Q.

1) Characteristics and sources of agricultural credit

Credit is one of the critical inputs for agricultural development. It
capitalizes farmers to undertake new investments and/or adopt new
technologies. In India, there is an immense need for proper
agricultural credit as Indian farmers are very poor. From the very
beginning, the prime source of agricultural credit in India was
moneylenders.
After independence, the Government adopted the institutional credit
approach through various agencies like co-operatives, commercial
banks, regional rural banks etc. to provide adequate credit to
farmers, at a cheaper rate of interest. Moreover, with growing
modernisation of agriculture during the post-green revolution
period, the requirement of agricultural credit has increased further
in recent years.
Characteristics of agricultural credit
➢ Purpose-Specific: Tailored for buying agricultural inputs like
seeds, fertilizers, and equipment, and covering operational costs.
➢ Seasonal Nature: Credit demand and repayment align with
agricultural cycles (planting, growing, and harvesting).
➢ Collateral: Typically secured against land or future harvests,
sometimes supplemented by group guarantees or government
assurances.
➢ Subsidized Interest Rates: Often offered at lower rates than
commercial loans to encourage agricultural activities.
➢ Repayment Schedule: Repayment terms set around the harvest
cycle, allowing repayment after crop sales.
➢ High Risk: Influenced by uncontrollable factors like weather and
market fluctuations, making it riskier than typical loans.
➢ Diverse Lending Sources: Includes commercial banks,
cooperatives, government programs, microfinance institutions, and
informal lenders.
➢ Innovative Lending Models: Incorporates methods like peer-to-
peer lending, contract farming, and agricultural credit scoring to
overcome traditional banking challenges.
➢ Government Involvement: Significant government facilitation
through guarantees, direct lending, or subsidies due to agriculture’s
economic importance.
➢ Size and Duration: Varies from short-term loans for immediate
needs to long-term financing for capital investments.

