SMBA Report

1. Role of RBI in
agriculture
development in
India
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 description
in India

2. INSTITUTE OF TECHNOLOGY & MANAGEMENT
SUBJECT MACRO-ECONOMICS
BATCH SMBA-02
LECTURER Prof.Vijay Balu Raskar
GROUP / MEMBERS G-02 / M-01
PRESENTATION DATE 19-01-2012
REPORT SUBMITTED ON 19-01- 2012
Presentation report based on:-
“THE ROLE OF RBI IN AGRICULTURE DEVELOPMENT IN INDIA”
Presented by,
Mr. Vijay Balu Raskar
2

3. CONTENTS
S 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
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4. INTRODUCTION
AIM 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 was
established in April 1935 with a share capital of Rs. 5 crores on the basis of the
recommendations of the Hilton Young Commission. The share capital was divided into
shares of Rs. 100 each fully paid which was entirely owned by private shareholders in
the 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 superintendence
and direction of the Bank is entrusted to Central Board of Directors of 20 members, the
Governor and four Deputy Governors, one Government official from the Ministry of
Finance, ten nominated Directors by the Government to give representation to important
elements in the economic life of the country, and four nominated Directors by the
Central Government to represent the four local Boards with the headquarters at
Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each
Central Government appointed for a term of four years to represent territorial and
economic 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.
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5. FUNCTIONS OF RESERVE BANK OF INDIA:
There are many functions of RBI bank. The Reserve Bank of India Act of 1934
entrust 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
ACTIVITIES
Broadly, the activities/ purposes financed by banks included in priority sector are:
a. Agriculture and Small scale industry
b. Small road and water transport operators
c. Retail traders and small business operators
d. Professional and self-employed persons
e. 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 sector
l. Investment in venture capital Weaker Sections
The 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. THE ROLE OF RBI IN AGRICULTURAL DEVELOPMENT IN INDIA
Agriculture is integral to economic development in India. For a long time, Indian
Agriculture has remained isolated from the mainstream development. Since
independence, India has come a long way in removing technological isolation of
agriculture. Efforts were made in introducing scientific methods in agriculture, including
high yielding hybrid varieties. The resulting Green Revolution has solved the problem of
food security for the country. There is a growing feeling that time has come to remove
economic and financial isolation in which agricultural economy has been functioning so
far. Of the efforts being made in several directions, managing of risks through
commodity derivatives and facilitating financing of agriculture by using Warehouse
Receipts 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 on
Warehouse Receipts & Commodity Futures with a view to examining the role of banks
in providing loans against Warehouse Receipts and evolving a framework for
participation of banks in the commodity futures market. The Group had members from
the Reserve Bank of India, Indian Banks' Association (IBA), Forward Markets
Commission (FMC), NABARD and select banks active in agricultural lending such as
State Bank of India, Punjab National Bank, Bank of Baroda and ICICI Bank Ltd. The
Working Group was entrusted with the task of evolving broad guidelines, criteria, limits,
risk management system as also a legal framework for facilitating participation of banks
in commodity (derivative) market and use of Warehouse Receipts in financing of
agriculture. With economic growth assuming a new urgency since Independence, the
range of the Reserve Bank's functions has steadily widened. The Bank now performs a
variety of developmental and promotional functions, which, at one time, were regarded
as outside the normal scope of central banking.
The Reserve Bank was asked to promote banking habit, extend banking
facilities to rural and semi-urban areas, and establish and promote new specialized
financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the
IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of
India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural
Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporation of
India in 1972. These institutions were set up directly or indirectly by the Reserve Bank
to promote saving habit and to mobilize savings, and to provide industrial finance as
well as agricultural finance. As far back as 1935, the Reserve Bank of India set up the
Agricultural Credit Department to provide agricultural credit. But only since 1951 the
Bank's role in this field has become extremely important. The Bank has developed the
6

7. co-operative credit movement to encourage saving, to eliminate moneylenders from the
villages and to route its short term credit to agriculture. The RBI has set up the
Agricultural Refinance and Development Corporation to provide long-term finance to
farmers.
The monetary functions also known as the central banking functions of the RBI are
related to control and regulation of money and credit, i.e., issue of currency, control of
bank credit, control of foreign exchange operations, banker to the Government and to
the money market. Monetary functions of the RBI are significant as they control and
regulate the volume of money and credit in the country.
Equally important, however, are the non-monetary functions of the RBI in the context of
India's economic backwardness. The supervisory function of the RBI may be regarded
as a non-monetary function (though many consider this a monetary function). The
promotion of sound banking in India is an important goal of the RBI, the RBI has been
given wide and drastic powers, under the Banking Regulation Act of 1949 - these
powers relate to licensing of banks, branch expansion, liquidity of their assets,
management and methods of working, inspection, amalgamation, reconstruction and
liquidation. Under the RBI's supervision and inspection, the working of banks has
greatly improved. Commercial banks have developed into financially and operationally
sound and viable units. The RBI's powers of supervision have now been extended to
non-banking financial intermediaries. Since independence, particularly after its
nationalization 1949, the RBI has followed the promotional functions vigorously and has
been responsible for strong financial support to industrial and agricultural development
in the country.
The RBI has gradually withdrawn from the practice of providing concessional finance or
refinance for specified sectors such as agriculture, industry and export, though the legal
provisions continue to enable it. In the same view, as part of strengthening monetary
management, only notional provisions are made out of RBI profits for Agriculture,
Industrial and Housing Credit Funds. No doubt, there are persistent demands on RBI to
reverse the process, but the RBI advocates direct fiscal support to development
activities so as to be transparent, accountable and quantifiable rather than through
monetary operations of RBI, which would tantamount to quasi-fiscal operations. In
India, there are two sets of indices, viz., wholesale price index (WPI) and consumer
price indices (CPIs). The latter is based on occupational classification and category of
residence (rural or urban). Four broad measures of CPIs are available at the national
level to capture prices of a defined basket of goods and services consumed by a
particular segment of the population: (i) CPI for Agricultural Laborers (CPI-AL); (ii) CPI
for Rural Laborers (CPI-RL); (iii) CPI for Industrial Workers (CPI-IW); and (iv) CPI for
7

