Report on Role of RBI in agriculture development in India


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Report on Role of RBI in agriculture development in India

  1. 1. Role of RBI inagriculturedevelopment inIndia VIJAY BALU RASKAR VIJAY BALU RASKAR NAVI MUMBAI Report 9833066325[Type the fax number] Role of RBI in Agriculture Development in 16-Jan-12 India. Brief descriptionin India
  3. 3. CONTENTSS NO PARTICULARS PAGE NO 1 Report Details- Name, Batch etc 1 2 Contents – Report 2 3 Introduction- Aim, Objectives & 3 Reasons of establishments 4 Functions of RBI & Activities 4 5 The role of RBI in Agriculture 5-7 6 Need for Integrated development 8 7 Credit for agriculture & rural 9 Development 8 Agricultural Marketing Scenario 10-11 9 Statutory requirements 12-14 10 Marketing Committees Acts 15-16 11 Economic Review 17-21 12 Indian Agriculture & Reform 22-29 13 Conclusion, Result & Reference 30 3
  4. 4. INTRODUCTIONAIM of RBI:- To regulate the issue of bank notes and keeping of reserve with a view to secure system of the country to its advantage.OBJECTIVE AND REASONS FOR THE ESTABLISHMENT OF RBI:-  To manage the monetary and credit system of the country.  To stabilizes internal and external value of rupees.  For balanced and systematic development of banking in the country.  For the development of organized money market in the country.  For proper arrangement of agricultural finance.  For proper arrangement of industrial finance.  For proper management of public debts.  To establish monetary relations with other countries of the world and international financial institutions.  For centralization of cash reserves of commercial banks.  To maintain balance between the demand and supply of currency. The central bank of the country is the Reserve Bank of India (RBI). It wasestablished in April 1935 with a share capital of Rs. 5 crores on the basis of therecommendations of the Hilton Young Commission. The share capital was divided intoshares of Rs. 100 each fully paid which was entirely owned by private shareholders inthe beginning. The Government held shares of nominal value of Rs. 2,20,000.Reserve Bank of India was nationalized in the year 1949. The general superintendenceand direction of the Bank is entrusted to Central Board of Directors of 20 members, theGovernor and four Deputy Governors, one Government official from the Ministry ofFinance, ten nominated Directors by the Government to give representation to importantelements in the economic life of the country, and four nominated Directors by theCentral Government to represent the four local Boards with the headquarters atMumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members eachCentral Government appointed for a term of four years to represent territorial andeconomic interests and the interests of co-operative and indigenous banks.The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934(II of 1934) provides the statutory basis of the functioning of the Bank.The Bank was constituted for the need of following:  To regulate the issue of banknotes  To maintain reserves with a view to securing monetary stability and  To operate the credit and currency system of the country to its advantage. 4
  5. 5. FUNCTIONS OF RESERVE BANK OF INDIA:There are many functions of RBI bank. The Reserve Bank of India Act of 1934entrust all the important functions of a central bank the Reserve Bank of India.  Bank of Issue  Banker to Government  Bankers Bank and Lender of the Last Resort  Controller of Credit  Custodian of Foreign Reserves  Supervisory functions & Promotional functions  Classification of RBIs functions etc ACTIVITIESBroadly, the activities/ purposes financed by banks included in priority sector are:a. Agriculture and Small scale industryb. Small road and water transport operatorsc. Retail traders and small business operatorsd. Professional and self-employed personse. State-sponsored organizations for Scheduled Caste/Scheduled Tribe,f. Educational loans,g. Housing (up to Rs 0.5 million in rural/ semi urban areas and Rs 1 million in urban/ metropolitan areas)h. Consumption loans for weaker sections,i. Self Help Groups/ Non Governmental Organizations,j. Software industry (having credit limits up to Rs 10 million from the banking System)k. Food and agro based processing sectorl. Investment in venture capital Weaker SectionsThe categories of borrowers included under weaker sections are:i. Small and marginal farmers with land holdings of five acres and less, landless labourers, tenant farmers and sharecroppers;ii. Artisans, village and cottage industries where individual credit requirements do not exceed Rs. 25,000 ;iii. Beneficiaries of Integrated Rural Development Programme (IRDP), Scheme for Urban Micro Enterprises (SUME) and Scheme for Liberation and Rehabilitation of Scavangers (SLRS);iv. Scheduled castes and scheduled tribes;v. Beneficiaries under the Differential Rate of Interest (DRI) scheme;vi. Self Help Groups. 5
  6. 6. THE ROLE OF RBI IN AGRICULTURAL DEVELOPMENT IN INDIAAgriculture is integral to economic development in India. For a long time, IndianAgriculture has remained isolated from the mainstream development. Sinceindependence, India has come a long way in removing technological isolation ofagriculture. Efforts were made in introducing scientific methods in agriculture, includinghigh yielding hybrid varieties. The resulting Green Revolution has solved the problem offood security for the country. There is a growing feeling that time has come to removeeconomic and financial isolation in which agricultural economy has been functioning sofar. Of the efforts being made in several directions, managing of risks throughcommodity derivatives and facilitating financing of agriculture by using WarehouseReceipts has received particular attention in the recent years. In the Mid-term Review of the Annual Policy Statement for the year 2004-05,Governor, Reserve Bank of India announced constitution of a Working Group onWarehouse Receipts & Commodity Futures with a view to examining the role of banksin providing loans against Warehouse Receipts and evolving a framework forparticipation of banks in the commodity futures market. The Group had members fromthe Reserve Bank of India, Indian Banks Association (IBA), Forward MarketsCommission (FMC), NABARD and select banks active in agricultural lending such asState Bank of India, Punjab National Bank, Bank of Baroda and ICICI Bank Ltd. TheWorking Group was entrusted with the task of evolving broad guidelines, criteria, limits,risk management system as also a legal framework for facilitating participation of banksin commodity (derivative) market and use of Warehouse Receipts in financing ofagriculture. With economic growth assuming a new urgency since Independence, therange of the Reserve Banks functions has steadily widened. The Bank now performs avariety of developmental and promotional functions, which, at one time, were regardedas outside the normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend bankingfacilities to rural and semi-urban areas, and establish and promote new specializedfinancing agencies. Accordingly, the Reserve Bank has helped in the setting up of theIFCI and the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust ofIndia in 1964, the Industrial Development Bank of India also in 1964, the AgriculturalRefinance Corporation of India in 1963 and the Industrial Reconstruction Corporation ofIndia in 1972. These institutions were set up directly or indirectly by the Reserve Bankto promote saving habit and to mobilize savings, and to provide industrial finance aswell as agricultural finance. As far back as 1935, the Reserve Bank of India set up theAgricultural Credit Department to provide agricultural credit. But only since 1951 theBanks role in this field has become extremely important. The Bank has developed the 6