Types of agricultural credit

Considering the period and purpose of the credit requirement of the
farmers of the country, agricultural credit in India can be classified into
three major types
➢ Short term credit: Indian farmers require credit to meet their short
term needs viz., purchasing seeds, fertilizers, paying wages to hired
workers etc. for a period of less than 15 months. Such loans are
generally repaid after harvest.
➢ Medium-term credit: This type of credit includes credit
requirement of farmers for a medium period ranging between 15
months and 5 years and it is required for purchasing cattle, pumping
sets, other agricultural implements etc. Medium-term credits are
normally larger in size than short term credit.
➢ Long term credit: Farmers also require finance for a long period of
more than 5 years just for the purpose of buying additional land or
for making any permanent improvement on land like the sinking of
wells, reclamation of land, horticulture etc. Thus, the long-term
credit requires sufficient time for the repayment of such loan.
 Sources of Rural Credit in India:
The two sources of rural credit from which the farmers can raise loans
are:
1.Non-institutional Sources (Informal)
2.Institutional Sources (Formal)
A. Non-institutional Sources (Informal):
It constitutes of cash lenders, free agents, landlords, relatives, and
friends. Historically, non-institutional sources satisfied or fulfilled the
majority of farmers’ credit requirements due to their simpler loan
procedures and willingness to give even for unproductive purposes.
However, due to restricted resources, they were unable to satisfy their
medium and long-term needs/requirements. These sources accounted
for roughly 93% of the full credit score requirement of the agricultural
people in 1950-51 and at present account for 30% of the most effective
credit score requirement. They used to take advantage of small and
marginal farmers by asking for high rates of interest and manipulating
accounts to keep them in debt.
➢ Moneylenders:
Moneylenders have long been a source of credit for many agricultural
households in India’s rural credit environment. However, they exploit
peasants through high rates of interest and even manipulate their
accounts to keep them in debt.
➢ Traders and Commission Agents:
Traders and commission agents give loans to agriculturists for
productive reasons before crop maturity and then compel farmers to
sell their harvests at very low rates to them while charging a high fee.
This form of loan is typically used for cash crops. These traders’ share
of agricultural loans grew gradually from 5.5 percent in 1951-52 to 8.8
percent in 1961-62 before declining to 5.0 percent in 1996. As a result,
its significance has decreased in recent years.
➢ Relatives:
In times of crisis, cultivators frequently borrow funds from their own
relatives, either in cash or in kind. These are informal debts that have
no interest and are usually repaid after harvest. This form of farm credit
is also becoming less important, with its share of agricultural credit
declining from 14.2 percent in 1951-52 to 8.7 percent in 1981 and then
to 3.0 percent in 1995-96.
➢ Rich Landlords:
In India, small and marginal cultivators and tenants are also accepting
loans from landowners to satisfy their financial requirements. This
source has been following all of the bad practices of moneylenders,
merchants, and so on. Landless workers are sometimes forced to work
as bonded labourers. This source of agricultural credit increased from
3.3 percent in 1951-52 to 14.5 percent in 1961-62, then declined
significantly to 8.8 percent in 1981 and then to 10.0 percent in 1995-
96.
B. Institutional credit sources
It includes rural cooperatives, Regional Rural Banks (RRBs),
Scheduled Commercial Banks (SCBs), NABARD, Non-Banking
Financial Institutions (NBFIs), Microfinance Institutions (MFIs),
Small Finance Banks (SFBs), and other government agencies. Of these,
SCBs, RRBs, and cooperatives are the three main rural financial
institutions (RFIs) that provide credit to the agricultural sector at the
village level by leveraging on their geographical and demographic
outreach.
➢ Regional Rural Banks (RRBs)
RRBs are financial institutions that ensure adequate credit for
agriculture and other rural sectors.
Regional Rural Banks were set up on the basis of the recommendations
of the Narasimhan Working Group (1975), and after the legislation of
the Regional Rural Banks Act, 1976.
Stakeholders: The equity of a regional rural bank is held by the Central
Government, concerned State Government, and the Sponsor Bank in
the proportion of 50:15:35.
The main objectives of RRBs are
To provide credit and other facilities to the small and marginal farmers,
agricultural labourers, artisans, and small entrepreneurs in rural areas.
To check the outflow of rural deposits to urban areas and reduce
regional imbalances and increase rural employment generation.
The RRBs are required to provide 75% of their total credit as priority
sector lending.
➢ Small Finance Banks (SFBs)
Small Finance Banks are the financial institutions that provide financial
services to the unserved and unbanked region of the country.
They are registered as a public limited company under the Companies
Act, 2013.
They are required to extend 75% of its Adjusted Net Bank Credit
(ANBC) to the sectors eligible for classification as priority sector
lending by the Reserve Bank of India.
At least 50% of its loan portfolio should constitute loans and advances
of up to Rs. 25 lakhs.
➢ National Bank for Agriculture and Rural Development
(NABARD)
NABARD is a development bank focussing primarily on the rural
sector of the country. It is the apex banking institution to provide
finance for Agriculture and rural development. It headquarters is
located in Mumbai, the country’s financial capital.
It Is a statutory body established in 1982 under Parliamentary Act-
National Bank for Agriculture and Rural Development Act, 1981.
It was set up based on the Shri B. Sivaraman committee
recommendation.
It provides refinance support for building rural infrastructure.
It prepares district-level credit plans to guide and motivating the
banking industry in achieving these targets.
It supervises Cooperative Banks and Regional Rural Banks (RRBs)
and helping them develop sound banking practices and integrate them
into the CBS (Core Banking Solution) platform.

