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Indian Economic Policy

Notes Fragmentation of Agricultural Land
The third associated area of concern is the fragmentation of agricultural land, with the average size
of the holdings shrinking from 1.69 hectares in 1985-1986 to 1.33 hectares in 2000-2001. The proportion
of marginal landholdings (less than a hectare) increased from 57.8 percent in 1985-1986 to 62.3 percent
in 2000-2001. More importantly, about 19 percent of the other holdings are in the small farms category:
between one and two hectares.
Agricultural Indebtedness
It is little wonder then that agricultural indebtedness has been the bane of the sector. Indeed, at least
10,000 farmers committed suicide every year; the five worst affected states being Maharashtra, Andhra
Pradesh, Karnataka, Madhya Pradesh and Chhattisgarh. The government’s US$ 1.4bn (INR 71,000
crore) farm loan waiver scheme last year helped large and medium farmers more than small and
marginal farmers who are indebted to local moneylenders.
Moreover, increased funding for agriculture and rural development is a partial misconception (see
table). Standard credit delivery mechanisms do not help farmers because these banks - even the inept
co-operative banks - are not accessible by the bulk of farmers and, when they are, there is no collateral
to produce for loans. Finally, when the loans come, they are inherently risky given the vagaries
facing Indian agriculture. No out-of-the-box thinking has been deployed in this calamitous space,
and the substantial hikes in credit to the farmer have been commandeered by the better-placed agro
industry sector.
As far as the small farmer is concerned, increasing credit flows without a supporting policy framework
that safeguards farmers’ rights to land and improves the profitability of agriculture may well be of
limited value. Short-term loans for high-cost, high-input agriculture are likely to increase indebtedness
for small farmers. In Madhya Pradesh, the local press has indicated the farmers had availed of credit
for financing land leases and the purchase of agricultural inputs. When frost destroyed their crop,
they had no means of repaying the loans.
The finance minister admitted as much in his latest budget speech. Micro-finance as it is practiced in
India - despite its promise - has failed to deliver. The gaps in institutional credit, which were to be
covered by micro-finance, have thus attracted tremendous interest in recent years. The Andhra Pradesh
experience shows that the delivery costs are very high, pushing interest rates up to unacceptable
levels in the absence of consumer protection regulation and a perceived absence of a cap on micro-
finance interest rates. A proposed plan for the direct transfer of subsidies (proposed in the recent
Union Budget) may ensure the subsidy reaches the intended beneficiaries more efficiently.
Water Waste

The fifth area of concern is the sinister waste of water resources. India’s annual precipitation of a
handsome 4,000 cu km gets slashed into an effective water availability of no more than 1,123 cu km
(utilizable water resources 690 cu km and utilizable ground water 433 cu km). No more than 28.3
percent of the rainwater is utilized, thanks to India’s creaking water management infrastructure,
lopsided policies, illogical spending patterns on large irrigation projects that pay poor dividends and
a comprehensive lack of perspective that haunts the water industry. There is a lack of realization that
water has an economic value in all its competing uses and should be recognized as an economic good
and supported with sound planning for conservation and efficient allocation.
The rainfall in India is not evenly spread - nearly 80 percent of it coming in the four-month monsoon
season from June to September. A sizable part of this water is allowed to flow away wastefully to
the seas, eroding precious soil on its way. India needs to conserve this water for year-round use by
storing it either in the surface reservoirs or in the sub-surface (underground) water aquifer. None
of this is happening to the required extent. The surface water storage capacity created in India
through major and medium reservoirs and millions of small ponds, tanks and other water bodies is
insufficient to hold enough water to meet the annual needs of the country. Contrast this with the
United States, for instance, with water storage capacity good enough to meet three to five years’
requirement.

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