  7. 7. co-operative credit movement to encourage saving, to eliminate moneylenders from thevillages and to route its short term credit to agriculture. The RBI has set up theAgricultural Refinance and Development Corporation to provide long-term finance tofarmers.The monetary functions also known as the central banking functions of the RBI arerelated to control and regulation of money and credit, i.e., issue of currency, control ofbank credit, control of foreign exchange operations, banker to the Government and tothe money market. Monetary functions of the RBI are significant as they control andregulate the volume of money and credit in the country.Equally important, however, are the non-monetary functions of the RBI in the context ofIndias economic backwardness. The supervisory function of the RBI may be regardedas a non-monetary function (though many consider this a monetary function). Thepromotion of sound banking in India is an important goal of the RBI, the RBI has beengiven wide and drastic powers, under the Banking Regulation Act of 1949 - thesepowers relate to licensing of banks, branch expansion, liquidity of their assets,management and methods of working, inspection, amalgamation, reconstruction andliquidation. Under the RBIs supervision and inspection, the working of banks hasgreatly improved. Commercial banks have developed into financially and operationallysound and viable units. The RBIs powers of supervision have now been extended tonon-banking financial intermediaries. Since independence, particularly after itsnationalization 1949, the RBI has followed the promotional functions vigorously and hasbeen responsible for strong financial support to industrial and agricultural developmentin the country.The RBI has gradually withdrawn from the practice of providing concessional finance orrefinance for specified sectors such as agriculture, industry and export, though the legalprovisions continue to enable it. In the same view, as part of strengthening monetarymanagement, only notional provisions are made out of RBI profits for Agriculture,Industrial and Housing Credit Funds. No doubt, there are persistent demands on RBI toreverse the process, but the RBI advocates direct fiscal support to developmentactivities so as to be transparent, accountable and quantifiable rather than throughmonetary operations of RBI, which would tantamount to quasi-fiscal operations. InIndia, there are two sets of indices, viz., wholesale price index (WPI) and consumerprice indices (CPIs). The latter is based on occupational classification and category ofresidence (rural or urban). Four broad measures of CPIs are available at the nationallevel to capture prices of a defined basket of goods and services consumed by aparticular segment of the population: (i) CPI for Agricultural Laborers (CPI-AL); (ii) CPIfor Rural Laborers (CPI-RL); (iii) CPI for Industrial Workers (CPI-IW); and (iv) CPI for 7
  8. 8. Urban Non-Manual Employees (CPI-UNME). While these various measures of CPI domove together in the long run, significant variations are observed in the 9 short-run.Currently, several of administered interest rates are prescribed over a range of depositand lending activity, roughly accounting for a third of overall banking business in India.While bank term deposit rates stand deregulated, small savings and provident fundscontinue to be administered, thereby imparting a degree of rigidity to the interest ratestructure. In recent times, there has been some tendency to widen the net ofadministered interest rates to cover bank loans for agriculture. While such a tendencymay not be an unlikely outcome, given the predominance of publicly-owned financialintermediaries, it needs to be recognized that the current system of pricing of bankloans appears less than satisfactory. There is a public perception that banks’ riskassessment and risk management processes are less than appropriate and sub-optimaland that there is under pricing of credit for corporate, while there could be overpricing oflending to agriculture and the small scale industries. In addition to formal prescription ofinterest rates, public sector banks which account for over seventy per cent of bankingassets in a bank-dominated economy are called upon by the majority shareholder todischarge social obligations to reflect public policy priorities, through continuousinteraction and periodical reviews with chief Executives. 8
  9. 9. NEED FOR INTEGRATED DEVELOPMENT IN AGRICULTURE:-(1) Need to develop Agriculture on commercially competitive terms.(2) Agriculture is the main occupation in the country, engaging about 72% of thepopulation. There is a strong correlation between the performance of this sector andthat of the overall economy. In achieving 7 to 8% GDP growth, agriculture sector willbe a decisive driver, despite its reduced share in GDP from 58.9% (1950-51) to about22.2% (2003-04).(3) Our agriculture sector offers promising prospects on both the demand and supplysides.On the demand side, there is a big domestic market for food and other agriculturalproduces.Further, the country is strategically located, being close to the middle-Eastand South East Asian economies as important export destinations. Under the WTOregime, the external markets are expected to offer unprecedented opportunities.Globalization has brought a new perspective, fresh challenges and vast opportunities toour agripreneurs. On the supply Side, we have fertile soils, the largest irrigated area inthe world and varied agro-climatic zones having potential to grow a wide variety of cropsto trade in the domestic and global markets.(4) Among the critical issues faced by Indian agriculture, the Price distortions due tolong supply chain in farm produce marketing and Resultant low share of farmers in thefinal price is an important matter. Integrated systems for value addition, processing,cold- 11 - chain, storage and product handling are yet to materialize. Enablingenvironment for agricultural marketing and contract farming, in spite of the initiatives bythe Government of India, is yet to be in position in many states.(5) Notwithstanding the problems, our agriculture sector can benefit greatly fromintegration with the commercial and industrial sector on sound business principlesincluding sound risk management practices and availability of credit on commerciallycompetitive terms.. The first Green Revolution was necessitated to ward off the threat ofnational food insecurity on account of deficit production. On this count, it has achievedits objectives. The next step, popularly christened as the Second Green Revolution isthe need of the hour, so as to achieve the commercialization of our agriculture andinfuse global competitiveness into Indian agribusiness. 9
  10. 10. Credit for agriculture and rural development(1)Institutional credit has enabled Indian farming community to access capital andtechnology and thereby increases agricultural production. Short-term credit for purchaseof inputs and other services and the long-term credit for investment purposes are themajor facets of Agri-finance initiatives. The success of Green Revolution and the recentshift from the subsistence level of production to market oriented approach can bebroadly attributed to institutional credit support.(2) The Rural Financial Access Survey (2003) conducted by World Bank and NCAER inAndhra Pradesh and Uttar Pradesh revealed that 44% rural households had informalborrowings in the preceding 12 months on interest rates of up to 48% per annum. Only21%- 12 - rural households had access to formal credit and majority of bank loans werecollateralized.(3)The credit strategy for agricultural development in the country has been founded onthe philosophy of “growth with equity” and includes measures like directed targets oflending to the agriculture sector, coupled with availability of refinance to the banks atsofter terms e.g., lower down-payment, longer maturity period and lower rates ofinterest have helped in facilitating easier access and affordable credit to marginal andsmall farmers. Furth expansion of credit to agriculture has to be on strictly commerciallyviable terms, which in turn would enable the farmers to adopt new technologies ofproduction and supply chain management. In this context, credit support to marketingand post harvest storage are to be strengthened further. Futures market and warehousereceipt financing could play a key role in this respect. 10
