that will be affected and timeframe of delay is still under watch.

Some agencies have predicted that the El Nino will come into play later in the season and affect next year’s monsoon.

The only silver lining is that the impact, if accurate, comes after last year’s excellent late monsoon burst and an extended winter cover that ensured higher water levels in reservoirs and more water in the Ganges and Indus tributaries due to the melting Himalayan snow.

The Indian banking system is amongst the few to have a statutory requirement to allocate a portion of its advances for the agriculture sector. This decision has been visionary. However, the continued focus towards lending to the small and marginal farmers and the predominance of crop loans in banks’ portfolios has only resulted in money perpetually being lent to farmers.

The increasing annual agricultural targets only create an increasing debt situation for farmers from which they will not be able to and/or do not intend to come out.

Coupled with this, the soft approach on loan defaults, the promises of farm loan waivers during elections and changes to lending policies, aimed only at subsistence farmers, have resulted in bankers taking a negative view of the agriculture sector..

However, while assessing opportunities to lend to this sector, banks have had the choice to look at it either for purely meeting priority sector targets or to identify opportunities for creating infrastructure by way of large warehouses and cold storages, intensive farming activities or for developing cattle rearing units.

Funding such ventures has insulated loans to climatic conditions such as monsoon failure, El Nino or seasonal price fluctuations of regular agricultural commodities.

However, funding these sectors progressively has been discouraged/disqualified as lending to large farmers does not need priority sector support. While there is euphoria in the rural sector and its demand for consumer goods, farm lending is a patient on the ventilator to who many banks would stop lending the moment the priority sector targets are withdrawn.

Policies have never tried to identify critical areas such as warehousing and cold storage infrastructure for funding. There is also a need to monitor import-export mix of our agricultural commodities to ensure that global commodity prices are not impacted due to erratic shifts in demand from India for agri commodities and ensure control on prices. This would also mean that the sector’s contribution to the GDP grows above the traditional two-three per cent.

As the country is in the phase of great expectations with the change in power, the agri and agri lending sectors also look to government policies more than the El Nino for their long term sustenance.

(The writer is Executive Vice-President, Kotak Mahindra Bank. View are personal.)