8. Urban Non-Manual Employees (CPI-UNME). While these various measures of CPI do
move 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 deposit
and lending activity, roughly accounting for a third of overall banking business in India.
While bank term deposit rates stand deregulated, small savings and provident funds
continue to be administered, thereby imparting a degree of rigidity to the interest rate
structure. In recent times, there has been some tendency to widen the net of
administered interest rates to cover bank loans for agriculture. While such a tendency
may not be an unlikely outcome, given the predominance of publicly-owned financial
intermediaries, it needs to be recognized that the current system of pricing of bank
loans appears less than satisfactory. There is a public perception that banks’ risk
assessment and risk management processes are less than appropriate and sub-optimal
and that there is under pricing of credit for corporate, while there could be overpricing of
lending to agriculture and the small scale industries. In addition to formal prescription of
interest rates, public sector banks which account for over seventy per cent of banking
assets in a bank-dominated economy are called upon by the majority shareholder to
discharge social obligations to reflect public policy priorities, through continuous
interaction and periodical reviews with chief Executives.
8

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 the
population. There is a strong correlation between the performance of this sector and
that of the overall economy. In achieving 7 to 8% GDP growth, agriculture sector will
be a decisive driver, despite its reduced share in GDP from 58.9% (1950-51) to about
22.2% (2003-04).
(3) Our agriculture sector offers promising prospects on both the demand and supply
sides.On the demand side, there is a big domestic market for food and other agricultural
produces.Further, the country is strategically located, being close to the middle-East
and South East Asian economies as important export destinations. Under the WTO
regime, the external markets are expected to offer unprecedented opportunities.
Globalization has brought a new perspective, fresh challenges and vast opportunities to
our agripreneurs. On the supply Side, we have fertile soils, the largest irrigated area in
the world and varied agro-climatic zones having potential to grow a wide variety of crops
to trade in the domestic and global markets.
(4) Among the critical issues faced by Indian agriculture, the Price distortions due to
long supply chain in farm produce marketing and Resultant low share of farmers in the
final price is an important matter. Integrated systems for value addition, processing,
cold- 11 - chain, storage and product handling are yet to materialize. Enabling
environment for agricultural marketing and contract farming, in spite of the initiatives by
the Government of India, is yet to be in position in many states.
(5) Notwithstanding the problems, our agriculture sector can benefit greatly from
integration with the commercial and industrial sector on sound business principles
including sound risk management practices and availability of credit on commercially
competitive terms.. The first Green Revolution was necessitated to ward off the threat of
national food insecurity on account of deficit production. On this count, it has achieved
its objectives. The next step, popularly christened as the Second Green Revolution is
the need of the hour, so as to achieve the commercialization of our agriculture and
infuse global competitiveness into Indian agribusiness.
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10. Credit for agriculture and rural development
(1)Institutional credit has enabled Indian farming community to access capital and
technology and thereby increases agricultural production. Short-term credit for purchase
of inputs and other services and the long-term credit for investment purposes are the
major facets of Agri-finance initiatives. The success of Green Revolution and the recent
shift from the subsistence level of production to market oriented approach can be
broadly attributed to institutional credit support.
(2) The Rural Financial Access Survey (2003) conducted by World Bank and NCAER in
Andhra Pradesh and Uttar Pradesh revealed that 44% rural households had informal
borrowings in the preceding 12 months on interest rates of up to 48% per annum. Only
21%- 12 - rural households had access to formal credit and majority of bank loans were
collateralized.
(3)The credit strategy for agricultural development in the country has been founded on
the philosophy of “growth with equity” and includes measures like directed targets of
lending to the agriculture sector, coupled with availability of refinance to the banks at
softer terms e.g., lower down-payment, longer maturity period and lower rates of
interest have helped in facilitating easier access and affordable credit to marginal and
small farmers. Furth expansion of credit to agriculture has to be on strictly commercially
viable terms, which in turn would enable the farmers to adopt new technologies of
production and supply chain management. In this context, credit support to marketing
and post harvest storage are to be strengthened further. Futures market and warehouse
receipt financing could play a key role in this respect.
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11. AGRICULTURAL MARKETING SCENARIO
(1) Global trends show that agriculture is becoming increasingly commercialized and is
gearing to produce for specific markets. Agricultural marketing is witnessing major
changes world over, owing to liberalization of trade in agricultural commodities. To
benefit farming community for the new global market access opportunities, the internal
agricultural marketing system in the country needs to be integrated and strengthened. It
requires a healthy environment, smooth channels for the transfer of produce, physical
infrastructure to support marketing activities; easy cash support to the widely scattered
community 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 marketed
through private trade operating in organized markets / mandies. However, restriction on
movement of agriculture goods and marketing of produce outside the regulated markets
hinders free movement of agro-goods under normal forces of demand and supply.
(2 )The Indian farming community consists mostly of small and marginal farmers. Micro
level studies indicate that small farm holdings contribute about 54% of marketable
surplus and distress sale by these small farmers account for about 50% of the
marketable surplus. The farmers often sell their produce to square off their debts soon
after harvesting. Large price spreads and low price realization due to imperfections and
weak linkages in commodity markets have dominantly characterized Indian agriculture.
(3) Expert Committee on Strengthening and Developing Agricultural Marketing and
Marketing Reforms (Shankar Lal Guru Committee: 2001) and the Inter-ministerial Task
Force on agricultural Marketing Reforms (2002) have identified areas such as contract
farming, private market yards, public-private partnership etc, for integration of farmers'
production 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 more
balanced approach to crop production and post-harvest operations will open up new
opportunities for commercialization of Indian agriculture and institutional finance has a
prominent 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 be
strengthened by increasing pledge finance, credit for marketing and introduction of
advances against Warehouse Receipts.
11

