Agricultural credit system in India: evolution, effectiveness and innovations

Indian agriculture is dominated by smallholders. With an average holding size of just 1.08 ha (in 201516), and 86 percent of holdings being of less than 2 ha size, Indian agriculture produces sufficient food, feed, and fiber for India’s large population of 1.35 billion, and in addition generates some net export surplus. This would not have been possible without the infusion of massive credit to farmers to buy modern inputs ranging from seeds, fertilizers, pesticides, farm machinery, etc. But how has this system of agri-credit evolved in India over time? What is its organizational structure, and how effective is it in terms of its reach, especially to smallholders? How efficiently can it deliver credit and what sorts of innovations are unfolding in this sector to make it more efficient, inclusive and sustainable? These are some of the key questions that are addressed in this paper. This paper shows that the Indian agri-credit system has made commendable progress, with major policy changes, especially in 1969. The share of institutional credit to farming households in overall credit increased from about 10 percent in 1951 to 63 percent in 1981. But since then it has hovered around that level until 2013, the latest year for which this information is available from All India Debt and Investment Survey (AIDIS). However, total direct agri-credit (loans outstanding) from formal institutional sources as a percentage of AgGDP increased from about 16 percent in FY1982 to about 42 percent in FY2017; and direct short term institutional credit (loans outstanding) as a percentage of input requirements in agriculture increased from 22 percent in 1990-91 to 123 percent in 2015-16.