FINANCIAL INCLUSION AND ACCELERATION OF AGRICULTURAL

DEVELOPMENT AN EMPIRICAL ANALYSIS

B.B. Barik1

I
INTRODUCTION
Around 62% of Indias population depends on agriculture for a living. Agriculture
sector also provides employment to nearly 52 per cent of the work force. In contrast
to this the contribution of agriculture to the national GDP is 14.6% in 2011 against
15.7 % in 2008-09. The average productivity of major crops i.e., cereals has
remained 1600-1800 kgs/ha since 1995. The stagnation in agricultural productivity,
increase in cost of production, distortion in the market and poor infrastructure have
made the livelihood of farming population more difficult. A large number of povertyridden farming households especially marginal and small farmers, tenant farmers,
oral lessees, share croppers and agricultural labourers etc. eke out living from a mix
of subsistence activities like animal husbandry especially of small ruminants, wage
labour, horticulture, foresting, plantation, logging etc.. The reasons of pervasive rural
poverty are low growth rate in agriculture, low productivity, failed crops,
unemployment and inadequate command over resources due to low income level,
low adoption of agricultural technology, inaccess to credit and even inequitable
access to credit. Agricultural growth is the panacea for rural poverty alleviation and
social transformation. In the advanced estimates of 2010-11 it was expected that the
agricultural sector is likely to grow at 5.4%. In order to achieve the five year plan
(2007-2012) target of average of 4% per annum the agriculture sector requires to
grow at 8.5% during the year 2011-12. Enhanced growth rate in agriculture will not
only improve the income and employment levels of farm households but also reduce
the level of poverty, address the hunger, malnutrition, promote rural prosperity and
mitigate rural distress.
In order to accelerate the higher growth rate in agriculture it is imperative to generate
and infuse new technologies and work for overcoming the technology fatigue. The
1

Principal, B V Rural Institute, Agra

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committed public and private initiative requires for the generation and adoption of
new agricultural technology. As the agriculture is the biggest private enterprise in our
country the farmers have to invest their own resources for the intensive use of inputs
and package of practices. Due to resource constraints the farmers are compelled to
depend upon the institutional / non-institutional sources of credit for the use of critical
inputs and package of practices. But 45.9 million farm households in the country
which constitute 51.4 per cent of total households are deprived of access to credit
either from institutional or non-institutional sources. Only 27 per cent of farm
household have availed credit from formal financial institutions and out of these
around 9 per cent also have availed credit from formal institutions. These financially
excluded farm households should be covered under financial inclusion drive so that
they have unrestricted access to credit in addition to saving/deposit, payment
/settlement,

insurance

and

remittance

facilities.

These

financially

included

households will not only be able to improve their agricultural productivity through
easy access to credit but also their dependence on non-institutional sources of credit
will be arrested. As a result they will be the effective partner of inclusive agricultural
development of the country.
It is also important to know how the financially included farmers have benefited
presently through improvement of their agricultural activities due to financial
inclusion. At the same time it is imperative to know in what way the financially
excluded farmers have been deprived of these benefits. In order to examine the
empirical reality of financial inclusion for agricultural development at the ground level
the farm households of Western U.P. are taken up for the study. With this backdrop
a comparative study between financially included and excluded farm households
was undertaken with the objectives to (i) analyse the socio-economic characteristics
of selected financially included and excluded farming households in the area of study
(ii) examine the credit availed from different formal and informal sources by the
financially included and excluded farm households, (iii) analyse the impact of
financial inclusion on agricultural productivity of selected financially included farm
families in comparison to financially excluded families and (iv) compare the