12. (6) Poor credit support from formal banking sector had an adverse effect on the
development of agricultural marketing systems in the country. The informal sector which
includes the commission agents (adatiyas) provides significant credit to agriculture and
wholesale trade but the cost of credit is high compared to the rate at which banks may
provide it. Bank credit to farmers against agriculture produce is not substantial. These
lacunae need to be corrected. The lending policies and programmers for financing the
agriculture should focus on the increased capital needs of agricultural marketing. The
nature of demand for agricultural credit in future would be different from the past. The
input based financing patterns of agricultural credit would give way to output based
finance, which are more aligned to the market, where production, processing and
marketing become an integrated activity and financed as a package.
(7) One of the strategies currently in vogue, in this respect is to promote pledge
financing which facilitates the usage of inventories of graded produce as collateral for
accessing credit from the organized credit market. It enables farmers to hold inventory
of graded produce under favorable storage conditions and standardized preservation
under supervised conditions in rural godowns and warehouses. It also advances
grading of farm produce to the farm gate, thus enabling farmers to improve price
realization considerably.
(8) Based on the foregoing discussion it is evident that agricultural marketing credit
support needs to be strengthened and reoriented.
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13. STATUTORY REQUIREMENTS
Dealing in Commodity Derivatives by banks:-
(1) Financing of agriculture poses certain special risks for banks and so, banks need to
mitigate 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 of
agricultural commodities may cause severe loss to the farmer who may be unable to
repay his dues to the bank. If the prices collapse, the distress in the farming community
can 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 been
examined in greater detail later in the report.
(2) A well established system of issuance of Warehouse Receipts is a pre-requisite of
an efficient market in commodity derivatives. Warehouse Receipts are also useful to the
farmer in securing timely finance from banks at economical rates. This issue, too, has
been discussed in greater detail later in the report.
(3) In terms of Section 8 of the Banking Regulation Act, 1949, no banking company
shall directly or indirectly deal in buying or selling or bartering of goods except in
connection with realisation of securities given to or held by it, or engage in any trade or
buy, sell or barter goods of others. For this purpose, “goods” means every kind of
movable property, other than actionable claims, stocks, shares, money, bullion and
specie and all instruments referred to in Clause (a) of sub-section (1) of Section 6 of
the 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 and
therefore, they are not permitted to participate in the commodity derivatives market.
(4)The Group deliberated whether banks may deal in commodity derivatives in terms of
the existing statutory provisions. In this connection an argument that restrictions placed
in Section 8 of B.R. Act, 1949 are not applicable to banks' buying and selling of
commodity derivatives was examined. It has been argued that Section 8 ibid prohibits
selling and buying of goods. In buying/selling commodity derivatives, what the bank is
buying/ 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 financial
instruments and hence, trading in commodity derivatives may be treated as permissible.
To remove any lingering doubt, banks could be prohibited from giving or taking physical
delivery. 4.1.5 On the other hand, two arguments were put forward against taking a view
such as above. Firstly, while it is desirable that banks should not deal in physical
commodities, yet a statutory prohibition on banks in taking or giving physical delivery
may act to their disadvantage as in no circumstance would they be able to force
13

14. physical delivery. Secondly, a commodity future is nothing but a exchange traded and
standardized 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 or
indirectly buying and selling of goods except in connection with realization of security.
The legislative intent is clear, that banks may finance commodity business but should
not 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 Central
Government may, by notification in the Official Gazette specify as a form of business in
which it is lawful for a banking company to engage. The proviso to section 8 of the
Banking Regulation Act, 1949 states that the section shall not apply to any such
business as is specified in pursuance of clause (o) of sub-section (1) of Section 6. The
Group decided to recommend that the Central Government may issue necessary
notification under clause (o) of sub-section (1) of Section 6 of the Banking Regulation
Act, 1949 to enable banks to deal in the business of agricultural commodities including
commodity derivatives.
Negotiability of Warehouse Receipt
(1) Central Warehousing Corporation (CWC) and State Warehousing Corporations
(SWCs) receive deposits from farmers, companies and Government, issuing
Warehouse Receipts denominated as negotiable or non-negotiable. Negotiability
should mean that Warehouse Receipts could be transferred between members of the
trade by endorsement, or by attaching a delivery note, without fear that ownership by
holders in due course can be successfully challenged, or subjected to unforeseen liens.
There is considerable uncertainty in practice as to whether Warehouse Receipts are
documents of title. So, with minor exceptions, they are not used to transfer title. There
has been a persistent demand that Warehouse Receipts may be made negotiable
instruments, 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 under
the Negotiable Instruments Act, 1881.However, the Act could not be passed.
(3) Ministry of Consumer Affairs, Food and Public Distribution have constituted a Core
Group for drafting the Negotiable Warehouse Receipts Act. We understand that the
proposed 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. the warehousing business. The said authority will register warehousemen, accreditation
agencies and certifying agencies for grading. The draft bill provides for issuance of
negotiable Warehouse Receipts. The validity of the negotiation of the receipt is not
impaired by the fact that (a) the negotiation was a breach of duty on the part of person
making the negotiation or (b) the owner of the receipt was induced by fraud, mistake, or
duress to entrust the possession or custody of the receipt to that person, if the person to
whom 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 such
legislation expeditiously.
(4)The Consultancy assignment by Forward Markets Commission for Development of
Warehousing Receipt System in India has dwelt at length on the concept of negotiability
and the need for the same. In some legal systems, a negotiable warehouse receipt is
one, which confers on a transferee "a direct interest in the underlying property, free of
any outstanding claims". On the other hand the term "negotiable" is often understood
as meaning that the warehouse receipt is freely transferable between successive
holders by endorsement.
(5) Law can provide for the rights of the holder of the negotiable Warehouse Receipt but
it should not necessarily be expected to become the norm. It would therefore be naïve
to expect a mere- 20 -enabling provision in the law, say, through a warehouse receipt
statute, to solve all the above-mentioned problems. As indicated by Justice S.M.
Jhunjhunwala when referring to the Negotiable Instruments Act of 1881, holding an
instrument to be negotiable is not the same as the practice that makes such instrument
negotiable, this quality being "the creature of custom of merchants". Hence a stronger
legal definition of warehouse receipt may be of little avail where there is a lack of volition
to accept the document as such.
(6) The Group deliberated on the issue and reached a conclusion that if India can create
a system by which Warehouse Receipts are freely transferred between holders, it will
reduce transactions costs and increase usage. For achieving this, beside the enabling
legislation, which can take considerable time, it will be necessary to create an
environment in which the Warehouse Receipts can be traded securely with minimum
transaction cost. One such proposed system is discussed in detail later in the report.
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16. AGRICULTURAL PRODUCE MARKETING COMMITTEES ACTS
(1) Agricultural produce marketing is subject to State level APMC Acts. The existing Act
originates from pre independence but marginal adjustments have occasionally been
made by individual States. This Act regulates marketing of “Notified Agricultural
Produce”, including the operation of wholesale markets, and compulsory sale of
produce through these markets. Notified Agricultural produce may be as many as over
hundred products. Thus, the wholesaling of agricultural produce is governed by the
Agricultural Produce Marketing Acts of various State governments. The specific
objective of market regulation is to ensure that farmers are offered prices that are fair
and transparent. The market committees have the authority to levy and collect market
fees on all transactions- 21 - within regulated markets of which there are more than
7,000 in the country.
(2) The Expert Committee constituted by the Ministry of Agriculture (2001) noted the
problems that have flowed from this monopoly. Licensed traders have functioned to
prevent new entrants. Such entry barriers have led market participants to fix their
charges without being checked by competition. Furthermore, the monopoly has fostered
a lack of accountability and as a result, important supporting services such as grading,
standardization and market Facilities have been neglected. The Expert Committee
goes on to recommend that registration (rather than licensing) with the APMC.The Inter
Ministerial Task Force set up by GOI has recommended that the APMC Acts be
amended to allow direct marketing and the establishment of agricultural markets in the
private cooperative sector. The Task Force viewed the government’s role as a facilitator
rather than that of having control over the management of markets.
(3) In 2003, the Ministry of Agriculture, Government of India prepared a Model Act for
agricultural produce marketing which the state governments could use as a model for
their individual Acts. Under the Model Act, private agents can be licensed to set up a
market or buy produce directly from farmers. The license will be given by an authority
of the State Government such as the State Agricultural Marketing Board. The present
Model Act for APMCs circulated by the Central Government is an initial exercise to
enable State Governments to involve professionals in market management. Initially
Public Private Partnerships (PPP) could be mobilized to accommodate issues relating to
infrastructure. Government of Karnataka has taken initiatives and facilitated the setting
up of a market by NDDB. Maharashtra also has amended the APMC Act in- 22 -April
2003, enabling farmers to sell their produce without involving intermediaries. Madhya
Pradesh and Punjab have taken the lead in allowing private participation in agricultural
marketing.
16