  11. 11. AGRICULTURAL MARKETING SCENARIO(1) Global trends show that agriculture is becoming increasingly commercialized and isgearing to produce for specific markets. Agricultural marketing is witnessing majorchanges world over, owing to liberalization of trade in agricultural commodities. Tobenefit farming community for the new global market access opportunities, the internalagricultural marketing system in the country needs to be integrated and strengthened. Itrequires a healthy environment, smooth channels for the transfer of produce, physicalinfrastructure to support marketing activities; easy cash support to the widely scatteredcommunity of producers a sense of market orientation among the farmers. However,currently, there is a multiplicity of market functionaries intermediaries with conflicting- 13-interests. At present, most of the agricultural produce in the country is marketedthrough private trade operating in organized markets / mandies. However, restriction onmovement of agriculture goods and marketing of produce outside the regulated marketshinders free movement of agro-goods under normal forces of demand and supply.(2 )The Indian farming community consists mostly of small and marginal farmers. Microlevel studies indicate that small farm holdings contribute about 54% of marketablesurplus and distress sale by these small farmers account for about 50% of themarketable surplus. The farmers often sell their produce to square off their debts soonafter harvesting. Large price spreads and low price realization due to imperfections andweak linkages in commodity markets have dominantly characterized Indian agriculture.(3) Expert Committee on Strengthening and Developing Agricultural Marketing andMarketing Reforms (Shankar Lal Guru Committee: 2001) and the Inter-ministerial TaskForce on agricultural Marketing Reforms (2002) have identified areas such as contractfarming, private market yards, public-private partnership etc, for integration of farmersproduction with domestic and global markets.(4) ECRC (2001) has pointed out the imbalance between financing production and post-harvest operations, as also poor linkages between credit and marketing. A morebalanced approach to crop production and post-harvest operations will open up newopportunities for commercialization of Indian agriculture and institutional finance has aprominent role to play in this respect.(5) The advisory committee on provision of credit to agriculture and- 14 -allied activities(2004) also noted that linkages between production and marketing need to bestrengthened by increasing pledge finance, credit for marketing and introduction ofadvances against Warehouse Receipts. 11
  12. 12. (6) Poor credit support from formal banking sector had an adverse effect on thedevelopment of agricultural marketing systems in the country. The informal sector whichincludes the commission agents (adatiyas) provides significant credit to agriculture andwholesale trade but the cost of credit is high compared to the rate at which banks mayprovide it. Bank credit to farmers against agriculture produce is not substantial. Theselacunae need to be corrected. The lending policies and programmers for financing theagriculture should focus on the increased capital needs of agricultural marketing. Thenature of demand for agricultural credit in future would be different from the past. Theinput based financing patterns of agricultural credit would give way to output basedfinance, which are more aligned to the market, where production, processing andmarketing become an integrated activity and financed as a package.(7) One of the strategies currently in vogue, in this respect is to promote pledgefinancing which facilitates the usage of inventories of graded produce as collateral foraccessing credit from the organized credit market. It enables farmers to hold inventoryof graded produce under favorable storage conditions and standardized preservationunder supervised conditions in rural godowns and warehouses. It also advancesgrading of farm produce to the farm gate, thus enabling farmers to improve pricerealization considerably.(8) Based on the foregoing discussion it is evident that agricultural marketing creditsupport needs to be strengthened and reoriented. 12
  13. 13. STATUTORY REQUIREMENTSDealing in Commodity Derivatives by banks:-(1) Financing of agriculture poses certain special risks for banks and so, banks need tomitigate these risks in order to ensure effective credit delivery to the agricultural sector.One of the key risks for banks is the commodity price risk. The volatility in the prices ofagricultural commodities may cause severe loss to the farmer who may be unable torepay his dues to the bank. If the prices collapse, the distress in the farming communitycan be widespread and security obtained by the bank may have very limited usefulness.Commodity derivatives can mitigate these risks to a certain extent. The issue has beenexamined in greater detail later in the report.(2) A well established system of issuance of Warehouse Receipts is a pre-requisite ofan efficient market in commodity derivatives. Warehouse Receipts are also useful to thefarmer in securing timely finance from banks at economical rates. This issue, too, hasbeen discussed in greater detail later in the report.(3) In terms of Section 8 of the Banking Regulation Act, 1949, no banking companyshall directly or indirectly deal in buying or selling or bartering of goods except inconnection with realisation of securities given to or held by it, or engage in any trade orbuy, sell or barter goods of others. For this purpose, “goods” means every kind ofmovable property, other than actionable claims, stocks, shares, money, bullion andspecie and all instruments referred to in Clause (a) of sub-section (1) of Section 6 ofthe B.R. Act, 1949. Thus, while bullion and specie are specifically permitted for trading-17 -under the Act, banks are prohibited from entering into commodity business andtherefore, they are not permitted to participate in the commodity derivatives market.(4)The Group deliberated whether banks may deal in commodity derivatives in terms ofthe existing statutory provisions. In this connection an argument that restrictions placedin Section 8 of B.R. Act, 1949 are not applicable to banks buying and selling ofcommodity derivatives was examined. It has been argued that Section 8 ibid prohibitsselling and buying of goods. In buying/selling commodity derivatives, what the bank isbuying/ selling is paper/ electronic contracts that are generally cash settled. It is argued,therefore, while dealing in commodity futures, banks are in effect, dealing in financialinstruments and hence, trading in commodity derivatives may be treated as permissible.To remove any lingering doubt, banks could be prohibited from giving or taking physicaldelivery. 4.1.5 On the other hand, two arguments were put forward against taking a viewsuch as above. Firstly, while it is desirable that banks should not deal in physicalcommodities, yet a statutory prohibition on banks in taking or giving physical deliverymay act to their disadvantage as in no circumstance would they be able to force 13
  14. 14. physical delivery. Secondly, a commodity future is nothing but a exchange traded andstandardized forward contract for purchase / sale of the commodity. Thus, in buying/selling futures, there is no doubt that banks in effect will be buying/ selling goods.Section 8 of the Banking Regulation Act, 1949 clearly prohibits banks from directly orindirectly buying and selling of goods except in connection with realization of security.The legislative intent is clear, that banks may finance commodity business but shouldnot trade in commodities themselves.(5) In terms of clause (o) of sub-section (1) of Section 6 of the Banking Regulation Act,1949, a banking company may engage in any other form of business which the CentralGovernment may, by notification in the Official Gazette specify as a form of business inwhich it is lawful for a banking company to engage. The proviso to section 8 of theBanking Regulation Act, 1949 states that the section shall not apply to any suchbusiness as is specified in pursuance of clause (o) of sub-section (1) of Section 6. TheGroup decided to recommend that the Central Government may issue necessarynotification under clause (o) of sub-section (1) of Section 6 of the Banking RegulationAct, 1949 to enable banks to deal in the business of agricultural commodities includingcommodity derivatives.Negotiability of Warehouse Receipt(1) Central Warehousing Corporation (CWC) and State Warehousing Corporations(SWCs) receive deposits from farmers, companies and Government, issuingWarehouse Receipts denominated as negotiable or non-negotiable. Negotiabilityshould mean that Warehouse Receipts could be transferred between members of thetrade by endorsement, or by attaching a delivery note, without fear that ownership byholders in due course can be successfully challenged, or subjected to unforeseen liens.There is considerable uncertainty in practice as to whether Warehouse Receipts aredocuments of title. So, with minor exceptions, they are not used to transfer title. Therehas been a persistent demand that Warehouse Receipts may be made negotiableinstruments, by law.(2) A Warehouse Receipts Bill was drafted in 1978 with the principal, if not sole,objective of endowing upon Warehouse Receipts the- 19 -status of negotiability underthe Negotiable Instruments Act, 1881.However, the Act could not be passed.(3) Ministry of Consumer Affairs, Food and Public Distribution have constituted a CoreGroup for drafting the Negotiable Warehouse Receipts Act. We understand that theproposed bill is in an advanced stage of drafting. The draft bill provides for setting up of‘The Warehousing Regulatory and Development Authority’ to promote orderly growth of 14
