Financing Agriculture Value Chains in India Challenges and Opportunities

Abstract

Fostering rapid growth in farm sector remains an important policy concern in India in spite of a significant decline in its share in the gross domestic product (GDP), from 47% in 1970–1971 to 15% in 2014–2015. The importance of farm sector goes beyond its income contribution, as it still engages about half of the country’s workforce and is dominated by small landholders ( 2 ha), the majority of whom practice subsistence agriculture. The smallholder farmers face numerous challenges, more prominently the poor access to markets and finances in transiting toward market-oriented agriculture. Agricultural markets are fragmented, characterized by a long chain of interme diaries, high marketing costs and margins, low value addition, and low share of farmers in the final price that consumers pay. Smallholders have little marketable surplus and face higher marketing and transaction costs in selling it in distant urban markets (Birthal et al. 2005). Their limited access to institutional finance hampers them to adopt productivity-enhancing technologies and inputs, and to invest in land improvements, irrigation, mechanization, and farm storage. Their financial require ments are not large, yet commercial banks and such financial institutions are reluctant to provide them credit because of the high cost of lending relative to size of the loan, and higher lending risks (Chen et al. 2015). Further, smallholders have limited and often less-documented assets to use as collateral to secure institutional finance.