Tuesday, June 29, 2010

Eradication of Rural Poverty through Low Cost Mechanization-The Role of Rural Credit in Creating a “Service Sector” in the Rural Economy

Eradication of Rural Poverty through Low Cost Mechanization-The Role of Rural Credit in Creating a “Service Sector” in the Rural Economy
An Article by Mr. Ravindra Kumar, Managing Director, SAS Motors Limited

The removal of rural poverty is now acknowledged as the most important objective of National Governance. Without the achievement of this objective the nation cannot move forward and the catastrophic social and political consequences would be devastating.

Agricultural Credit vs Rural Credit

There appears to be some confusion with respect to the distinction between Agricultural and Rural Credit. Though, there is a substantive interface between the two, leading to a conceptual non distinction, this distinction needs to be clarified and considered by the decision makers to optimize the achievement of the objectives.

We shall restrict our analysis to the sector of mechanization of farming and rural transportation by evaluating the present policies and procedures.

1. The impact of the provision of resource on the ‘poverty line’ in rural areas, measured by the increase in employment opportunities, or growth in per capita income.
2. The equity of the distribution of credit, i.e., are the actual beneficiaries of the credit facilities, the intended ones.
3. The percentage of bad debts or non-performing assets on the credit advanced.
4. The quantum of social dividend accrued to the government.

Ground Realities in Rural India

The demographic composition of rural India consists of:

a) Land owning farmers with a land holding from 1 acre to 12 acres.
b) Land less farmers (who farm the land not owned by them at their own risk).
c) Agricultural labour who are employed for agricultural activities on a contractual basis.
d) Rural population that is engaged in non-agricultural activities (artisans and workers) in rural industrial and commercial establishments.

The composition of rural population and its vocation needs to be carefully considered to equitably distribute rural credit amongst the constituents on a need based basis of the rural population to bring a radical change in the persistence of rural poverty.

The inherent inadequacies of policies and procedures in dispersement of rural credit

With the average land holding size in rural India of 3.6 acres, what is the suitable model of mechanization that is required or is relevant to bring about the desired results towards achieving elimination of rural poverty?

The beneficiaries of the rural credit by the existing delivery mechanisms

If the delivery of the rural credit is to be equitable, it must reach the intended beneficiaries and be invested in creation of assets, which would enable them to establish a permanent source of income, moving them above the poverty line and improve their earnings in a self sustained manner through productive use of the assets that come into their possession as a result of rural credit schemes.

The delivery mechanisms of rural credit (like the tractor finance scheme) are inherently deficient. Nationalized Banks Farm Mechanization Scheme, stipulates that finance can be availed for purchase of tractors etc. where eligibility is established for tractors by land holdings of 6-8 acres of perennial irrigated land for more than 35 Hp and 4 acres for less than 35 Hp.

Anybody familiar with agricultural operations would realize that a tractor with engine power of 35 Hp would be able to complete all soil preparation activities on 8 acres of land for 2 crops within 15 days to 20 days (maximum) out of 365 days of a year.

This means that the tractor is either idle for most of the year or is being used to create an alternate income stream for more than 10 months of the year.

The fact is, that, by financing a tractor more than 35 Hp or less than 35 Hp at an average price of Rs. 4 lacs, to a household already owning 8 acres of land (capable of sustaining the family), has been provided with a additional source of income which is, insufficient to service the debt and it also does not contribute to removal of rural poverty.

The beneficiary is a well off Zamindar with a net worth in excess of Rs. 12 Lacs (4 acres) or Rs. 24 Lacs (8 acres), where as the land less farmer, the marginal farmer and the agricultural labourer is self-excluded from the credit scheme.

When analyzed deeper the deficiencies of the scheme become more apparent.

1. The 4 acre/ 8 acre Zaminder due to his “social positioning” in the village would not himself work with the tractor or offer “hire services” for various needs (both agricultural and transportation) to those who are subordinate in the social hierarchy of the village. Nor would he hire out his tractor driven by an employee to owners of small fields (1 or 2 acres)

2. The value erosion of the tractor is the difference between the cost of a new tractor and its market value as a used tractor. The present market situation erodes the value of a Rs. 3-4 lakh tractor by as much as Rs. 1.5 lakhs in the first year itself. If the interest on the loan is computed @ 10% p.a. it adds another Rs. 30 thousand to the cost of owing a new tractor in the first year itself.