  15. 15. the warehousing business. The said authority will register warehousemen, accreditationagencies and certifying agencies for grading. The draft bill provides for issuance ofnegotiable Warehouse Receipts. The validity of the negotiation of the receipt is notimpaired by the fact that (a) the negotiation was a breach of duty on the part of personmaking the negotiation or (b) the owner of the receipt was induced by fraud, mistake, orduress to entrust the possession or custody of the receipt to that person, if the person towhom the receipt was negotiated paid value for it without knowing of the breach of duty,or fraud mistake or duress. The Group appreciated the desirability of passing suchlegislation expeditiously.(4)The Consultancy assignment by Forward Markets Commission for Development ofWarehousing Receipt System in India has dwelt at length on the concept of negotiabilityand the need for the same. In some legal systems, a negotiable warehouse receipt isone, which confers on a transferee "a direct interest in the underlying property, free ofany outstanding claims". On the other hand the term "negotiable" is often understoodas meaning that the warehouse receipt is freely transferable between successiveholders by endorsement.(5) Law can provide for the rights of the holder of the negotiable Warehouse Receipt butit should not necessarily be expected to become the norm. It would therefore be naïveto expect a mere- 20 -enabling provision in the law, say, through a warehouse receiptstatute, to solve all the above-mentioned problems. As indicated by Justice S.M.Jhunjhunwala when referring to the Negotiable Instruments Act of 1881, holding aninstrument to be negotiable is not the same as the practice that makes such instrumentnegotiable, this quality being "the creature of custom of merchants". Hence a strongerlegal definition of warehouse receipt may be of little avail where there is a lack of volitionto accept the document as such.(6) The Group deliberated on the issue and reached a conclusion that if India can createa system by which Warehouse Receipts are freely transferred between holders, it willreduce transactions costs and increase usage. For achieving this, beside the enablinglegislation, which can take considerable time, it will be necessary to create anenvironment in which the Warehouse Receipts can be traded securely with minimumtransaction cost. One such proposed system is discussed in detail later in the report. 15
  16. 16. AGRICULTURAL PRODUCE MARKETING COMMITTEES ACTS(1) Agricultural produce marketing is subject to State level APMC Acts. The existing Actoriginates from pre independence but marginal adjustments have occasionally beenmade by individual States. This Act regulates marketing of “Notified AgriculturalProduce”, including the operation of wholesale markets, and compulsory sale ofproduce through these markets. Notified Agricultural produce may be as many as overhundred products. Thus, the wholesaling of agricultural produce is governed by theAgricultural Produce Marketing Acts of various State governments. The specificobjective of market regulation is to ensure that farmers are offered prices that are fairand transparent. The market committees have the authority to levy and collect marketfees on all transactions- 21 - within regulated markets of which there are more than7,000 in the country.(2) The Expert Committee constituted by the Ministry of Agriculture (2001) noted theproblems that have flowed from this monopoly. Licensed traders have functioned toprevent new entrants. Such entry barriers have led market participants to fix theircharges without being checked by competition. Furthermore, the monopoly has fostereda lack of accountability and as a result, important supporting services such as grading,standardization and market Facilities have been neglected. The Expert Committeegoes on to recommend that registration (rather than licensing) with the APMC.The InterMinisterial Task Force set up by GOI has recommended that the APMC Acts beamended to allow direct marketing and the establishment of agricultural markets in theprivate cooperative sector. The Task Force viewed the government’s role as a facilitatorrather than that of having control over the management of markets.(3) In 2003, the Ministry of Agriculture, Government of India prepared a Model Act foragricultural produce marketing which the state governments could use as a model fortheir individual Acts. Under the Model Act, private agents can be licensed to set up amarket or buy produce directly from farmers. The license will be given by an authorityof the State Government such as the State Agricultural Marketing Board. The presentModel Act for APMCs circulated by the Central Government is an initial exercise toenable State Governments to involve professionals in market management. InitiallyPublic Private Partnerships (PPP) could be mobilized to accommodate issues relating toinfrastructure. Government of Karnataka has taken initiatives and facilitated the settingup of a market by NDDB. Maharashtra also has amended the APMC Act in- 22 -April2003, enabling farmers to sell their produce without involving intermediaries. MadhyaPradesh and Punjab have taken the lead in allowing private participation in agriculturalmarketing. 16
  17. 17. (4) While considering various suggestions to facilitate the ease with which banks aslenders could dispose of the security in the form of agricultural produce, the necessity ofsetting up of a nationwide spot trading facility in commodities was brought to the fore. Itwas pointed out that the state level APMC Acts may act as hindrance to setting up of aspot trading facility. The committee is of the opinion that the process of adopting ofmodel act by more states would be hastened by setting up of a spot trading facilityunder a Closed User Group which has been discussed later in the report. 17
  18. 18. ECONOMIC REVIEWGrowth rebounded strongly in 2010-11, after the dip in 2008-09 in the wake of the globalfinancial crisis and the recovery in 2009-10. However, inflation rose and remainedstubbornly high throughout 2010-11 as supply-side shocks got generalized amidststrong aggregate demand. With added risks to growth from inflation above the thresholdlevel where growth-inflation trade-off can work, the Reserve Bank responded witheleven rate hikes between March 2010 and July 2011. This lifted effective policy ratesby 475 basis points in the current interest rate cycle. As a result of monetary tighteningand deteriorating global economic conditions, some moderation in growth andsignificant moderation in inflation from the later part of the year is anticipated goingforward. However, risk demanding compression remains from likely slippage onenvisaged fiscal consolidation. 2010-11 marked the completion of the process of recovery from the adverseimpact of the global financial crisis and the consequent slowdown of the globaleconomy. Slack in the advanced economies, with their output gap estimated at 3.4 percent in 2010, as also the uncertainty about their future growth, employment and debtstill impinge upon the activity levels in India. However, growth in India was back to theearlier high growth path. Starting in double digits, headline inflation remained elevated throughout 2010-11. With vegetable prices spiking following unseasonal rains after a good monsoon andglobal commodity prices firming up in the second half of 2010-11, inflation expectationsstarted to feed on themselves and cost push factors from the manufacturing sideexerted pressures on inflation. Inflation turned persistent and generalized as a result.The stance of monetary policy continued to be anti-inflationary during the course of2010-11 and in the year so far to contain inflation and anchor inflation expectations. THE REAL ECONOMYGrowth rebounds strongly in 2010-11Real GDP growth at factor cost increased to 8.5 per cent in 2010-11 from 8.0 per cent in2009-10. At this pace, the real GDP growth rate increased for the second successiveyear after the global crisis-induced sharp slowdown in 2008-09.The main impetus to growth during 2010-11 emanated from agriculture whichrebounded to above-trend growth rate on the back of a normal monsoon. Reflectingthis, the contribution of the agriculture sector to overall GDP growth increased sharply in2010-11 (Chart II.1). Services sector continued to be the predominant driver of growth,though its growth was slightly lower than the average in the pre-crisis high growth phaseof 2003-08.Sustainability of high growth – enabling conditionsGrowth is expected to moderate to the trend level of about 8 per cent in 2011-12. Ifglobal conditions worsen, downside bias to this projection may arise. This raisesconcern about sustainability of the high growth over the medium to long-term. ThePlanning Commission in its paper on Issues for the Approach to the Twelfth Plan (2012- 18