In conclusion, agricultural credit plays a vital role in the development

and modernization of agriculture in India, offering essential financial
support to farmers to enhance productivity and sustainability. Over the
years, the shift from informal, non-institutional lenders to a more
structured, institutional lending framework has significantly
transformed the rural credit landscape. Institutions such as Regional
Rural Banks, Small Finance Banks, and NABARD have not only
provided necessary financial resources but have also introduced
innovative lending practices tailored to the unique needs of the
agricultural sector. Despite these advances, challenges such as high-
risk factors associated with farming and the need for tailored financial
products remain. Continued efforts to refine agricultural credit
systems, improve access to affordable credit, and integrate advanced
technological solutions are essential for empowering farmers, boosting
agricultural output, and achieving economic stability in the rural
sectors of India.
Measures adopted by government to improve credit for
agricultural development
The Indian government has implemented various measures to improve
agricultural credit, focusing on enhancing accessibility, affordability,
and the effectiveness of financial services for farmers. Here are some
key initiatives and policy measures:
1.Priority Sector Lending (PSL): Under the Reserve Bank of India
(RBI) guidelines, banks are required to allocate a certain percentage of
their lending to sectors identified as "priority," including agriculture.
This ensures that a substantial part of banking credit flows into
agricultural activities.
2. Kisan Credit Card (KCC) Scheme: Launched in 1998, this scheme
enables farmers to access timely and adequate credit for their
agricultural needs. KCC covers short-term credit requirements for
cultivation and other needs such as maintenance of farm equipment,
dairy animals, and other expenses.
3. Interest Subvention Scheme: To make loans more affordable, the
government provides an interest subsidy for short-term crop loans up
to a specified amount. This subsidy is available to farmers who repay
their loans on time, effectively reducing the interest rate.
4. Agricultural Debt Waiver and Debt Relief Schemes: Such schemes
have been periodically introduced to relieve the debt burden of
distressed farmers, aiming to restore their creditworthiness and
encourage them to invest in agricultural activities.
5. Micro Finance Institutions (MFIs) and Self-Help Groups (SHGs):
These institutions provide microloans to farmers who do not have
access to formal banking channels. SHGs especially play a crucial role
in providing financial services to small and marginal farmers.
6.Rural Infrastructure Development Fund (RIDF): Set up in NABARD,
this fund provides loans to state governments and state-owned
corporations to implement rural infrastructure projects, which
indirectly supports agricultural operations.
7.Direct Benefit Transfer (DBT): This mechanism ensures that
subsidies reach farmers directly, reducing leakages and ensuring that
financial support is timely and accurate.
8.Fasal Bima Yojana (Crop Insurance Scheme): While not a direct
credit facility, this insurance scheme protects farmers against the
financial repercussions of crop failures due to natural calamities, pests,
or diseases, thereby improving their creditworthiness and ability to
secure loans.
9.Agricultural Technology Management Agency (ATMA) Scheme:
This initiative supports integrated development in the agricultural
sector by making technology and information accessible, which
improves farm productivity and income, thereby enhancing the
repayment capacity of farmers.
These measures, collectively, aim to strengthen the agricultural credit
system in India, making it more robust, inclusive, and supportive of the
farmer's financial needs, ultimately contributing to the overall
development of the agricultural sector.
Q.2) Role of Co-operatives in agricultural credit
Cooperatives, particularly Primary Agricultural Credit Societies (PACS),
serve as the backbone of agricultural credit systems, playing a vital role
in sustaining the financial health of rural communities worldwide. With a
focus on inclusivity and member-driven operations, cooperatives provide
essential financial services, including credit facilities, to farmers,
especially in regions where traditional banking infrastructure is limited or
absent.
The significance of cooperatives in agricultural credit cannot be
overstated. These institutions act as the first point of contact for rural
borrowers, offering them access to affordable credit, tailored financial
products, and a range of supportive services. By operating on a member-
owned basis, cooperatives ensure that the needs and interests of farmers
remain at the forefront of their operations, fostering a sense of ownership
and accountability within the community.
Furthermore, cooperatives go beyond mere financial transactions by
providing extension services, technical assistance, and training programs
to farmers, empowering them with the knowledge and resources needed
to enhance farm productivity and sustainability. Through risk-sharing
mechanisms and government support initiatives, cooperatives mitigate the
financial risks associated with lending to farmers, making agricultural
credit more accessible and sustainable.
As governments and stakeholders continue to recognize the pivotal role
of cooperatives in rural development, various initiatives and policies are
being implemented to strengthen these institutions further. From
computerization and modernization efforts to policy reforms and tax
incentives, concerted efforts are underway to promote the growth and
viability of cooperatives, ensuring their continued contribution to the
prosperity of agricultural communities.
Here are some key aspects of their role:
1. Access to Credit:
PACS act as the grassroots level arm of the cooperative credit structure,
directly engaging with rural borrowers, primarily farmers. By offering
loans, PACS ensure that farmers, including small and marginal ones, have
access to much-needed credit, especially in areas where traditional
banking services are lacking.
2. Affordable Interest Rates:
PACS typically offer loans at lower interest rates compared to private
moneylenders, easing the financial burden on farmers, particularly during
challenging times like crop failures or natural disasters.
3. Tailored Financial Products:
These cooperatives design financial products customized to the specific
needs of farmers, including crop loans, livestock loans, and farm
equipment loans, thereby enabling farmers to invest effectively in their
agricultural activities.
4. Member Ownership:
PACS often operate on a member-owned basis, meaning that the
borrowers are also the owners of the cooperative. This ensures that the
interests of farmers are prioritized in the operations of the cooperative.
5. Risk Mitigation:
PACS implement risk-sharing mechanisms, where members contribute to
a common fund to cover loan defaults or losses. This approach helps
mitigate financial risks associated with lending to farmers, enhancing the
