Following the alarm caused by suicides by farmers in various parts of the country, the government is considering a slew of measures aimed at improving their lot, including a hike in subsidy on farm loans, tax free bonds by Nabard to recapitalise rural co-operative banks and sops to strengthen rural infrastructure.
Sources say some of these may find a place in Budget 2007-08, including permitting Nabard to float tax free bonds to re-capitalise rural co-operative banks. The sector needs Rs 15,000 crore (Rs 150 billion).
The Centre through Nabard and state governments has issued bonds, but these are not sufficient.
Nabard has a 'Bhavishya Nirman Bond' with a pre-tax yearly return of 7.5 per cent and post-tax return of 6.9 per cent.
However, to expand the subscriber base it may be necessary to offer bonds at more attractive rates. There is an expectation that this may be allowed.
Crop failures and the growing incidence of rural indebtedness has compelled the government to offer agriculturists cheaper loans. Besides, the UPA government has launched the Rs 50,000 crore (Rs 500 billion) 'Bharat Nirman Programme' to develop rural infrastructure.
There is also an expectation that the government may hike loan subsidy to farmers from the present level of two per cent.
The government has given nearly Rs 1,900 crore (Rs 19 billion) as interest subsidy to farmers who avail of credit at seven per cent.
In the forthcoming Budget, the interest subsidy is likely to be phenomenally high which will enable banks to offer loans at a higher subsidy.
The increase in repo rate and cash reserve ratio has upset the apple cart leading to rate hikes.
Official sources say access to financial resources enables the poor to exploit investment opportunities, reduce their vulnerability to shocks and promotes economic growth. But lack of credit at reasonable rates is a persistent problem, in large parts, reflecting the collapse of the co-operative credit system.
Besides, the failure of the organised credit system in extending credit has led to excessive dependence on informal sources usually at exhorbitant interest rates. This, they say, is at the root of farmers' distress reflected in excessive indebtedness.
The sources said there are, however, some positive signs on the horizon. For example, the acceptance by the government of the Vaidyanathan Committee Report on co-operatives and the success of commercial banks to almost double the flow of agricultural credit after 2003.
Nonetheless, problems still loom large. Implementation of the Vaidyanathan Committee has been tardy because of the reluctance of states to give up control over co-operatives.
Officials admit that problems of long-term credit structure have not been addressed and the large increase in commercial banks credit has not significantly improved access in either poorly banked regions or for small and marginal farmers and tenants. There is thus a need for doing more, they say.
The Budget may be the right place.