Agricultural Marketing

                         Part B : lesson 22 “Agricultural Marketing”
In this chapter  we will discuss about Agricultural Marketing in India. After reading this essay you will learn about: 1. Introduction to Agricultural Marketing 2. Present State of Agricultural Marketing in India 3. Conditions for Satisfactory Development 4. Defects 5. Remedial Measures 6. Steps Taken.
Meaning of Agricultural Marketing:-
         Agricultural marketing system is an efficient way by which the farmers can dispose their surplus produce at a fair and reasonable price. Improvement in the condition of farmers and their agriculture depends to a large extent on the elaborate arrangements of agricultural marketing. So in the context of Indian Agriculture, one can say that marketing is a menace and serious threat to the inducement to invest.   
More often than not, they are the victim of ‘ paradox of plenty': greater the production, lesser the revenue, as price tend to crash owing to bulk sales in the market. To quote Royal commission Report “ problem of Agricultural growth can’t be fully solved unless agricultural marketing is improved.
           Definition of Agricultural Marketing :- according to Faruque, “ Agricultural Marketing comprises all operations involved in the movement of Farm produce to ultimate consumer. “
So, Main operations included in  agricultural marketing are as follows as under:-
• Arrangement regarding collection of Agricultural produce.
• Arrangement of grading & standardising the product.
• Processing of the products,
• Warehousing facilities for storage.
• Cold storage facilities for the perishable products.
• Transportation facility.
• Credit facility.
Diverse outlets of Agricultural Marketing in India:-
1. Sale in Villages or local market:- In the local markets, agricultural produce is sold in three different ways:
(a) In the rural fairs/Bazars
(b) Directly to the mahajans or moneylenders.
(c) To the Mobile Traders of the urban areas.
2. Sale in Urban Markets:- Urban market in India are of two types:-
(a) Unregulated Market ( farmers produce purchased by commission agents)
3. Regulated Market.( under this fair price offered to the farmers under direct supervision of the market committee.)
4. Other outlets of sale:- It include the following:-
          ( a) Sale through cooperative societies
          (b) Direct sale to the Government. ( through FCI, Jute corporation, cotton corporation of India etc.)
Conditions for Satisfactory Development of Agricultural Marketing in India:
The following are some of the important conditions for the satisfactory development of agricultural marketing in India:
(i) Eliminating Middlemen:
In order to ensure a fair and satisfactory market for agricultural produce, elimination of middlemen is very much required. Such middlemen between the farmers and the ultimate consumers usually disturb the normal functioning of the market.
(ii) Freedom from Moneylenders:
Easy finance facility should be developed so as to set free the farmers from the clutches of moneylenders who often force them to go for distress sale of their output.
(iii) Storage Facility:
Suitable agricultural marketing structure needs an improved and adequate storage capacity in the form of modern warehouses and cold storages. Such facilities can raise the holding capacity of farmers for getting a remunerative price of their product.
(iv) Bargaining Capacity:
The poor bargaining capacity of the farmers arising out of poor holding capacity should he improved for getting price of their produce in the market.
(v) Regulated Markets:
A good number of regulated markets should be set up throughout the country for removing the practice of exploitation of farmers by the middlemen. Weights and measures are also to be modernized.
(vi) Adequate Transport Facility:
For developing satisfactory agricultural marketing cheaper and adequate means of transport must be developed so that farmer can take their produce in urban market or mandis.
(vii) Agricultural Marketing Societies:
Agricultural marketing co-operative societies should be formed throughout the country for developing a better marketing structure.
(viii) Market Intelligence:
Proper arrangement should be made through mass media coverage to pass correct and updated information to the farmers about ruling prices and marketing operations.
Defects of Agricultural Marketing in India:
Following are some of the main defects of the agricultural marketing in India:
(i) Lack of Storage Facility:
There is no proper storage or warehousing facilities for farmers in the villages where they can store their agriculture produce. Every year 15 to 30 per cent of the agricultural produce are damaged either by rats or rains due to the absence of proper storage facilities.