sustainability of the cooperative model.
6. Extension Services:
In addition to credit facilities, PACS may provide extension services such
as technical assistance, training, and information on best agricultural
practices, thereby enhancing farm productivity and ensuring optimal
utilization of the credit received.
7. Strengthening Initiatives:
The government and stakeholders are actively involved in strengthening
PACS through initiatives like computerization, model byelaws, and
integrating them into broader schemes such as Common Service Centres
(CSCs) to improve service delivery and viability.
8. Policy Support and Development:
The Ministry of Cooperation, through initiatives like the National
Cooperation Policy and tax rebates for cooperative societies, aims to
promote and support the cooperative movement, facilitating the provision
of agricultural credit and other essential services to rural communities.
9. Diverse Offerings:
PACS, along with other cooperative structures like Large Area Multi-
Purpose Societies (LAMPS) and Farmers Services Societies (FSS),
provide a range of services beyond credit, including inputs, market access,
and value addition, contributing to the overall development of rural areas.
In essence, cooperatives, especially PACS, serve as a lifeline for
agricultural credit in rural areas, playing a crucial role in promoting
financial inclusion, sustainable agricultural practices, and rural
development. Through a combination of financial services, member
ownership, and government support, cooperatives continue to be a
cornerstone of agricultural financing systems, contributing to the well-
being of farmers and rural communities.
Q.3) Role of NABARD in agricultural credit
I. Introduction
Agriculture serves as the backbone of many economies worldwide,
especially in developing countries. In India, where a significant portion of
the population relies on agriculture for their livelihood, access to credit
plays a pivotal role in fostering rural development and ensuring food
security. The National Bank for Agriculture and Rural Development
(NABARD) stands as a key institution in facilitating agricultural credit
and promoting rural prosperity. This essay critically evaluates NABARD's
role in providing agricultural credit, examining its historical background,
initiatives, impacts, challenges, comparative analysis, and offering policy
recommendations for its future direction.
II. Historical Background of NABARD
Established in 1982, NABARD was created with the mandate to uplift
rural areas by providing credit for agriculture and rural development. Over
the years, NABARD has evolved from primarily being a refinancing
agency for agricultural and rural development banks to a multifaceted
institution actively involved in direct lending, capacity building, and
policy advocacy.
NABARD has been given many responsibilities related to the formulation
of policies, planning, and operations in agriculture and financial
development. NABARD carries these responsibilities efficiently and
works towards promoting and developing man industries in the rural areas
like the agriculture industry, cottage industries, other small scale
industries, and rural crafts in an effort to create better infrastructure and
better employment opportunities for the people living in these regions.
III. NABARD's Initiatives in Agricultural Credit
NABARD has launched various initiatives to enhance agricultural credit
accessibility:
The Rural Infrastructure Development Fund (RIDF) finances rural
infrastructure projects, such as irrigation, roads, and warehouses, thereby
improving agricultural productivity and market access.
Long-term and short-term credit facilities cater to the diverse financial
needs of farmers, including crop production, livestock rearing, and farm
mechanization.
Microfinance initiatives extend financial services to small and
marginalized farmers who often face challenges in accessing formal
credit.
Special schemes target specific segments like women farmers, tribal
communities, and those engaged in organic farming, aiming to address
their unique needs and challenges.
IV. Assessment of NABARD's Impact
Positive Impacts:
1. Increased access to credit has enabled farmers to invest in modern
agricultural practices, leading to enhanced productivity and income
levels.
2. Development of rural infrastructure financed through RIDF has
improved connectivity and market linkages, thereby reducing post-
harvest losses and enhancing farmer incomes.
3. NABARD's emphasis on promoting sustainable agricultural practices
has facilitated the adoption of eco-friendly techniques, contributing to
environmental conservation and resilience against climate change.
Challenges and Criticisms:
1. Limited coverage and outreach, particularly in remote and
underdeveloped regions, hinder the effective delivery of credit to all
deserving beneficiaries.
2. Issues related to loan repayment and debt burden have been observed,
especially among small and marginal farmers, leading to instances of
distress and farmer suicides.
3. Despite initiatives targeting marginalized farmers, there remains a gap
in addressing their specific needs, such as access to markets, extension
services, and inputs.
4. Bureaucratic hurdles and operational inefficiencies in NABARD's
functioning have often delayed the disbursement of credit and hindered
the implementation of schemes at the grassroots level.
V. Comparative Analysis
NABARD's performance in providing agricultural credit can be assessed
by comparing it with other financial institutions engaged in similar
activities. While NABARD has made significant strides in promoting
rural development, there are areas where it can learn from best practices
and adopt innovative approaches to enhance its effectiveness.
VI. Policy Recommendations and Future Directions
To address the challenges and further improve its role in providing
agricultural credit, NABARD should consider the following policy
recommendations:
- Strengthening outreach and coverage by expanding its network of
branches and leveraging technology for remote service delivery.
- Enhancing financial literacy and farmer education programs to improve
credit utilization and promote prudent financial management practices.
- Tailoring credit products to suit the diverse needs of farmers, including
customized loan packages for different crops, livestock, and value chains.
- Addressing governance and operational challenges through streamlined
processes, transparency, and accountability mechanisms.
- Leveraging technology, such as mobile banking and digital platforms, to
enhance the efficiency and accessibility of credit delivery to remote and
underserved areas.
VII. Conclusion
In conclusion, NABARD plays a crucial role in providing agricultural
credit and fostering rural development in India. While it has made
commendable efforts in improving credit accessibility and promoting
sustainable agriculture, there are challenges that need to be addressed to
maximize its impact. By implementing the recommended policy measures
and embracing innovation, NABARD can further strengthen its position
as a catalyst for rural prosperity and inclusive growth.
Q.4) Role of RRB in agricultural credit