17. (4) While considering various suggestions to facilitate the ease with which banks as
lenders could dispose of the security in the form of agricultural produce, the necessity of
setting up of a nationwide spot trading facility in commodities was brought to the fore. It
was pointed out that the state level APMC Acts may act as hindrance to setting up of a
spot trading facility. The committee is of the opinion that the process of adopting of
model act by more states would be hastened by setting up of a spot trading facility
under a Closed User Group which has been discussed later in the report.
17

18. ECONOMIC REVIEW
Growth rebounded strongly in 2010-11, after the dip in 2008-09 in the wake of the global
financial crisis and the recovery in 2009-10. However, inflation rose and remained
stubbornly high throughout 2010-11 as supply-side shocks got generalized amidst
strong aggregate demand. With added risks to growth from inflation above the threshold
level where growth-inflation trade-off can work, the Reserve Bank responded with
eleven rate hikes between March 2010 and July 2011. This lifted effective policy rates
by 475 basis points in the current interest rate cycle. As a result of monetary tightening
and deteriorating global economic conditions, some moderation in growth and
significant moderation in inflation from the later part of the year is anticipated going
forward. However, risk demanding compression remains from likely slippage on
envisaged fiscal consolidation.
2010-11 marked the completion of the process of recovery from the adverse
impact of the global financial crisis and the consequent slowdown of the global
economy. Slack in the advanced economies, with their output gap estimated at 3.4 per
cent in 2010, as also the uncertainty about their future growth, employment and debt
still impinge upon the activity levels in India. However, growth in India was back to the
earlier 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 and
global commodity prices firming up in the second half of 2010-11, inflation expectations
started to feed on themselves and cost push factors from the manufacturing side
exerted pressures on inflation. Inflation turned persistent and generalized as a result.
The stance of monetary policy continued to be anti-inflationary during the course of
2010-11 and in the year so far to contain inflation and anchor inflation expectations.
THE REAL ECONOMY
Growth rebounds strongly in 2010-11
Real GDP growth at factor cost increased to 8.5 per cent in 2010-11 from 8.0 per cent in
2009-10. At this pace, the real GDP growth rate increased for the second successive
year after the global crisis-induced sharp slowdown in 2008-09.
The main impetus to growth during 2010-11 emanated from agriculture which
rebounded to above-trend growth rate on the back of a normal monsoon. Reflecting
this, the contribution of the agriculture sector to overall GDP growth increased sharply in
2010-11 (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 phase
of 2003-08.
Sustainability of high growth – enabling conditions
Growth is expected to moderate to the trend level of about 8 per cent in 2011-12. If
global conditions worsen, downside bias to this projection may arise. This raises
concern about sustainability of the high growth over the medium to long-term. The
Planning Commission in its paper on Issues for the Approach to the Twelfth Plan (2012-
18