  19. 19. 17) proposed a growth target of 9.0-9.5 per cent. A pre-requisite for high growth isupfront removal of structural constraints with close attention on legal and institutionalframework, as also execution and governance. In the short run, growth will have tocontend with risks from low agricultural productivity, poor infrastructure, high globalcommodity prices, quality of corporate governance and low productivity enhancement inthe manufacturing sector. Furthermore, the substantial increase in oil prices in 2010-11and 2011-12 so far, has raised concerns about the near-term growth (Box II.1).Calculations suggest that aggregate saving and investment rates need to be stepped upfrom 33.7 per cent and 36.5 per cent of GDP in 2009-10, in order to achieve GDPgrowth of 9.5 per cent, envisaged for the Twelfth Five Year Plan. An investment rate ofaround 38-39 per cent with an ICOR of around 4.1 (as was envisaged for the EleventhFive Year Plan) would be required. Thus, the investment rate needs to be stepped upby 2.5-3.0 percentage points. The gross domestic saving rate needs to be augmentedto 37 per cent or more. This underscores the importance of at least attaining the highlevels of private corporate and public sector savings reached in the past. Furthermore,there is a need for stepping up of household savings, which have stagnated in recentyears, largely reflecting the reallocation of savings between financial and physicalassets as well as the near synchronous movement of changes in financial assets andfinancial liabilities. 19
  20. 20. Technology breakthroughs key to maintaining demand-supply balancesThere are several factors constraining agriculture supply response thereby impactinginflation. The foremost relates to low productivity and monsoon dependence. Presently,productivity levels remain low and productivity differentials across States and cropscontinue to persist. The target growth rate of 4 per cent for the agriculture sector(Twelfth Five Year Plan), in relation to the trend growth rate of around 3 per cent, willrequire considerable technological and institutional improvements.Productivity in Indian agriculture is low compared with productivity at the world level andmajor producers such as China and the US (Chart II.4). Even the most productiveStates in the country fall short of the world standards in terms of yields of major crops,namely, food grains, pulses and oilseeds. Further, there exists a wide variation inproductivity of these crops across States/regions (Chart II.5). This is significant giventhe import dependence for edible oils and pulses. Increase in food grain productivity canbe realized by ensuring soil conservation, which has been neglected and use of optimaland locale-specific agricultural practices and introduction of precision agriculture.India’s self-sufficiency in food and other agro products can be endangered if technologyadvancements do not keep pace with growing demand stemming from rising populationand income levels. Policy interventions are required to support sustainable growth incrop production and environmental protection through development of improved anddiversified cultivars, eco-friendly and cost-effective pest management practices, efficientseed supply systems, and commercialization of the diversified and alternative uses ofcrop produce. This, in turn, would improve farm incomes and food security, whilehelping to keep food inflation low. 20
  21. 21. Notwithstanding the sharp decline in the share of agriculture in GDP from an average of53 per cent in the fifties to 19 per cent in the 2000s, 52 per cent of the work forcecontinues to be engaged in agriculture. With just around 44.6 per cent of the grosscropped area irrigated (as per the latest data available for 2007-08), the dependence ofIndian agriculture on rainfall remains preponderant (Chart II.6). It is in this backdrop thatpublic policy interventions to step up investment and productivity enhancements foraugmenting food supplies, assumes importance.Even though the per capita availability of milk has increased from 194 grams per day in1994-95 to 258 grams per day in 2008-09, there is a need to address the structuralconstraints ailing the sector. The productivity of Indian bovine compares unfavorablywith the world average mainly due to gradual genetic deterioration, poor fertility, as wellas poor nutritive value of feed and fodder. To sustain production of milk, AcceleratedFodder Development Programmed intended to benefit farmers in 25,000 villages hasbeen launched. There is need for research focused on ecological adaptability of cattleand developing the disease resistance of cross-bred species.Need to focus on food management in times of high food inflation, production andwastage 21
  22. 22. .Procurement and PricingProcurement of food grains, in particular, wheat and rice, is an open-ended operation.The Food Corporation of India (FCI) procures food grains at the MSP, which are basedon the recommendations of the Commission for Agricultural Costs and Prices (CACP).In addition, in recent years, a number of states have opted for DecentralizedProcurement Scheme introduced in 1997, under which food grains are procured anddistributed by the State governments themselves. Between 2006-07 and 2010-11, MSPof rice and wheat were hiked at an average annual rate of 14.1 per cent and 14.6 percent, respectively. On average, agricultural price policy has provided a margin of around20 per cent over total costs to both rice and wheat farmers. This has ensured sufficientand steady procurement of food grains which can cater to the demand for the PDS andvarious welfare schemes of the Government. Price interventions alone are, however,inadequate for ensuring better food management and greater focus on non-priceinterventions is necessary. Skewed incentives have affected land use and croppingpattern. Spatially, bulk of the public procurement remains confined to a few States forwant of access to take-in windows. Production and Food SecurityFood grain production in India grew at an average rate of 1.6 per cent annually between1990 and 2010, lower than the decadal rate of population growth of 1.8 per cent.. Thismay have implications for food security in future.The NFSB has been approved by the Empowered Group of Ministers (EGoM) on foodsecurity. Distribution and Delivery MechanismDistribution and delivery have been the most intricate and challenging aspects of foodmanagement in the country. The existing PDS in India with roughly 0.5 million Fair PriceShops (FPS) is plagued with deficiencies such as low margins that create perverseincentives for diversion of food. 22