Introduction

The Regional Rural Banks, or RRBs, are the third layer of commercial
banking organization, after commercial and cooperative banks. The RRBs
were established as per the recommendations of the Narasimham
Committee to cater to the rural credit needs of the farming and other rural
communities. The main aim of the RRBs is to provide credit and other
banking facilities to the small and marginal farmers, agricultural laborers,
and small artisans who form an evident part of the development of the
rural economy. The RRBs are a new form of commercial banks, backed
by commercially strong banks to serve within a limited local area. The
RRBs were set up under the Regional Rural Bank Act of 1976. The
Prathama Grameen Bank was the first bank to be established on 02nd
October 1975. The Syndicate Bank became the first commercial bank to
sponsor the Prathama Grameen Bank RRB.

Some distinct features of RRBs are:

• RRBs have the characteristics of both a commercial bank and a co-

operative bank. It has the professionalism and ability to mobilise

financial resources like a commercial bank and is familiar with rural
problems like a co-operative bank.
• RRBs ensure adequate credit for agriculture and other rural sectors.

• Like any commercial bank, RRBs have a board of directors, a

chairperson, a managing director, a manager, regional managers,

and other staff.
• According to the RRB Act 1976, RRBs provide financial assistance

to farmers, Medium and Small Enterprises (MSMEs), local

craftsmen, and artisans for agriculture, industries, trade, commerce,
and their economic development.
 • RRBs are owned by the stakeholders in a fixed proportion of
50:35:15, with the central government owning 50%, the sponsor
bank owning 35%, and the state government owning 15%.
• 75% of the total bank credit has to be provided to the Priority
Lending Sector (PLS). Short-term loans at a low rate of interest are
extended to the priority sector.
• RRBs cannot extend large or long-term loans to their customers.
Functions of Regional Rural Banks:
• Accept Deposits

RRBs accept deposits from their bank account holders. Deposits

can be made in current or savings accounts, in fixed or recurring
forms.
• Loan Extension

RRBs extend loans and credit services to the Priority Sector (PS)
classified under Priority Sector Lending (PSL). The priority sector
comprises people and sectors like -
o Small and marginal farmers

o Craftsmen and artisans

o Local traders

o Medium and small-scale businesses

o Education

o Housing

o Renewable energy

• Wage disbursement

RRBs perform a vital task of distribution of wages under the

MGNREGA (Mahatma Gandhi National Rural Employment
Guarantee Act), the Pradhan Mantri Gram Sadak Yojana
(PMGSY). RRBs also distribute the pensions provided under the
poverty alleviation and pension schemes of India.
 • Other functions of RRBs
Like commercial banks, RRBs provide agency services to their
customers, such as foreign exchange, bill payments, and money
wire transfers. Utility services like ATMs, UPI, debit card
issuance, locker facilities, etc. are also provided by RRBs.

Role of RRB in Agricultural Credit

1. **Accessibility**: RRBs are often the only formal financial institutions
available in remote rural areas. They bridge the gap between financial
services and rural communities, making credit accessible to farmers who
might otherwise rely on informal sources or moneylenders charging
exorbitant interest rates.
2. **Targeted Approach**: RRBs are mandated to focus on rural and
agricultural lending. They have specific directives to allocate a certain
percentage of their lending to priority sectors like agriculture, ensuring
that credit reaches those who need it the most.
3. **Customized Products**: RRBs design financial products tailored to
the needs of farmers and rural communities. These may include crop
loans, farm equipment financing, livestock loans, and agricultural
insurance schemes. Such customized products enhance the agricultural
sector's productivity and resilience.
4. **Risk Management**: Agricultural lending involves inherent risks
due to factors like weather uncertainties, market fluctuations, and the
cyclical nature of agriculture. RRBs employ risk mitigation strategies
such as crop insurance, collateral requirements, and assessing
creditworthiness based on factors beyond traditional financial metrics.
5. **Capacity Building**: RRBs often engage in capacity-building
activities such as farmer education, training programs, and workshops on
modern agricultural practices. These initiatives empower farmers to make
informed decisions, improve productivity, and manage finances
effectively.
6. **Technology Adoption**: Many RRBs have embraced technology to
enhance their reach and efficiency. Mobile banking, digital payments, and
online loan applications streamline processes, reduce transaction costs,
and improve customer convenience, especially in remote areas.