19. 17) proposed a growth target of 9.0-9.5 per cent. A pre-requisite for high growth is
upfront removal of structural constraints with close attention on legal and institutional
framework, as also execution and governance. In the short run, growth will have to
contend with risks from low agricultural productivity, poor infrastructure, high global
commodity prices, quality of corporate governance and low productivity enhancement in
the manufacturing sector. Furthermore, the substantial increase in oil prices in 2010-11
and 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 up
from 33.7 per cent and 36.5 per cent of GDP in 2009-10, in order to achieve GDP
growth of 9.5 per cent, envisaged for the Twelfth Five Year Plan. An investment rate of
around 38-39 per cent with an ICOR of around 4.1 (as was envisaged for the Eleventh
Five Year Plan) would be required. Thus, the investment rate needs to be stepped up
by 2.5-3.0 percentage points. The gross domestic saving rate needs to be augmented
to 37 per cent or more. This underscores the importance of at least attaining the high
levels 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 recent
years, largely reflecting the reallocation of savings between financial and physical
assets as well as the near synchronous movement of changes in financial assets and
financial liabilities.
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20. Technology breakthroughs key to maintaining demand-supply balances
There are several factors constraining agriculture supply response thereby impacting
inflation. The foremost relates to low productivity and monsoon dependence. Presently,
productivity levels remain low and productivity differentials across States and crops
continue 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, will
require considerable technological and institutional improvements.
Productivity in Indian agriculture is low compared with productivity at the world level and
major producers such as China and the US (Chart II.4). Even the most productive
States 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 in
productivity of these crops across States/regions (Chart II.5). This is significant given
the import dependence for edible oils and pulses. Increase in food grain productivity can
be realized by ensuring soil conservation, which has been neglected and use of optimal
and locale-specific agricultural practices and introduction of precision agriculture.
India’s self-sufficiency in food and other agro products can be endangered if technology
advancements do not keep pace with growing demand stemming from rising population
and income levels. Policy interventions are required to support sustainable growth in
crop production and environmental protection through development of improved and
diversified cultivars, eco-friendly and cost-effective pest management practices, efficient
seed supply systems, and commercialization of the diversified and alternative uses of
crop produce. This, in turn, would improve farm incomes and food security, while
helping to keep food inflation low.
20

21. Notwithstanding the sharp decline in the share of agriculture in GDP from an average of
53 per cent in the fifties to 19 per cent in the 2000s, 52 per cent of the work force
continues to be engaged in agriculture. With just around 44.6 per cent of the gross
cropped area irrigated (as per the latest data available for 2007-08), the dependence of
Indian agriculture on rainfall remains preponderant (Chart II.6). It is in this backdrop that
public policy interventions to step up investment and productivity enhancements for
augmenting food supplies, assumes importance.
Even though the per capita availability of milk has increased from 194 grams per day in
1994-95 to 258 grams per day in 2008-09, there is a need to address the structural
constraints ailing the sector. The productivity of Indian bovine compares unfavorably
with the world average mainly due to gradual genetic deterioration, poor fertility, as well
as poor nutritive value of feed and fodder. To sustain production of milk, Accelerated
Fodder Development Programmed intended to benefit farmers in 25,000 villages has
been launched. There is need for research focused on ecological adaptability of cattle
and developing the disease resistance of cross-bred species.
Need to focus on food management in times of high food inflation, production and
wastage
21