(ii) Distress Sale:
Most of the Indian farmers are very poor and thus have no capacity to wait for better price of his produce in the absence of proper credit facilities. Farmers often have to go for even distress sale of their output to the village moneylenders-cum-traders at a very poor price.
(iii) Lack of Transportation:
In the absence of proper road transportation facilities in the rural areas, Indian farmers cannot reach nearby mandis to sell their produce at a fair price. Thus, they prefer to sell their produce at the village markets itself.
(iv) Unfavourable Mandis:
The condition of the mandis is also not at all favourable to the farmers. In the mandis, the farmers have to wait for disposing their produce for which there is no storage facilities. Thus, the farmers will have to take help of the middleman or dalal who take away a major share of the profit, and finalizes the deal either in his favour or in favour of arhatiya or wholesalers.
(v) Intermediaries:
A large number of intermediaries exist between the cultivator and the consumer. All these middlemen and dalals claim a good amount of margin and thus reduce the returns of the cultivators.
(vi) Unregulated Markets:
There are huge numbers of unregulated markets which adopt various malpractices. Prevalence of false weights and measures and lack of grading and standardization of products in village markets in India are always going against the interest of ignorant, small and poor farmers.
(vii) Lack of Market Intelligence:
There is absence of market intelligence or information system in India. Indian farmers are not aware of the ruling prices of their produce prevailing in big markets. Thus, they have to accept any un-remunerative price for their produce as offered by traders or middlemen.
(viii) Lack of Organisation:
Accordingly, the Royal Commission on Agriculture has rightly observed, “So long as the farmer does not learn the system of marketing himself or in co-operation with others, he can never bargain better with the buyers of his produce who are very shrewd and well informed.”
(ix) Lack of Grading:
Indian farmers do not give importance to grading of their produce. They hesitate to separate the qualitatively good crops from bad crops. Therefore, they fail to fetch a good price of their quality product.
(x) Lack of Institutional Finance:
In the absence of adequate institutional finance, Indian farmers have to come under the clutches of traders and moneylenders for taking loan. After harvest they have to sell their produce to those moneylenders at unfavourable terms.
(xi) Unfavourable Conditions:
Farmers are marketing their product under adverse circumstances. A huge number of small and marginal farmers are forced by the rich farmers, traders and moneylenders to fall into their trap to go for distress sale of their produce by involving them into a vicious circle of indebtedness. All these worsen the income distribution pattern of the village economy of the country.
Remedial Measures for Improvement of Agricultural Marketing:
Improvement of the agricultural marketing in India is utmost need of the hour.
Following are some of the measures to be followed for improving the existing system of agricultural marketing in the country:
(i) Integration of Domestic Markets with International Markets: The barriers in free marketing across different states especially for foodgrains should be dismantled. This calls for dismantling of restrictions on pricing, trading, distribution and movement of agricultural products within the country. Further, India, being a signatory to the World Trade Organization (WTO) Agreement, should do away with physical barriers, both for imports and exports, on various agricultural commodities. Simultaneously, it should reduce tariff barriers within a time frame. These steps could facilitate the integration of domestic markets with international markets in due course.
(ii)Strengthening Co-operative Marketing Societies: The progress made by co-operative marketing societies so far, though noteworthy, is not wholly satisfactory. Co-operatives have yet to cover a substantial part of the total agricultural produce. It is, therefore, essential that these cooperatives develop at a faster speed and along right lines. Marketing societies need to be more closely intertwined with other societies dealing with farming inputs, credit, etc. The best way to do so is to establish multipurpose societies to look after all the aspects of agricultural marketing. These societies, apart from organizing the sale of agricultural produce, should undertake construction of their own storage capacity, provide for their own transport, arrange for the processing of produce, grade their goods, organize exports, etc. This will reduce their dependence on other sources and provide a total view of marketing services to the members.