Challenges faced
While RRBs were established to provide equal access to financial services
in urban and rural areas, they had been struggling to be financially
sustainable, facing several challenges such as -
• Limited activities and a focus on mainly offering government

schemes like direct benefit transfer in rural areas.

• Inadequate finance, as they depend on NABARD for finances for

their operations, led to no deposits, as poor rural people cannot save.

• Poor loan recovery while overdue and pending payments are high.

• It has not been able to play a significant role in poverty alleviation

due to a lack of economic infrastructure, poor marketing strategies,

and poor customer knowledge.
• Low internet banking because existing regulations allow RRBs with

a minimum statutory capital to risk-weighted asset ratio (CRAR) of

more than 10% to offer internet banking.
Way Forward
To be financially sustainable, as advised by the government, RRBs have
to first and foremost move towards digitisation. Some of the steps
suggested for a positive change are -
 • Have a Core Banking System (CBS) and offer internet banking
services to customers expand their credit base further and enhance
their outreach and profitability.
• Increase their efficiency and touch various other dimensions of
banking, like providing loans to merchants, MSMEs that could
increase their profitability.
• Create a clear roadmap in a time-bound manner to strengthen the
RRBs further and support the post-pandemic economic recovery.
• Conduct a workshop for RRBs to share best practices with each
other.
• Merge of RRBs with sponsor banks once these branches reach a
certain level of business.

In conclusion, while RRBs play a vital role in agricultural credit, there are
challenges that need to be addressed to maximize their impact.
Strengthening governance, enhancing financial inclusion, investing in
technology, and ensuring adequate resources are essential steps to unleash
the full potential of RRBs in promoting rural development through
agricultural finance.
Q.5) Agricultural price policy in India and its evolution
Introduction
Agricultural price policy refers to the set of measures, regulations, and
interventions implemented by governments or relevant authorities to
influence the prices of agricultural commodities. The primary goal of
agricultural price policy is to ensure stability in agricultural markets,
provide fair returns to farmers, and maintain food security for the
population.
Key components of agricultural price policy typically include:
1. Minimum Support Prices (MSPs): Governments set minimum prices at
which they are willing to purchase certain crops from farmers. This
ensures that farmers receive a guaranteed income for their produce, even
if market prices fall below the MSP.
2.Procurement Mechanisms: Governments may directly purchase
agricultural commodities from farmers at the MSP through designated
procurement agencies. This helps in stabilizing prices and managing
surplus production.
3. Subsidies: Agricultural price policies often involve the provision of
input subsidies, such as fertilizers, seeds, and irrigation, to reduce
production costs for farmers and encourage higher levels of agricultural
output.
4.Market Intervention: Governments may intervene in agricultural
markets through measures such as price stabilization funds, buffer stocks,
and import/export controls to regulate supply and demand dynamics and
stabilize prices.
5. Trade Policies: Agricultural price policies may include trade policies
such as tariffs, quotas, and export subsidies to protect domestic producers
from international price fluctuations and ensure a level playing field in
global markets.
6.Price Information Systems: Governments may establish price
information systems to provide farmers with timely and accurate
information on market prices, enabling them to make informed decisions
about crop selection, timing of sales, and marketing strategies.
Need for Agricultural Price Policy
1.Food Security: Ensuring stable and affordable prices for essential food
commodities is essential for food security, especially for vulnerable
sections of society. Price policies help in stabilizing food prices and
making food more accessible to the masses.
2. Farmers' Income: Agriculture is the primary source of livelihood for a
significant portion of India's population, especially in rural areas. Price
policies that guarantee remunerative prices for farmers' produce are
necessary to improve their income and living standards.
3.Market Efficiency: Agricultural markets in India are often characterized
by inefficiencies, with farmers facing exploitation by middlemen and
traders. Price policies can help in improving market efficiency by
reducing price volatility and ensuring fair returns to farmers.
4.Rural Development: Agriculture is closely linked to rural development,
as it provides employment opportunities and contributes to rural
infrastructure development. Price policies that support agricultural growth
can stimulate overall rural development and poverty alleviation.
Evolution of Agricultural Price Policy in India
The evolution of agricultural price policy in India has been closely
intertwined with the broader objectives of agricultural development and
food security. Over the decades, various policy initiatives and reforms
have been implemented to address the changing dynamics of agricultural
production, market forces, and the welfare of farmers and consumers.
1950s-1960s:
• Key Features: Expansion of agricultural area was the primary source
of growth.
• Major Policy Initiatives:
Agrarian reforms: Abolition of intermediary landlordship and
imposition of land ceiling acts.
Strengthening of co-operative credit institutions.
• Policy Objective: Ensuring national food production in response to
early food shortages.
• Institutional Development: Establishment of key institutions like the
Food Corporation of India (FCI) and the Agricultural Prices
Commission.
1970s-1980s:
Key Features: Increase in productivity became the main source of growth,
marked by the Green Revolution.
Major Policy Initiatives:
Adoption of high-yielding varieties of wheat and rice, accompanied by
the expansion of extension services and input usage.
- Development pathways for the adoption of technological
breakthroughs.
- **Policy Objective**: Accelerating agricultural productivity to meet
domestic demand and achieve self-sufficiency.
- **Institutional Development**: Expansion of agricultural research,
credit facilities, and market support mechanisms.
1990s:
- **Key Features**: Economic liberalization in agriculture lagged behind
general economic reforms.
- **Major Policy Initiatives**:
- Gradual relaxation of trade protection in some agricultural products.
- Increases in input subsidies.
- **Policy Objective**: Balancing the need for liberalization with
safeguarding domestic agricultural production.
- **Institutional Development**: Continued expansion of credit facilities
and input subsidies.