22. .Procurement and Pricing
Procurement 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 based
on the recommendations of the Commission for Agricultural Costs and Prices (CACP).
In addition, in recent years, a number of states have opted for Decentralized
Procurement Scheme introduced in 1997, under which food grains are procured and
distributed by the State governments themselves. Between 2006-07 and 2010-11, MSP
of rice and wheat were hiked at an average annual rate of 14.1 per cent and 14.6 per
cent, respectively. On average, agricultural price policy has provided a margin of around
20 per cent over total costs to both rice and wheat farmers. This has ensured sufficient
and steady procurement of food grains which can cater to the demand for the PDS and
various welfare schemes of the Government. Price interventions alone are, however,
inadequate for ensuring better food management and greater focus on non-price
interventions is necessary. Skewed incentives have affected land use and cropping
pattern. Spatially, bulk of the public procurement remains confined to a few States for
want of access to take-in windows.
Production and Food Security
Food grain production in India grew at an average rate of 1.6 per cent annually between
1990 and 2010, lower than the decadal rate of population growth of 1.8 per cent.. This
may have implications for food security in future.
The NFSB has been approved by the Empowered Group of Ministers (EGoM) on food
security.
Distribution and Delivery Mechanism
Distribution and delivery have been the most intricate and challenging aspects of food
management in the country. The existing PDS in India with roughly 0.5 million Fair Price
Shops (FPS) is plagued with deficiencies such as low margins that create perverse
incentives for diversion of food.
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23. INDIAN AGRICULTURE AND REFORM :
CONCERNS, ISSUES AND AGENDA
RBI had conducted the first ever Rural Credit Survey in the world, promoted the
National Bank for Agriculture and Rural Development (NABARD) and, is financing
endowment chairs on the subject in Universities. Apart from this, belonging to Andhra
Pradesh and having worked in the Finance and Planning Department in the State of
Andhra Pradesh for several years, I have naturally been taking significant interest in
matters related to agriculture.
On hearing the annual report on the activities of the Society, one cannot but be
impressed with the remarkable enthusiasm and commitment with which the Indian
Society of Agricultural Marketing is able to carry on its endeavor. There is also a
distinguishing feature of the Conference on Agricultural Marketing.
CONCERNS
The most important aspect that has been referred to in the Reserve Bank of India
Annual Report and in the Report on Currency and Finance of recent years is a serious
concern that of late, real Gross Domestic Product (GDP) in agriculture and allied
activities 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 of
1.7 per cent has increased to 1.9 per cent in the second quarter. In the third quarter, the
lower growth of 1.2 per cent can still be considered significant when compared with the
absolute decline of 1.1 per cent during the corresponding quarter of 1999-00. The
movements in the index of agricultural production suggest that this recent downturn is
part of a longer-term trend. The annual trend growth rate of agricultural production has
decelerated to 2.2 per cent in the 1990s from 3.1 per cent in the 1980s. The 1990s also
witnessed considerable degree of variability of agricultural output with five years in the
decade recording absolute declines in output.
Overall, it may be argued by some that the secular decline in output growth is not a
matter of serious concern since structural transformation of the economy may imply that
growth in agriculture would be less than that in non-agricultural sectors. Although the
contribution of agriculture and allied activities to the GDP has declined from 35 per cent
in the 1980s to 25 per cent in 1999-2000, more than two-third of the population
continues to depend upon agriculture. Growth in sectors other than agriculture is not
absorbing 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 level
making it what may be called peoples sector. The agricultural sector also makes a
significant contribution to India’s exports, accounting for a little less than a fifth of total
merchandise exports. Also, despite some degree of weatherproofing acquired by the
economy in recent years, agriculture continues to play a critical role in determining the
macroeconomic balances in our country especially in generating private consumption
demand.
It is no surprise therefore, that considerable anxiety is being expressed in some
quarters that perhaps the poor performance of agriculture in the ‘nineties indicates that
the process of reforms has by-passed the agricultural sector. It is also argued that while
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24. there has been emphasis on trade, industry and the financial sector, attention of the
reform in some sense has not percolated to the agricultural sector, although as will be
explained later, terms of trade improved for agriculture.
Observers who compare the performance of India and China feel that in the reform
cycle in China, agricultural reforms were started in the early stage, which helped
increase China’s rate of growth of this sector and consequently the potential output of
the economy as a whole, thereby placing it on a high growth path. In India, while
financial sector reforms have been undertaken early in the reform cycle, the
commentators feel that reforms in agriculture sector have not been as much in the
forefront both in terms of sequencing and overall priority. This issue of appropriate
priority for agriculture in our reform process needs to be explored further in view of the
fact that the trends in recent years are clearly indicative of a possible long-term
deceleration in agriculture.
Some studies have been undertaken in the Reserve Bank of India focusing on some of
these issues. The internal research studies seem to indicate that there are two major
areas, which are constraining the upward movement of output towards its potential for
India. These relate to agricultural sector and physical infrastructure. These preliminary
findings, which are yet to be confirmed, add weight to the argument already articulated
in the recent Annual Reports that agriculture has to be on the top of the agenda of
reforms in India.
In regard to the importance of agriculture in a broader socio-economic sense, all the
three basic objectives of economic development of the country, namely, output growth,
price stability and poverty alleviation are best served by growth of agriculture sector. It
may sound ironic that agriculture is one sector where there is convergence of all the
three main objectives of economic policy in India but we seem to have relegated the
sector to the background in the process of economic reform. In fact, there is a feeling
that the economy may face slowdown if there is inadequate pickup in demand from rural
areas and the depressed price conditions in agricultural commodities in the recent past
have brought to the fore the criticality of agriculture sector in enabling Indian economy
to maintain a respectable growth rate.
ISSUES
First issue relates to macroeconomic balances. In terms of macro balances, the
overall saving-investment gap in India in the recent years has been between 1.0 and 1.4
per cent of GDP. This is very low, and it has tended to move down in the second half of
1990s. This is contrary to the general impression that after liberalization, increased
dependence is being placed on foreign flows. It is, however not so, since the role of
foreign 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 the
private sector. But the data, particularly the recent CSO data, indicates that the contrary
has occurred. Earlier, government savings used to be negative and the public
enterprises savings were positive, and between the government and public enterprises
put together, the public sector as a whole showed marginal positive saving. Now, the
government 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
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25. the private sector to enable them to undertake larger investments, the way the fiscal
reform has been managed did result in a situation where the saving-investment gap has
moved adverse to the private sector, and public sector (including Government)dissaving
has in fact increased in recent years.
It can be observed that out of the gross domestic saving of 22 per cent, 19.8 per cent
are household saving, 50-60 per cent of which is financial saving. Furthermore, about
80 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 revenue
deficits of the Centre and States indicate that much of the private financial savings
absorbed 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 gross
domestic capital formation has declined from 6.8 per cent in 1993-94 to 5.5 per cent in
1998-99. The decline in capital formation has been more pronounced in the public
sector, reflecting the persistent and large revenue deficits. The share of agriculture and
allied activities in total Plan outlay has declined from 6.1 per cent in the Sixth Plan
Period to an estimated 4.4 per cent in the Ninth Plan Period. The share of irrigation and
flood control in total outlay has also shrunk from 10.0 per cent to an estimated 6.5 per
cent over the Plan periods.
Early correction of overall macro imbalances by improving fiscal management will help
to release higher investible resources in the country, which would benefit agriculture
also. But, this cannot be an excuse for not increasing public investments in agriculture.
Secondly, while public investment in agriculture is coming down, the subsidy bill
accruing towards agriculture is going up though the general impression is that all
subsidies have been pruned in recent years. Budgetary subsidies for the agriculture
sector have been increasing in nominal terms over the years. The increase is
concentrated on input subsidies, though food subsidies are also incurred to maintain
high levels of food stocks.
The share of fertilizer subsidies in the total explicit subsidies of the central government
steadily increased from 35 per cent in the 1980s to 42 per cent in the first half of the
1990s and further to 49.8 per cent in the second half. Fertilizer subsidy as a ratio to
GDP fell from 0.8 per cent in 1990-91 to 0.7 per cent in 1999-00. In absolute terms, it
rose from Rs.4,390 crore to Rs.13,463 crore during the same period. Though this
subsidy is formally attributed to agriculture, in reality, most of it supports fertiliser
manufacturing industry. States’ power sector subsidies to agriculture have also
undergone steady growth during the 1990s. Power sector subsidies to agriculture
account for well over one per cent of GDP. Hidden subsidies provided by the States for
agriculture increased from Rs.5,938 crore in 1991-92 to Rs.25,577 crore in 1999-00. In
comparison, in 1990-91, the Plan outlay of agriculture sector including irrigation was
Rs.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 given
the overall resource constraint, as to what would be good for agriculture at this juncture
in our country – increase in subsidies or more investment. Although it is recognized that
subsidies can be regarded as production equivalents, the question that has to be raised
in the context of overall balance is whether it would be worthwhile shifting the total
spending on subsidies to investment, especially in terms of contribution to agricultural
25