  23. 23. INDIAN AGRICULTURE AND REFORM : CONCERNS, ISSUES AND AGENDARBI had conducted the first ever Rural Credit Survey in the world, promoted theNational Bank for Agriculture and Rural Development (NABARD) and, is financingendowment chairs on the subject in Universities. Apart from this, belonging to AndhraPradesh and having worked in the Finance and Planning Department in the State ofAndhra Pradesh for several years, I have naturally been taking significant interest inmatters related to agriculture.On hearing the annual report on the activities of the Society, one cannot but beimpressed with the remarkable enthusiasm and commitment with which the IndianSociety of Agricultural Marketing is able to carry on its endeavor. There is also adistinguishing feature of the Conference on Agricultural Marketing.CONCERNSThe most important aspect that has been referred to in the Reserve Bank of IndiaAnnual Report and in the Report on Currency and Finance of recent years is a seriousconcern that of late, real Gross Domestic Product (GDP) in agriculture and alliedactivities recorded absolute declines.The decline is of 1.3 per cent in the third and fourth quarters of 1999-2000. In 2000-01,the first quarter growth of real GDP originating from agriculture and allied activities of1.7 per cent has increased to 1.9 per cent in the second quarter. In the third quarter, thelower growth of 1.2 per cent can still be considered significant when compared with theabsolute decline of 1.1 per cent during the corresponding quarter of 1999-00. Themovements in the index of agricultural production suggest that this recent downturn ispart of a longer-term trend. The annual trend growth rate of agricultural production hasdecelerated to 2.2 per cent in the 1990s from 3.1 per cent in the 1980s. The 1990s alsowitnessed considerable degree of variability of agricultural output with five years in thedecade recording absolute declines in output.Overall, it may be argued by some that the secular decline in output growth is not amatter of serious concern since structural transformation of the economy may imply thatgrowth in agriculture would be less than that in non-agricultural sectors. Although thecontribution of agriculture and allied activities to the GDP has declined from 35 per centin the 1980s to 25 per cent in 1999-2000, more than two-third of the populationcontinues to depend upon agriculture. Growth in sectors other than agriculture is notabsorbing work force on a significant scale. Agricultural development has, therefore,rightly come to be regarded as an indicator of the quality of life at the grassroot levelmaking it what may be called peoples sector. The agricultural sector also makes asignificant contribution to India’s exports, accounting for a little less than a fifth of totalmerchandise exports. Also, despite some degree of weatherproofing acquired by theeconomy in recent years, agriculture continues to play a critical role in determining themacroeconomic balances in our country especially in generating private consumptiondemand.It is no surprise therefore, that considerable anxiety is being expressed in somequarters that perhaps the poor performance of agriculture in the ‘nineties indicates thatthe process of reforms has by-passed the agricultural sector. It is also argued that while 23
  24. 24. there has been emphasis on trade, industry and the financial sector, attention of thereform in some sense has not percolated to the agricultural sector, although as will beexplained later, terms of trade improved for agriculture.Observers who compare the performance of India and China feel that in the reformcycle in China, agricultural reforms were started in the early stage, which helpedincrease China’s rate of growth of this sector and consequently the potential output ofthe economy as a whole, thereby placing it on a high growth path. In India, whilefinancial sector reforms have been undertaken early in the reform cycle, thecommentators feel that reforms in agriculture sector have not been as much in theforefront both in terms of sequencing and overall priority. This issue of appropriatepriority for agriculture in our reform process needs to be explored further in view of thefact that the trends in recent years are clearly indicative of a possible long-termdeceleration in agriculture.Some studies have been undertaken in the Reserve Bank of India focusing on some ofthese issues. The internal research studies seem to indicate that there are two majorareas, which are constraining the upward movement of output towards its potential forIndia. These relate to agricultural sector and physical infrastructure. These preliminaryfindings, which are yet to be confirmed, add weight to the argument already articulatedin the recent Annual Reports that agriculture has to be on the top of the agenda ofreforms in India.In regard to the importance of agriculture in a broader socio-economic sense, all thethree basic objectives of economic development of the country, namely, output growth,price stability and poverty alleviation are best served by growth of agriculture sector. Itmay sound ironic that agriculture is one sector where there is convergence of all thethree main objectives of economic policy in India but we seem to have relegated thesector to the background in the process of economic reform. In fact, there is a feelingthat the economy may face slowdown if there is inadequate pickup in demand from ruralareas and the depressed price conditions in agricultural commodities in the recent pasthave brought to the fore the criticality of agriculture sector in enabling Indian economyto maintain a respectable growth rate.ISSUESFirst issue relates to macroeconomic balances. In terms of macro balances, theoverall saving-investment gap in India in the recent years has been between 1.0 and 1.4per cent of GDP. This is very low, and it has tended to move down in the second half of1990s. This is contrary to the general impression that after liberalization, increaseddependence is being placed on foreign flows. It is, however not so, since the role offoreign savings has been reduced in the second half of 1990s.Further, it may be noted that the public sector investment-saving gap has increased.The objective of reform is that more investible resources should be released to theprivate sector. But the data, particularly the recent CSO data, indicates that the contraryhas occurred. Earlier, government savings used to be negative and the publicenterprises savings were positive, and between the government and public enterprisesput together, the public sector as a whole showed marginal positive saving. Now, thegovernment and the public sector as a whole are contributing negatively to savings. So,during the reforms, though it is popularly felt that more resources have been released to 24
  25. 25. the private sector to enable them to undertake larger investments, the way the fiscalreform has been managed did result in a situation where the saving-investment gap hasmoved adverse to the private sector, and public sector (including Government)dissavinghas in fact increased in recent years.It can be observed that out of the gross domestic saving of 22 per cent, 19.8 per centare household saving, 50-60 per cent of which is financial saving. Furthermore, about80 per cent of the financial saving of household sector is absorbed by the public sector(i.e. government and public enterprises) in India. Moreover, the continuing revenuedeficits of the Centre and States indicate that much of the private financial savingsabsorbed by public sector is being used up for consumption and not investment.The share of gross capital formation in agriculture as a proportion of total grossdomestic capital formation has declined from 6.8 per cent in 1993-94 to 5.5 per cent in1998-99. The decline in capital formation has been more pronounced in the publicsector, reflecting the persistent and large revenue deficits. The share of agriculture andallied activities in total Plan outlay has declined from 6.1 per cent in the Sixth PlanPeriod to an estimated 4.4 per cent in the Ninth Plan Period. The share of irrigation andflood control in total outlay has also shrunk from 10.0 per cent to an estimated 6.5 percent over the Plan periods.Early correction of overall macro imbalances by improving fiscal management will helpto release higher investible resources in the country, which would benefit agriculturealso. But, this cannot be an excuse for not increasing public investments in agriculture.Secondly, while public investment in agriculture is coming down, the subsidy billaccruing towards agriculture is going up though the general impression is that allsubsidies have been pruned in recent years. Budgetary subsidies for the agriculturesector have been increasing in nominal terms over the years. The increase isconcentrated on input subsidies, though food subsidies are also incurred to maintainhigh levels of food stocks.The share of fertilizer subsidies in the total explicit subsidies of the central governmentsteadily increased from 35 per cent in the 1980s to 42 per cent in the first half of the1990s and further to 49.8 per cent in the second half. Fertilizer subsidy as a ratio toGDP fell from 0.8 per cent in 1990-91 to 0.7 per cent in 1999-00. In absolute terms, itrose from Rs.4,390 crore to Rs.13,463 crore during the same period. Though thissubsidy is formally attributed to agriculture, in reality, most of it supports fertilisermanufacturing industry. States’ power sector subsidies to agriculture have alsoundergone steady growth during the 1990s. Power sector subsidies to agricultureaccount for well over one per cent of GDP. Hidden subsidies provided by the States foragriculture increased from Rs.5,938 crore in 1991-92 to Rs.25,577 crore in 1999-00. Incomparison, in 1990-91, the Plan outlay of agriculture sector including irrigation wasRs.12,515 crore, which increased to Rs.33,858 crore during 1999-2000.Therefore, the issue that arises here is that a conscious choice has to be made giventhe overall resource constraint, as to what would be good for agriculture at this juncturein our country – increase in subsidies or more investment. Although it is recognized thatsubsidies can be regarded as production equivalents, the question that has to be raisedin the context of overall balance is whether it would be worthwhile shifting the totalspending on subsidies to investment, especially in terms of contribution to agricultural 25