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agricultural income and employment of selected financially included farm families

with financially excluded families.
II
METHODOLOGY
Selection of Sample Units and Collection of Data
Out of 26 districts of Western Uttar Pradesh two developed districts, Meerut and
Ghaziabad and two undeveloped district Agra and Firozabad were selected
randomly. Multistage stratified random sampling procedure were followed for the
selection of sample units. From the four selected districts two Blocks from each
district and four villages from each selected Block were selected randomly. From
these thirtytwo selected villages 223 financially included farming households
comprising marginal (less than 1 ha.), small (more than 1 and upto 2 ha.), medium
(more than 2 ha. and upto 4 ha.) and large (above 4 ha.) farmers having deposit
accounts in different financial institutions were selected randomly. In the same 32
villages 75 financially excluded farming households comprising marginal, small and
medium farmers who do not have deposit accounts in any of the formal financial
institutions were also selected randomly. In the selected thirtytwo villages most of the
landless households are financially excluded and all the large farmers are financially
included. In addition to secondary data the primary data pertaining to agricultural
year 2009-10 were collected with the help of pre-tested questionnaire-cum-schedule
by following the interview method through personal contact (Table No. 1).
III
RESULTS AND DISCUSSION
Socio-economic Profile :
Before the analysis of the impact of financial inclusion on agricultural development it
is necessary to have a picture of socio-economic characteristics of financially
included and excluded sample households. The size of the family of financially
included and excluded households varies from 6 to 7, 5 to 8 respectively. The overall
size of the family is around 6 in case of financially included and excluded households
(Table No. 2). Average size of operational land holding of financially included

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marginal (0.73 ha.), small (1.58 ha.), medium (2.76 ha.), large (6.22 ha.) farmers are
higher than respective categories of financially excluded farmers (0.34 ha., 1.26 ha.,
2.40 ha.). The overall operational holding (1.53 ha.) of financially included farmers is
higher than the financially excluded farmers (0.45 ha.). It shows that there is positive
relationship between size of operational holding and level of financial inclusion
(Table No. 3 and 4). Most of the four categories of farmers (89.7 per cent) have
deposit accounts in Commercial Banks and next comes the District Cooperative
Bank i.e. around 9.7 per cent. Only small farmers have their deposit accounts in
Regional Rural Banks and even their number is very negligible. It may be due to less
number of branches of RRBs in rural areas (Table No. 5).
Cropping Pattern
The table no. 6 shows that the financially included farmers have devoted their land to
high value crops like sugar cane, paddy and potato where as the financially excluded
farmers have devoted to their land to traditional/ subsistence crops. This can be
inferred that due to inaccess to credit from formal financial institutions or financial
exclusion they are unable to grow high value crops as these crops are inputintensive crops and requires higher monetary resources. The cropping intensity of
financially excluded farmers (187.8 per cent) is higher than the financially included
farmers (158.7 per cent). Due to lower average size of operational holdings of the
financially excluded farmers they have utilized their land optimally more than the
financially included farmers in order to maximise their income through subsistence
crops.
Borrowings
The main agents of financial inclusion are Commercial Banks, RRBs and
Cooperative Banks. State Cooperative Agriculture and Rural Development Banks
(SCARDB) are also covered under financial inclusion. Commercial Banks and RRBs
provide only short-term loan or crop loan directly to farmers. District Cooperative
Banks do not provide short-term or crop loan directly to farmers. The Primary
Agricultural Cooperative Credit Society (PACS) directly provides crop loan (S.T.) to
farmers. These four financial institution provides term loans to farmers directly. The
District Cooperative Banks provide credit to farmers for agricultural development