26. employment and poverty alleviation. Thus, the trade-off between investment in
agriculture 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 be
viewed in two different ways. One, the Reserve Bank has been taking a number of
initiatives to ensure adequate credit to agriculture sector and recently the Capoor
Committee had made a number of recommendations on issues relating to cooperative
sector. Two, the issue may also be viewed in the broader perspective of institutional
dynamics. There are broadly three categories of institutions which deliver credit to rural
areas, 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 being
subjected to greater competition from private and foreign banks. Some of the public
sector commercial banks are sometimes adopting their competitors’ strategies without
recognizing that their comparative advantage lies in rural and semi-urban areas. Sooner
the public sector banks recognize the importance of rural economies better it is for their
long-term commercial sustainability. The RRBs have been in the early years subjected
to an interest rate regime that led inexorably to accumulated losses, which are
continuing to constrain their operations even now. The rural co-operatives sector has
not come up to expectations in large parts of the country and is heavily dependant on
flow of finance from NABARD.
The issue, therefore, Is what are the ideal instruments that would deliver adequate and
timely agricultural credit? It is not necessary that the same institutions that have been
responsible for providing agricultural credit for the last twenty years or so should
continue to do so as they did in the past. The moment agriculture is accorded high
priority, revamping the rural cooperatives also come on top of the agenda, which would
require recapitalizing them. More attention to the actual revamping process of RRBs
would need to be bestowed.
The third item of the agenda will, therefore, be the appropriate institutional changes that
are required to ensure necessary credit flow to agriculture. Clearly, there is a need to
examine the issue of rural credit and rural credit delivery systems in an objective as well
as transparent way and accord them priority in legislative actions and financial
allocations.
Fourthly, as a result of reform measures, there are some commercial banks that are
not able to reach the prescribed target of lending to agriculture. As per the current
prescription, 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 in
agriculture related activities, mainly rural infrastructure. An issue has been raised that
such a process amounts to indirect borrowings from the banks by State Governments
and that funds originally meant to be deployed for agriculture are diverted for public
investment. Incidentally, it is worth noting that even after accounting for such Rural
Infrastructure Development Fund (RIDF) allocations during the reform era, public
investment in agriculture has slackened. Furthermore, the risk based rates of return on
banks’ investments in RIDF are better than similar returns by lending to agriculture,
implying incentive incompatibility of RIDF with the main objective. Also, coverage of
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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 such
funds to agricultural operations through revamped systems of RRBs and cooperatives.
Incidentally, banks have been arguing that a constraint facing them with regard to
deployment of agriculture credit is lack of viable credit products, implying lack of
demand for credit. On the other hand, there exists an informal sector which provides
agricultural credit at high interest rates, which indicates that there is no demand
constraint. The dichotomy between the formal and informal sectors could be explained
by the lack of banks’ capacity to reach potential borrowers, which in turn could be
explained by attitudinal, procedural and institutional factors. In fact, the very purpose of
deregulation of interest rates for this sector, which was expected to encourage banks to
lend 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 past
relates to micro-finance. A Committee was constituted under the leadership of NABARD
for this purpose. Lending under micro finance can be formal or informal. In Professor
Ram Reddy memorial Lecture delivered by the same author, it has been mentioned that
the temptation to bureaucratize and regulate microfinance must be resisted. This aspect
is also being carefully looked into by the RBI.
Sixthly, another matter that has been engaging the attention of the policy makers for
the past ten years relates to the huge food stocks, but the problem has exacerbated in
recent years. There are several aspects that need to be carefully considered. The world
food market and the market instruments by which food stocks are imported have
changed in recent years. It is possible to buy options so that we can pay now merely for
an option to import specific quantities at a price. Another issue relates to types of
storage facilities that need improvement in public sector and the compelling requirement
of creating private storage facilities. The cost and efficiency of operations of Food
Corporation of India has also been a subject of scrutiny more recently by a study
conducted in Administrative Staff College of India. The pattern of food consumption,
food storage, food production and food trading in the world has changed. Therefore, our
policy on what constitutes optimal food stocks would need to be revisited and this was
raised in the RBI Annual Report last year. Of direct interest to the RBI is the monetary
and fiscal implication of buffer stock operations. The Reserve Bank of India has
requested the Administrative Staff College of India to study this issue separately and
submit a technical report.
Seventhly, the issue of terms of trade is important. The terms of trade in agriculture in
India is not dwelt upon have except to recognize that the terms of trade have on the
whole moved somewhat favorably to agriculture in recent years. Recently the global
competitiveness of our agriculture sector has gained attention of policy-makers but the
aspect of supply elasticity’s in our economy needs to be looked into. If public investment
and market infrastructure in agriculture continue to be inadequate, there could be a
serious problem of competitiveness and adequate supply response. No doubt, India is a
large producer of several agricultural products. In terms of quantity of production, India
is the top producer in the world in milk, and second largest in wheat and rice. We
should, therefore, be concerned about improving quality while maintaining the lead in
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28. quantity. If the focus is on global agriculture, it is important to think of both quality and
quantity of production. The issue is whether it is possible to create an environment
where we can compete in terms of quality also.
Quality in global standards has several dimensions. Quality may mean rigid adherence
to global environmental and health standards. It may also mean rigid adherence to
delivery-schedules, in terms of both quantity and quality, and timeliness. Global
orientation would require a complete re-orientation of what may be called ‘towards a
more aggressive thinking’, rather than ‘defensive thinking’, to create an enabling
institutional environment to compete and survive. For example, it is not desirable to
have highly segmented markets, although large quantities are available in the country.
Certification of quality requires institutional arrangements within the country that carry
credibility in both domestic and foreign markets. In this context, the institutional
arrangements such as commodity exchange assumes importance and it is an area
where we are still rooted in the past. A thorough review of adequacy of institutional
arrangements in quality control, certification and trading in agriculture sector should be
a national priority to take advantage of global opportunities. Indeed, with liberalisation of
imports, even domestic markets would demand such institutional changes if our
agriculture sector has to survive competition brought about trade liberalisation.
Eighth, another important aspect relates to the mindset on role of middlemen. In India
the general attitude to trade especially in agriculture has been to favour elimination of
middlemen or ensure that middlemen’s functions are carried out by public sector or
cooperatives in name, but public sector in reality. However, experience has shown that
public sector as middleman also utilises other middlemen and in any case has not been
cost effective. In a modern economy, it is inconceivable that the role of middlemen can
be eliminated. This underscores the need to regulate the middlemen in order to make
them more efficient, competitive and accountable. It is necessary to move to a situation
where an efficient system of market intermediaries is created in agriculture sector. The
related issue of mindset relates to futures-trading. There needs to be a mechanism for
hedging risks. Again, this should be adequately regulated in a competitive environment
so as to ward off unworthy speculation. This raises among others, issues of financing
trade, settlement mechanisms, ensuring that futures contracts are honoured, etc. The
concept of nationwide multi-commodity exchange has been mooted in the country. A
Committee was appointed, of which RBI was a member, to work on these issues. The
Report 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 of
uncertainty should be distinguished from the issue of commercial viability. Thus,
advocating subsidised credit to tackle the problem of distress among farmers due to
weather failure or depressed prices is not enough. The current regime of subsidies does
not tackle the major problem of agriculture viz. uncertainty. Uncertainty of weather may
be alleviated by insurance-mechanisms but unfortunately the experience so far, with
what has essentially been insurance of credit to agriculture, has not been encouraging.
Commercialisation of agriculture can progress only when institutional arrangements
such as insurance penetrate deep within the agriculture sector.
In the financial world, it is recognized that there are certain uncertainties and hence
financial participants are encouraged to devise mechanisms for hedging. Similarly,
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29. modern agriculture too will have to have a mechanism by which farmers are able to
hedge risks. This is possible only if there are proper institutional mechanisms and
incentives to hedge. The traditional approach of handling demand or supply side
problems or problems of uncertainty directly and essentially by Government in an ad
hoc manner, can no longer serve the purpose.
Finally, Reserve Bank of India recognizes Self Regulatory Organizations (SROs) in the
financial sector. The RBI encourages them to produce standard documentation for
trading in repo market. However, genuine self regulatory organizations do not seem to
have been nurtured in agriculture sector and in any case interaction between regulatory
agencies and SROs has not taken roots in agriculture sector, though it has achieved
some progress in the financial sector.
AGENDA: REDEFINE ROLE OF GOVERNMENT
It is clear that improving the growth rate and competitiveness of agriculture is very
critical at this juncture for a variety of reasons, including the lackluster performance of
agriculture in the recent past and specially the impact of liberalized trade-regime being
announced. There is some merit in the argument that the reform process has bypassed
agriculture so far and that this is best illustrated by the co-existence of segmented and
overregulated domestic markets with liberalized export–import regime in agricultural
commodities.
Briefly stated, those relevant are overall fiscal imbalances, declining and inadequate
public-investments in agriculture accompanied by increasing share of patently
unproductive and distortionary subsidies. Serious deficiencies relate to the legal and
institutional framework for flow of credit to agriculture, maintenance of huge food stocks
with considerable fiscal and monetary implications, virtual non-existence of institutional
mechanisms to promote assurance of quality and assured delivery in a nation-wide
market, outdated attitudes to the role of so-called middlemen, insurance, hedging and
finally overarching bureaucratization with little attention to promotion of Self-Regulatory
Organizations. In this background, the agenda for reform virtually encompasses a
thorough change in mindset and overhaul of legal and institutional mechanisms to
enable a growing, healthy and efficient agriculture sector. In brief, the role of
Government 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 fiscal
resources in agriculture and a medium term time-bound plan to transform the existing
system of subsidies in favors of a few to a more desirable well spread out public
investments. In other words, instrumentalism in policy-change should not be mistaken
for a sequenced reform in deployment of public funds in agriculture.
(2) The distortions and outdated policy approaches to the deployment of credit to
agriculture must be recognized and the institutional as well as instrument changes
urgently needed should be spelt out, but this would need governmental intervention. In
a deregulated financial sector, enabling environment and incentives are infinitely
superior to directions or moral suasion.
(3) Uncertainty in agricultural activities is admittedly more than in other activities and the
institutional arrangements, whether in public domain or private initiative are non-
existent. Commercialization of agriculture and competition warrant mechanisms to meet
29