  26. 26. employment and poverty alleviation. Thus, the trade-off between investment inagriculture and increase in subsidies should be an important item on the agenda.The third issue relates to inadequate flow of credit to agriculture. This could beviewed in two different ways. One, the Reserve Bank has been taking a number ofinitiatives to ensure adequate credit to agriculture sector and recently the CapoorCommittee had made a number of recommendations on issues relating to cooperativesector. Two, the issue may also be viewed in the broader perspective of institutionaldynamics. There are broadly three categories of institutions which deliver credit to ruralareas, i.e., commercial banks, Regional Rural Banks (RRBs) and cooperative banks.Owing to accumulation of losses in public sector banks on account of mounting NPAs,the flow of credit to rural areas by banks in recent years has not been up to the mark.There is also a marked change in the orientation of commercial banks, which are beingsubjected to greater competition from private and foreign banks. Some of the publicsector commercial banks are sometimes adopting their competitors’ strategies withoutrecognizing that their comparative advantage lies in rural and semi-urban areas. Soonerthe public sector banks recognize the importance of rural economies better it is for theirlong-term commercial sustainability. The RRBs have been in the early years subjectedto an interest rate regime that led inexorably to accumulated losses, which arecontinuing to constrain their operations even now. The rural co-operatives sector hasnot come up to expectations in large parts of the country and is heavily dependant onflow of finance from NABARD.The issue, therefore, Is what are the ideal instruments that would deliver adequate andtimely agricultural credit? It is not necessary that the same institutions that have beenresponsible for providing agricultural credit for the last twenty years or so shouldcontinue to do so as they did in the past. The moment agriculture is accorded highpriority, revamping the rural cooperatives also come on top of the agenda, which wouldrequire recapitalizing them. More attention to the actual revamping process of RRBswould need to be bestowed.The third item of the agenda will, therefore, be the appropriate institutional changes thatare required to ensure necessary credit flow to agriculture. Clearly, there is a need toexamine the issue of rural credit and rural credit delivery systems in an objective as wellas transparent way and accord them priority in legislative actions and financialallocations.Fourthly, as a result of reform measures, there are some commercial banks that arenot able to reach the prescribed target of lending to agriculture. As per the currentprescription, they are required to place funds to the extent of the shortfall with NABARD,which in turn, would place these funds with State Governments for investment inagriculture related activities, mainly rural infrastructure. An issue has been raised thatsuch a process amounts to indirect borrowings from the banks by State Governmentsand that funds originally meant to be deployed for agriculture are diverted for publicinvestment. Incidentally, it is worth noting that even after accounting for such RuralInfrastructure Development Fund (RIDF) allocations during the reform era, publicinvestment in agriculture has slackened. Furthermore, the risk based rates of return onbanks’ investments in RIDF are better than similar returns by lending to agriculture,implying incentive incompatibility of RIDF with the main objective. Also, coverage of 26
  27. 27. definition of priority sector lending has been broadened significantly in the recent years,thus overestimating credit flows to actual agricultural operations in recent years. It can,therefore, be argued that the RIDF should be refocused, if possible by diverting suchfunds to agricultural operations through revamped systems of RRBs and cooperatives.Incidentally, banks have been arguing that a constraint facing them with regard todeployment of agriculture credit is lack of viable credit products, implying lack ofdemand for credit. On the other hand, there exists an informal sector which providesagricultural credit at high interest rates, which indicates that there is no demandconstraint. The dichotomy between the formal and informal sectors could be explainedby the lack of banks’ capacity to reach potential borrowers, which in turn could beexplained by attitudinal, procedural and institutional factors. In fact, the very purpose ofderegulation of interest rates for this sector, which was expected to encourage banks tolend higher, does not seem to have served its purpose fully.Fifthly, one of areas the Reserve Bank has taken a lot of interest in the recent pastrelates to micro-finance. A Committee was constituted under the leadership of NABARDfor this purpose. Lending under micro finance can be formal or informal. In ProfessorRam Reddy memorial Lecture delivered by the same author, it has been mentioned thatthe temptation to bureaucratize and regulate microfinance must be resisted. This aspectis also being carefully looked into by the RBI.Sixthly, another matter that has been engaging the attention of the policy makers forthe past ten years relates to the huge food stocks, but the problem has exacerbated inrecent years. There are several aspects that need to be carefully considered. The worldfood market and the market instruments by which food stocks are imported havechanged in recent years. It is possible to buy options so that we can pay now merely foran option to import specific quantities at a price. Another issue relates to types ofstorage facilities that need improvement in public sector and the compelling requirementof creating private storage facilities. The cost and efficiency of operations of FoodCorporation of India has also been a subject of scrutiny more recently by a studyconducted in Administrative Staff College of India. The pattern of food consumption,food storage, food production and food trading in the world has changed. Therefore, ourpolicy on what constitutes optimal food stocks would need to be revisited and this wasraised in the RBI Annual Report last year. Of direct interest to the RBI is the monetaryand fiscal implication of buffer stock operations. The Reserve Bank of India hasrequested the Administrative Staff College of India to study this issue separately andsubmit a technical report.Seventhly, the issue of terms of trade is important. The terms of trade in agriculture inIndia is not dwelt upon have except to recognize that the terms of trade have on thewhole moved somewhat favorably to agriculture in recent years. Recently the globalcompetitiveness of our agriculture sector has gained attention of policy-makers but theaspect of supply elasticity’s in our economy needs to be looked into. If public investmentand market infrastructure in agriculture continue to be inadequate, there could be aserious problem of competitiveness and adequate supply response. No doubt, India is alarge producer of several agricultural products. In terms of quantity of production, Indiais the top producer in the world in milk, and second largest in wheat and rice. Weshould, therefore, be concerned about improving quality while maintaining the lead in 27