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purposes like installation of tube-well, Engines operated by diesel, vehicles for

transportation, storage structure etc.. Framers of all categories have mainly
borrowed short-term loan from Commercial Banks and PACS. It is due to wider net
work of branches of Commercial Banks and PACS in rural areas. The four
categories of financially included farmers have borrowed S.T. and Term Loan from
the Commercial Banks. Both the S.T. and Term Loan disbursed by Commercial
Banks and RRBs are treated as production credit. The Non-KCC farmers borrowed
under crop loan is considered as S.T. loan and the KCC farmer availed production
credit under KCC scheme is considered as Term loan. The same way the farmers
have availed production credit from RRBs under KCC scheme is also considered as
term loan.
There is positive relationship between size of land holding and quantum of
production credit i.e. total of S.T. and Term loan. The purposes of borrowing of
production credit from Commercial Banks and PACS mainly confined to fertilizer,
seed and working capital. The purpose of term loan is confined to purchase of
livestock, installation of tubewell, other agricultural development and petty business
in case of District Cooperative Bank (Table No. 7, 8, 9, 10, 11). Financially included
marginal and small farmers have borrowed funds from non-institutional sources in
order to fulfill their requirement. Mostly they have borrowed for the purposes of other
agricultural requirement and repair of residential houses. It shows that there is
mismatch between supply and demand of agricultural credit. All categories of
financially excluded farmers have not borrowed from any of the non-institutional
sources. Growing subsistence crops by the financially excluded farmers and high
rate of interest charged by non-formal agencies might be the reason not to borrow
from the non-institutional sources (Table No. 12, 13).
Agricultural Productivity
An attempt is made to compare the productivity of major crops like Bajra, Sugarcane,
Paddy, Wheat, Mustard and Potato between financially included farms and excluded
farms. The overall per hectare productivity of Bajra, Sugarcane, Wheat and Potato of
financially included farms are higher than the financially excluded farms. The only

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exception is that the per hectare productivity of Paddy and Mustard of financially
excluded farms are higher than the included farms. Sugarcane, Wheat and Potato
are the input-intensive crops. The financially included farms were able to achieve the
higher yield in comparison to financially excluded farms due to adoption of better
package of practices including inputs. This is also verified from the comparison of
paid-out costs (Table No. 14). The achieving of higher yield by the financially
included farm households was possible due to unrestricted access to credit from the
formal financial institutions.
Income
All categories of farmers in the study area are mainly involved in crop and dairy
activities. Per household financially included household gross crop income, paid out
cost and farm business income increases with the increase in farm sizes. Per
household gross crop income, paid-out cost and farm business income varies from
81011 to

783433,

41498 to

428583,

39513 to

354851 respectively. The

same way there is positive relationship between per household gross dairy income ,
paid-out cost and farm business income and farm sizes. The per household gross
dairy income, paid-out cost and farm business income varies from
30,000,

2632 to

9067,

6077 to

8710 to

20933 respectively across the farm

categories. The per households total farm business income from agricultural
activities (crops, dairy and others) varies from

45731 to

375784 across the farm

categories (Table No. 15 ). Per capita farm business income of financially included
household from crops, dairy and total (income) varies from
962 to

2855,

7242 to

6257 to

48389,

51243 respectively across farm categories (Table

No.16).
Large farmers are absent in the study area in financial excluded category. Farm
business income from crop, dairy and total income of financially excluded
households varies from

11487 to

26631,

5638 to

11914,

17125 to

38545 respectively across the categories (Table No. 17). The per capita farm
business income of household from crop, dairy and total income varies from
to

5001,

966 to

1489,

2935 to

1968

5001 respectively across the farm

categories (Table No.18). Per financially included household and per capita gross

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income, paid-out cost and farm business income from crops, diary and total are
substantially more, even more than two times, than the financially excluded
households. Due to easy access to credit the financially included households were
able to use more desired yield-raising inputs than the financially excluded
households. This is the main reason of incurring more expenditure on paid-out costs
by the financially included farmers than the financially excluded farmers. As a result
the financially included households are able to earn higher agricultural income than
the financially excluded households.
Per hectare gross crop income, paid-out cost and farm business income of
financially included households varies from
72948,