(iii)Strengthening of Regulated Market Structure: The management of regulated markets is entrusted to agricultural produce marketing committees (APMC) on which different interests are represented. There is an urgent need to make these market committees viable and managerially competent in keeping with liberalized trade atmosphere. The market committees should be headed by marketing professionals. Further, the present number of regulated markets is not enough to meet the growing requirements of the country. There is also an urgent need to develop rural periodic markets in a phased manner with necessary infrastructural amenities to have a strong grass-root level link in the marketing chain.
(iv) Re-framing Price Stabilization Policy: With a view to provide remunerative price to the farmer, food at affordable price to the consumer and sustained growth of marketable surplus, all undesirable restrictions on agricultural trade has to be removed. Public procurement, storage and distribution of foodgrains need to be managed efficiently on commercial lines.
(v) Developing Efficient Commodity Futures Markets: In order to strengthen the future market Government should set up more commodity exchanges, improve the regulatory and supervisory systems, modernize clearinghouse operations, upgrade training facilities and establish an enabling legal framework to develop vibrant commodity futures market in India.
(vi) Promoting Direct Marketing: Promotion of direct marketing as one of the alternative marketing structures is beneficial for the farmers as well as the buyers as it enables the former to meet the specific requirements of the latter. Direct marketing enables farmers and buyers to economize on transportation costs, handling charges, market fees, etc., to improve price realization considerably. In direct marketing, the market will operate outside the purview of Agricultural Produce Marketing Act and will be owned by professional agencies, such as wholesalers, trade associations, NGOs or self-help groups (SHGs).
(vii)Improving Transport Infrastructure: The traditional rural transport system should be improved. The public investments in the road, railway and waterways should be developed.
(viii)Improving Storage Facility: The private sector needs to be encouraged to enter the warehousing and storage in a big way by extending proper incentives to it. Experiment of the creation of decentralised rural godowns also needs to be pursued more vigorously. Village Panchayats, co-operatives, SHGs, farmers organizations, NGOs, etc., should also be encouraged to undertake warehousing activity under the scheme. In case of perishable commodities like fruits, vegetables and flowers, the complete cold chain comprising pre-cooling, grading, packaging, cold storage and refrigerated vans should be developed.
(ix) Providing Processing, Packaging and Grading Facilities: Proper cleaning, grading and packaging of primary products will need greater attention not only in the physical markets, but also in the villages from where produce is brought to the market for sale. Besides, there is a need to educate the farmers for proper grading and packaging before they bring the produce to the market. In the changed context, new technologies of packing like tetra packs, ascetic packing, pouches, etc. need to be introduced.
(x) Making Available Credit for Marketing: Provision of credit by the organized financial system to support agricultural marketing has to grow further. Considerable amount of institutional financing for agricultural marketing is directed towards public organizations. The credit facility available to private traders is quite limited.
(xi)Promoting Agricultural Marketing Research: The agricultural marketing research in the areas of agri-business management, post-harvest management, grading, standardization, quality assurance, export promotion and information technology should be promoted. The agriculture research institutes and universities should be further strengthened to undertake applied and operational research in agricultural marketing, impart training to market functionaries and provide consultancy services to the public as well as private organizations engaged in agricultural marketing. Further, conferences, seminars, and workshops should be conducted from time to time on current and relevant issues to facilitate exchange of views among various market functionaries.
Steps Taken by Government for Improvement of Agricultural Marketing in India:
In the mean time, the Government has taken following important steps for the improvement of agricultural marketing in India:
(i) Warehouses:
For constructing the network of warehouses in the town and mandis, the All India .Warehousing Corporation has already been set up. In 1988-89, the Central Warehousing Corporation (CMC) owned and managed nearly 465 warehouses with its total storage capacity of 6.4 million tonnes.
(ii) Development of Marketing Societies and Regulated Markets:
Moreover, the Co-operative Credit Societies are also re-vitalised for providing more credit to the farmers. Again about 2633 general purpose primary co-operative marketing and processing societies have also been formed for assuring reasonable prices to the farmers and also to remove all existing intermediaries from the market.
(iii) Infrastructure Facilities:
The central Government is also providing assistance for the creation of infrastructural facilities in the markets and also for setting up godowns in rural areas.
These schemes have been transferred to different States and Union Territories with effect from April 1992 In order to facilitate grading; standards have been laid down for 143 agricultural and allied commodities under the Agricultural Produce (Grading and Marketing) Act, 1937.
(iv) NAFED:
NAFED is a central nodal agency for undertaking price support operations for pulses and oilseeds and market intervention operation for horticultural items like Kinnu/Malta, onion, potato, grapes, black pepper, red chilies etc. During 1994-95 NAFED’s turnover was Rs 718.77 crore and the turnover target for 1997-98 is Rs 80.000 crore.
A few other organizations in the co-operative sector are the National Co¬operative Tobacco Growers Federation Ltd., the National Consumers’ Co-operative Federation and the Tribal Co-operative Marketing Development Federation of India Ltd. (TRIFED) which attends specifically to the marketing problems of the tribal areas.
However, the share of co-operatives in the total marketing of agricultural commodities is rather small.
(v) Commodity Boards:
Moreover, specialised Commodity Boards continue to operate for rubber, coffee, tea, tobacco, spices, coconut, oilseed and vegetable oils, horticulture etc. The National Dairy Development Board is also engaged in the marketing of agricultural commodities.
The role of Co-operatives in the marketing of agricultural produce has also been expanding progressively.
(vi) Standardisation and Grading:
Finally, promotion of standardisation and grading of agricultural products is the main function under institutionalised agricultural marketing. In order to improve the marketability of products within and outside the country, an effective quality control mechanism is essential.
The Act also empowers the Central Government to include additional commodities/products in the schedule for enforcement of grade standards and implementing grading and quality control. This kind of grading and quality control will help farmers to fetch a good price for quality products produced by them.
So far, Ag-mark standards have been framed and notified in respect of 163 commodities which include food grains, pulses, fruits and vegetables, spices, edible nuts, oilseeds, vegetable oils and fats, fibres, forest products, livestock, dairy and poultry products.
At present, 22 Regional Ag-mark Laboratories are operating under the Apex Central Ag-mark Laboratories, Nagpur. These laboratories also provide training to chemists of the laboratories of States and Union Territories.
(vii) Marketing Surveys: The market survey of agriculture products are conducted and published to benefit farmers. The surveys also discuss the problems and measures to tackle the problems associated with the marketing of agro-products. The prices of agriculture products in major markets are published widely. Further, for dissemination of information all sorts of media like radio, television, display board etc. are used.
Conclusion:-
The agricultural marketing system stands today at a critical stage of its evolution. It needs to meet the growing requirements of farmers, consumers, industry and exports as also of agriculture, which is becoming input-intensive and getting diversified. At the same time, the requirements of the small farmers and poorer sections have also to be met. Efficient marketing can ensure better income for the producers and improved satisfaction to the consumers. This requires the increased public investments to improve infrastructural facilities and proper maintenance and up gradation of the existing facilities through repair, replacements and technological modernization.
Concept-check Questions :
 * What are the important components of agriculture marketing structure in India?
 * What are problems facing agriculture cooperatives in India?
 * Write a note on future trading in agriculture commodities. 