  28. 28. quantity. If the focus is on global agriculture, it is important to think of both quality andquantity of production. The issue is whether it is possible to create an environmentwhere we can compete in terms of quality also.Quality in global standards has several dimensions. Quality may mean rigid adherenceto global environmental and health standards. It may also mean rigid adherence todelivery-schedules, in terms of both quantity and quality, and timeliness. Globalorientation would require a complete re-orientation of what may be called ‘towards amore aggressive thinking’, rather than ‘defensive thinking’, to create an enablinginstitutional environment to compete and survive. For example, it is not desirable tohave highly segmented markets, although large quantities are available in the country.Certification of quality requires institutional arrangements within the country that carrycredibility in both domestic and foreign markets. In this context, the institutionalarrangements such as commodity exchange assumes importance and it is an areawhere we are still rooted in the past. A thorough review of adequacy of institutionalarrangements in quality control, certification and trading in agriculture sector should bea national priority to take advantage of global opportunities. Indeed, with liberalisation ofimports, even domestic markets would demand such institutional changes if ouragriculture sector has to survive competition brought about trade liberalisation.Eighth, another important aspect relates to the mindset on role of middlemen. In Indiathe general attitude to trade especially in agriculture has been to favour elimination ofmiddlemen or ensure that middlemen’s functions are carried out by public sector orcooperatives in name, but public sector in reality. However, experience has shown thatpublic sector as middleman also utilises other middlemen and in any case has not beencost effective. In a modern economy, it is inconceivable that the role of middlemen canbe eliminated. This underscores the need to regulate the middlemen in order to makethem more efficient, competitive and accountable. It is necessary to move to a situationwhere an efficient system of market intermediaries is created in agriculture sector. Therelated issue of mindset relates to futures-trading. There needs to be a mechanism forhedging risks. Again, this should be adequately regulated in a competitive environmentso as to ward off unworthy speculation. This raises among others, issues of financingtrade, settlement mechanisms, ensuring that futures contracts are honoured, etc. Theconcept of nationwide multi-commodity exchange has been mooted in the country. ACommittee was appointed, of which RBI was a member, to work on these issues. TheReport of the Committee is under consideration of the Government of India.Ninth, farmers face uncertainties with regard to weather as well as price. The issue ofuncertainty should be distinguished from the issue of commercial viability. Thus,advocating subsidised credit to tackle the problem of distress among farmers due toweather failure or depressed prices is not enough. The current regime of subsidies doesnot tackle the major problem of agriculture viz. uncertainty. Uncertainty of weather maybe alleviated by insurance-mechanisms but unfortunately the experience so far, withwhat has essentially been insurance of credit to agriculture, has not been encouraging.Commercialisation of agriculture can progress only when institutional arrangementssuch as insurance penetrate deep within the agriculture sector.In the financial world, it is recognized that there are certain uncertainties and hencefinancial participants are encouraged to devise mechanisms for hedging. Similarly, 28
  29. 29. modern agriculture too will have to have a mechanism by which farmers are able tohedge risks. This is possible only if there are proper institutional mechanisms andincentives to hedge. The traditional approach of handling demand or supply sideproblems or problems of uncertainty directly and essentially by Government in an adhoc manner, can no longer serve the purpose.Finally, Reserve Bank of India recognizes Self Regulatory Organizations (SROs) in thefinancial sector. The RBI encourages them to produce standard documentation fortrading in repo market. However, genuine self regulatory organizations do not seem tohave been nurtured in agriculture sector and in any case interaction between regulatoryagencies and SROs has not taken roots in agriculture sector, though it has achievedsome progress in the financial sector.AGENDA: REDEFINE ROLE OF GOVERNMENTIt is clear that improving the growth rate and competitiveness of agriculture is verycritical at this juncture for a variety of reasons, including the lackluster performance ofagriculture in the recent past and specially the impact of liberalized trade-regime beingannounced. There is some merit in the argument that the reform process has bypassedagriculture so far and that this is best illustrated by the co-existence of segmented andoverregulated domestic markets with liberalized export–import regime in agriculturalcommodities.Briefly stated, those relevant are overall fiscal imbalances, declining and inadequatepublic-investments in agriculture accompanied by increasing share of patentlyunproductive and distortionary subsidies. Serious deficiencies relate to the legal andinstitutional framework for flow of credit to agriculture, maintenance of huge food stockswith considerable fiscal and monetary implications, virtual non-existence of institutionalmechanisms to promote assurance of quality and assured delivery in a nation-widemarket, outdated attitudes to the role of so-called middlemen, insurance, hedging andfinally overarching bureaucratization with little attention to promotion of Self-RegulatoryOrganizations. In this background, the agenda for reform virtually encompasses athorough change in mindset and overhaul of legal and institutional mechanisms toenable a growing, healthy and efficient agriculture sector. In brief, the role ofGovernment in agriculture needs to be comprehensively and urgently redefined,perhaps somewhat on the following lines.(1) There is a need to define the parameters of an optional pattern of utilization of fiscalresources in agriculture and a medium term time-bound plan to transform the existingsystem of subsidies in favors of a few to a more desirable well spread out publicinvestments. In other words, instrumentalism in policy-change should not be mistakenfor a sequenced reform in deployment of public funds in agriculture.(2) The distortions and outdated policy approaches to the deployment of credit toagriculture must be recognized and the institutional as well as instrument changesurgently needed should be spelt out, but this would need governmental intervention. Ina deregulated financial sector, enabling environment and incentives are infinitelysuperior to directions or moral suasion.(3) Uncertainty in agricultural activities is admittedly more than in other activities and theinstitutional arrangements, whether in public domain or private initiative are non-existent. Commercialization of agriculture and competition warrant mechanisms to meet 29
  30. 30. uncertainties while enhancing productivity. Meeting uncertainty is different fromsubsidizing non-viable operations, and putting in place an institutional framework forinsurance, hedging and public resources to make such mechanisms initially viable arenecessary as part of refocusing the mindset and resources of government to theemerging challenges of current slowdown and future threat of global competition.(4) Public policy should turn immediate attention to trading and marketing aspects, witha clear admission of need to change mindset. For example, middlemen are inevitableand the issue is how to foster competition and assure regulation of such middlemenkeeping in view the interests of producers as well as consumers. Certification andcredible regulation of trade to ensure competition quality and transparency protects bothproducer and consumer far better than price and distribution controls, provided publicdistributing systems are oriented to be more focussed, selective and efficient. A nationalcommodity exchange is but one element of reform. More but a different type ofgovernmental intervention is needed in marketing and trade while genuine co-operatives like in diary sector need to be considered afresh.(5) Genuine self-regulatory organizations need to be founded and nurtured andexperiences in other countries may not be irrelevant though our needs and culturalmilieu are unique. A major challenge is to devise nationwide formats that can cater tonationally integrated markets while allowing for local variations and initiativesparticularly at the state level. 30
  31. 31. CONCLUSION:- To sum up, inadequate finance and outdated as well as inappropriateinstitutional framework are the twin problems and, of the two, institutional reforms areneeded immediately requiring changes in mindset and redefining the role ofgovernment.RESULT:- RBI plays vital role in Indian Economy. REFERENCE:  Prof. Anand Sir  Macro-economic book    31