2000s-Present:
- **Key Features**: Shift towards producing higher-value commodities
like fruits, vegetables, and livestock.
- **Major Policy Initiatives**:
- Formulation of the National Agricultural Policy (NAP) aimed at
sustainable growth and resource conservation.
- Implementation of the National Policy for Farmers (NPF) focusing on
the economic well-being of farmers.
- Emphasis on diversification, private sector involvement, and rural
infrastructure development.
- **Policy Objective**: Accelerating agricultural GDP growth,
diversification, and ensuring economic well-being of farmers.
- **Institutional Development**: Increased focus on technology
dissemination, rural infrastructure, and governance reforms.

**Recent Agricultural Policy Emphasis on following points

1. **Sustainable Growth**: Recent agricultural policies in India
emphasize sustainable growth, focusing on the conservation of natural
resources and the promotion of eco-friendly farming practices.

2. **Diversification**: There is a growing emphasis on diversification

towards high-value crops like fruits, vegetables, and livestock, which
have higher income potential and better market prospects.

3. **Private Sector Involvement**: The involvement of the private sector

in agriculture is being encouraged through various policy initiatives,
including contract farming and agri-business development.

4. **Rural Infrastructure Development**: Improving rural infrastructure

such as irrigation facilities, storage facilities, and market linkages is a key
priority to enhance agricultural productivity and farmers' income.

5. **Governance Reforms**: Recent agricultural policies also focus on

governance reforms aimed at reducing bureaucratic hurdles, improving
transparency, and ensuring effective implementation of agricultural
programs and schemes.
In conclusion, the evolution of agricultural price policy in India reflects a
transition from a focus on self-sufficiency and productivity enhancement
to a more comprehensive approach encompassing sustainability,
economic well-being of farmers, and market diversification. The policies
have adapted to address changing agricultural realities while striving to
uphold the overarching goal of food security and nutrition for all segments
of society.
Cobweb Model

The cobweb model A dynamic model which has received particular

attention by agricultural economists, is the cobweb model. In some
agricultural product markets, the time paths of prices and output appear to
exhibit regular fluctuations, or cycles. For example, in some country’s
cycles of about 3 years for pigs and 3-5 years for potatoes have been
observed. Since the cobweb model provides an explanation for certain
types of cyclical behaviour, it has been used as the basis of theoretical and
empirical analysis of several product markets.

