V I J A Y B A L U R A S K A R

N A V I M U M B A I

9 8 3 3 0 6 6 3 2 5

[ T y p e t h e f a x n u m b e r ]

1 6 - J a n - 1 2

VIJAY BALU RASKAR

Report

Role of RBI in Agriculture Development in

India.

Brief description

Role of RBI in agriculture development in India

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

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CONTENTS

S NO PARTICULARS PAGE NO

1 Report Details- Name, Batch etc 1

2 Contents – Report 2

3 Introduction- Aim, Objectives & Reasons of establishments

3

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 Development

9

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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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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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.

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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

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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

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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.

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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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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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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.

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(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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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

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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

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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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.

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(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.

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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-

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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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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.

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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

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.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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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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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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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

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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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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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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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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

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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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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

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www.wikipidea.com

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