If the Zaminder hired a tractor at Rs. 200/hour for 150 hours in a year he would spend Rs. 30,000 only against a cost of Rs. 180,000 for owning a new tractor financed under the existing “Tractor Finance Scheme of Nationalized Banks.”

3. Agriculture is a seasonal activity and if the soil preparation and related activities are delayed even by a week it leads to a substantial loss of crop for a farmer. On account of this seasonality the demand for tractors or power tillers is acute and the supply is grossly inadequate during the season. The marginal small farmer is the one who is left out in a scramble. The tractor hire rates fluctuate widely in response to this demand pattern eroding the productivity and profitability of the small/marginal farmers who is not a beneficiary of the Tractor Finance Scheme.

4.Therefore it would be reasonable to conclude that the Tractor Finance Scheme leads a well off farmer into a Debt Trap.(hence the huge default on tractor loans). It does not contribute to the rural economy by increasing gross agricultural output. Nor is it prudent because it does not take into account the revenue stream to service the debt and only securitizes the collateral asset of Land Holding.

The Rural Service Sector to Transform Rural Economy

Credit should be directed towards creating a vibrant service sector in Rural India by disbursing it to the vast population of literate rural youth. The eligibility criteria should be basic literacy and age (not over 50 years). The requirement of land holding should be dispensed with for low cost small tractors built with appropriate technology requiring investments upto Rs. 1.5 lacs (inclusive of implements/accessories). It should be financed on the security of the asset (the tractor) itself as in the case of 3 wheelers (also costing approx. Rs. 1.5 lac). Higher margin of upto 25% would be insisted upon and EMI installments could be demanded on a quaterly basis without moratorium and the tenure of the loan should be short 5 (the productive service life of a vehicle).

Cost Benefit Analysis:

Loan for a small tractor + implements costing Rs. 1.5 lacs with a margin of 25 % and interest of 10% p.a. for 5 years.

Loan Amount Rs. 1,12,500
Margin Rs 37,500

A. EMI (monthly installments) Rs 2390/month

B. Revenues = 8 hrs/day x 20 days/month @ Rs 150/hr (average)
=Rs. 24000/ month


Fuel @ 2 ltrs/hour @ Rs.30/ltr x 150 hrs.
=Rs. 9000/ month ------------------- C

Lubricants/repairs +maintenance and depreciation
= Rs 2500/month----------------------D

Total C +D =11500/month
Add EMI A =2390/month

Total Outflow= 13890

Profit =10110 /month/tractor

The social divident of such a scheme would be spectacular and would measure well against the “parameters” mentioned earlier.

1. When compared to financing of a Rs. 4.5 lac tractor to an 8-acre owing Zaminder the same value of credit could bring prosperity to 3 poor landless or marginal farmers’ families.
2. The availability of tractors during peak seasons would increase 3 times so that small land holdings would have more availability of mechanization than otherwise.
3. The cost of agricultural and transportation operations in rural areas would come down by 25% - 30% adding to the agricultural productivity for the rural economy.
4. Collateral employment opportunities for servicing, maintaining tractors, trading spare parts and lubricants would result in increased employment of at least 1:2 for every tractor financed.
5. Due to lower ownership costs, fuel efficiency and optimum usage a permanent revenue stream would be available to service the debt.


For eradication of rural poverty the diversion of resources to agriculture for disbursement through the existing policies has clearly failed to achieve the desired results. The alternative strategy of creating a vibrant rural service sector catalysed by availability of rural credit through appropriate schemes would achieve the desired results and create massive rural self employment opportunities, increase agricultural productivity and thereby sustain an equitable growth of the rural economy.

It is therefore recommended that cognizance of the potential of “The Rural Service Sector”, be recognized by the Government and exploited by encouraging the investment of resources, earmarked for the rural economy, into low cost mechanization, through its delivery mechanisms such as IRDP, Agricultural Credit, Nabard etc. vigorously.

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