Assumptions of Cobweb theory

• In an agricultural market, farmers have to decide how much to

produce a year in advance – before they know what the market price
will be. (supply is price inelastic in short-term)
• A key determinant of supply will be the price from the previous year.
• A low price will mean some farmers go out of business. Also, a low
price will discourage farmers from growing that crop in the next
year.
• Demand for agricultural goods is usually price inelastic (a fall in
price only causes a smaller % increase in demand)

The dynamics in the model derive from the particular specification of the
supply relations. It is assumed that production plans are based on current
price and that there is a one period time lag in production response. Hence
the expected price (P) for output sold in period is equal to the actual price
in the previous period (i.e. PP). Since it is also assumed that production
plans are fully realised, there is a lag between price changes and
adjustments in supply (i.e. short run supply is a function of lagged price).
However, in the very short run, supply is assumed to be perfectly inelastic:
production forthcoming at harvest is sold in the market irrespective of
price. In a competitive market, the market clearing price in a given period
is then determined by the demand for the (given) output.
The type of cyclical behaviour which the cobweb model can generate is
illustrated in Fig. 8.18(a). Suppose that in the initial period price is set at
Po. On the assumption that this price will prevail, producers supply Q1 in
the subsequent period. This quantity however sells at P1, the market.
clearing price determined by the intersection of the demand curve and the
very short run supply at Q1 Producers now base their production plans on
P, and in the next period, supply Q2.
This output in turn determines higher price, P2 and so the process
continues, assuming there are no exogenous disturbances. The time path
of the market price is depicted in Fig. 8.18(b). (As we are observing price
only at a series of discrete time periods (1, 2, 3, etc.) the time path is
disjoint.) It is clear that in this case the process will converge to the
equilibrium price P"; this type of time path is described as damped
oscillatory.

However, the cobweb model can encompass two other types of cyclical
process. In Fig. 8.19, an explosive oscillatory time path is created and in
Fig. 8.20, the cycle is continuous, with undamped oscillations. The type
of cycle which is created will depend on the precise form of the demand
and supply relations. Specifically, for linear demand and supply curves,
the following characteristics will be exhibited:

Damped Oscillation Diagram

(i) If the absolute slope of the demand curve is less than that of the supply
curve, a disturbance will lead to oscillations in price and quantity which
are damped and which converge to equilibrium.

(ii) If the absolute slope of the demand curve is greater than that of the
supply curve, a disturbance will set in motion oscillations in price and
quantity which are divergent or explosive and which lead the market away
from equilibrium.

(iii) If the absolute slopes of the demand and supply curves are equal, the
oscillations will be of constant magnitude about the equilibrium.
Explosive oscillations diagram
Undamped Oscillations Diagram

The version of the cobweb model presented here can be represented by

three equations, a supply function, a demand function and a market-
clearing identity:

QSt =f (Pt-1) (1)

QDt = f (Pt) (2)

QDt = QSt (3)

To emphasise that the market clearing price is determined by demand,

equation 2 is often inverted: Pt = f ^ - 1 (QDt) .
By explicitly introducing dynamics, the cobweb model offers a better
representation of those markets in which price and quantity cycles are
observed. However, it must be stressed that the form of the model
presented above is too elementary to provide the basis for a
comprehensive analysis. Some authors argue that the model's usefulness
is limited by its unrealistic assumptions and by the adoption of the naive
expectations hypothesis (that expected price will be last period's observed
price) in particular. Whereas this assumption might be justified if the
cyclical behaviour predicted by the model were observed in product
markets, this is not the case. Price and quantity cycles, when they are
observed, appear to be continuous, but continuous cycles are only found
in the cobweb. model under rather special conditions. Moreover the model
suggests that the cycle should have a length of twice the production lag
but several 'real world cycles appear to be longer than this, perhaps four
times the time lag in production. In order to explain these empirical
observations, more complex models have been constructed. The
modifications which have been suggested include the introduction of 'shift
factors' into the demand and supply functions, of 'partial adjustment of
producers to price changes, and of an expectations hypothesis with more
behavioural content.

Limitations of Cobweb theory

Rational expectations. The model assumes farmers base next year’s

supply purely on the previous price and assume that next year’s price will
be the same as last year (adaptive expectations). However, that rarely
applies in the real world. Farmers are more likely to see it as a ‘good’ year
or ‘bad year and learn from price volatility.
Price divergence is unrealistic and not empirically seen. The idea that
farmers only base supply on last year’s price means, in theory, prices
could increasingly diverge, but farmers would learn from this and pre-
empt changes in price.
It may not be easy or desirable to switch supply. A potato grower may
concentrate on potatoes because that is his speciality. It is not easy to give
up potatoes and take to aubergines.
Other factors affecting price. There are many other factors affecting
price than a farmer’s decision to supply. In global markets, supply
fluctuations will be minimized by the role of importing from abroad. Also,
demand may vary. Also, supply can vary due to weather factors.
Buffer stock schemes. Governments or producers could band together to
limit price volatility by buying surplus