53773 to

110247 to

133315,

56474 to

60367 respectively across the farm categories. There is

inverse relationship between per hectare gross crop income, paid-out cost and farm
business income and farm sizes in case of financially excluded households. Per
hectare gross crop income, paid-out cost and farm business income of financially
included of all categories of farmers are more than the financially excluded farmers.
From the paid-out cost of all categories of financially included farmers it proves that
they are technologically savvy due to access to credit from financial institution (Table
No. 19).
In addition to agricultural income the non-agricultural income is an important source
for marginal and small farmers as they want to supplement their low income from
agriculture. The main source of income from non-agricultural activities are hire
services, off farm activities, small business/trades, employment in secondary and
tertiary sector, allied sectors etc. The non- agricultural income of per financially
included households of each farm category is more than the financially excluded
households. The total disposable income from agriculture and non-agriculture of per
financially included household across the farm categories varies from
378284 where as it varies from

25006 to

119629 to

120688 without the large farmers in

case of financially excluded households. It shows that the level of per household
income of financially included is more than the financially excluded. This also
substantiates the outcome of financial inclusion (Table No.20, 22). Per capita

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disposable income of financially included marginal and small farmers from nonagricultural activities are more than the counter part of financially excluded
household. The same way per capita disposable income from all sources of
financially included marginal, small and medium farmers are exceptionally more than
the each of the same categories of farmers in case of financially excluded
households (Table No.21, 23). Hence financial inclusion not only accelerates the
agricultural development but also enhances the income of the family.

Employment
Financial inclusion of farm households also accelerate the self and wage
employment opportunities in the agricultural sector. Financial inclusion also stimulate
the employment opportunities in agricultural wages and hire services activities. Farm
families are involved in agriculture, crop, dairy and others, agricultural wages, hire
services, off-farm and non-agricultural (Service and business/trade) activities. Self
employment of per person of the financially included families of all the four
categories of farmers varies from 140.67 to 166.44 person days where as it varies
from 132.49 to 167.50 person days except large farms in case of financially excluded
households. Per person self employment of financially included marginal and small
holders in agriculture are more than the respective categories in case of financially
excluded households. The per person self employment of financially included
marginal and small holders in agriculture are more than the respective categories in
case of financially excluded households. The per person self employment of
financially excluded medium household is higher than the financially included
household. The reason may be the selection of only one financially excluded
medium household in comparison to 45 selected financially included medium
households. Per person wage employment of financially excluded marginal and
small farms in agriculture are more than the respective categories of financially
included farms. The opportunity of wage employment arise due to agricultural
development (Table No24, 25). All categories of farmers of financially included
households are engaged in hire-service activities where as only financially excluded
marginal households are engaged in hire services activities insignificantly. Financial

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inclusion of farming households not only promotes agricultural development but also
stimulates the activities of business/trade due to higher generation of agricultural
income. Financially included farmers of marginal, small and medium categories are
engaged in the activities of business and trade where as only the financially
excluded farmers of marginal household are engaged in these activities. Person
days of self-employment of financially included marginal farmers are more than the
financially excluded marginal farmers. (Table No. 26, 27, 28, 29).
IV
CONCLUSION AND SUGGESTIONS
The financially included farmers are in a advantageous position due to higher
agricultural productivity and use of yield-raising inputs like chemical fertilizers,
adequate and timely application of irrigation water etc. due to easy access to
institutional credit at a cheaper rate of interest. Despite the higher cropping intensity
of financially excluded farmers their per hectare agricultural income is lower than the
financially included farmers. The financially included farming households are in
favourable position as they have grown yield-raising, input-intensive high value
crops. Due to in-access to institutional sources of credit the financially excluded
farmers were unable to use the adequate quantity of yield-raising inputs and failed to
achieve the desired agricultural productivity. The most sufferers of financial exclusion
are marginal farmers. In order to achieve the inclusive and equitable growth in the
agricultural sector the strategic efforts are required urgently to bring all the
categories of financially excluded farmers especially marginal farmers under financial
inclusion net. It is no doubt that financial inclusion of farm households will accelerate
the agricultural productivity and development.

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