30. uncertainties while enhancing productivity. Meeting uncertainty is different from
subsidizing non-viable operations, and putting in place an institutional framework for
insurance, hedging and public resources to make such mechanisms initially viable are
necessary as part of refocusing the mindset and resources of government to the
emerging challenges of current slowdown and future threat of global competition.
(4) Public policy should turn immediate attention to trading and marketing aspects, with
a clear admission of need to change mindset. For example, middlemen are inevitable
and the issue is how to foster competition and assure regulation of such middlemen
keeping in view the interests of producers as well as consumers. Certification and
credible regulation of trade to ensure competition quality and transparency protects both
producer and consumer far better than price and distribution controls, provided public
distributing systems are oriented to be more focussed, selective and efficient. A national
commodity exchange is but one element of reform. More but a different type of
governmental 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 and
experiences in other countries may not be irrelevant though our needs and cultural
milieu are unique. A major challenge is to devise nationwide formats that can cater to
nationally integrated markets while allowing for local variations and initiatives
particularly at the state level.
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31. CONCLUSION:- To sum up, inadequate finance and outdated as well as inappropriate
institutional framework are the twin problems and, of the two, institutional reforms are
needed immediately requiring changes in mindset and redefining the role of
government.
RESULT:- RBI plays vital role in Indian Economy.
REFERENCE:
 Prof. Anand Sir
 Macro-economic book
 www.google.com
 www.wikipidea.com
 www.rbi.org.in
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