Role & Functions of NABARD in India

Explain the role and Functions of NABARD in providing Agricultural credit:-
On the recommendations of shivaraman committee, appointed by the Reserve Bank Of India in march, 1979, to study the problems relating to Agricultural credit, National Bank for Agriculture and Rural Development was established on July 12, 1982.
NABARD role in rural development in India is phenomenal. National Bank For Agriculture & Rural Development (NABARD) is set up as an apex Development Bank by the Government of India with a mandate for facilitating credit flow for promotion and development of agriculture, cottage and village industries.

Role of NABARD:-
It is an apex institution which has power to deal with all matters concerning policy, planning as well as operations in giving credit for agriculture and other economic activities in the rural areas. ... It prepares rural credit plans, annually, for all districts in the country.
Dr. Harsh Kumar Bhanwala is the Chairman of National Bank for Agriculture and Rural Development (NABARD) since December 18, 2013.
Functions of NABARD:-
There are three types of functions of NABARD:-
1.Credit Functions:-
(i) Re- finance Facility
Refinance to Rural Financial Institutions for investment credit (long term loan) and production and marketing credit (short term loan) purposes for farm and off-farm activities in rural areas.
 (ii) Loans to State Governments for developing rural infrastructure and strengthening of the Cooperative Credit Structure
(iii)Loans for warehousing infrastructure to State Governments, State/ Central government Owned/ assisted entities, Cooperatives, Federation of cooperatives, Farmers’ Producers Organizations,(FPOs), Federations of Farmers’ Collectives, Primary Agricultural Credit Societies (PACS) / Cooperative Marketing Societies (CMS) or similar institutions, Corporates/ Companies, Individual entrepreneurs, etc., 
(iv) Direct lending to Cooperatives and Producers’ Organization, support to State owned institutions /corporations under (v) NABARD Infrastructure Development Assistance and direct lending to individuals, partnership firms, corporates, NGOs, MFIs, Farmers’ collectives etc. under Umbrella Programme for Natural Resource Management (UPNRM) Pass through agency of select Government of India Capital Investment Subsidy Schemes.

2. Regulatory functions:-
(i) Inspection of cooperative societies and RRBs.
(ii) Permission to open a branch of RRBs & cooperative societies forward by NABARD to RBI.
(iii) Submission of Returns copy to NABARD Also.
Power of taking information from the cooperative societies and banks.
3. Development Functions:-
(i) Formulate credit plans, build Institution, promote Research & innovations.
(ii) Coordinates the operations of Rural credit agencies, Develop expertise to deal with agricultural & Rural problems.
(iii) Provide facilities for Training & Research to enable them to coordinate to the share capital of eligible.

Agriculture credit in India

          Agricultural Credit in India

In this chapter we will discuss about Agricultural Credit in India. After reading this chapter you will learn about: 1. Meaning of Agricultural Credit in India 2. Types of Agricultural Credit in India 3. Sources 4. Disbursement in Recent Years 5. Problems 6. Suggestions 7. Conclusion.
 Meaning of Agricultural Credit:
Agricultural credit is considered as one of the most basic inputs for conducting all agricultural development programmes. 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 post-green revolution period the requirement of agricultural credit has increased further in recent years.
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:
(a) Short Term Credit:
The Indian farmers require credit to meet their short term needs viz., purchasing seeds, fertilisers, paying wages to hired workers etc. for a period of less than 15 months. Such loans are generally repaid after harvest.
(b) Medium Term Credit:
This type of credit includes credit requirement of farmers for 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.
(c) 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 sinking of wells, reclamation of land, horticulture etc. Thus, the long term credit requires sufficient time for the repayment of such loan.
  Sources of Agricultural Credit in India:
In India, agricultural credit are being advanced by different sources. The short term and medium term loan requirements of Indian farmers are mostly met by moneylenders, co-operative credit societies and Government. But the long-term loan requirements of the Indian farmers are also met by moneylenders, land development banks and the Government.
Nowadays, the long term and short term credit needs of these institutions are also being met by National Bank for Agricultural and Rural Development (NABARD).
Sources of agricultural credit can be broadly classified into institutional and non-institutional sources. Non-Institutional sources include moneylenders, traders and commission agents, relatives and landlords, but institutional sources include co-operatives, commercial banks including the SBI Group, RBI and NABARD.

Table 7.15 shows the contribution of these different sources to the total agricultural credit in India since 1951- 52 to 1996.

It can be revealed from Table 7.15 that among all the different non-institutional

sources the contribution of money lenders was highest and that was to the extent of 69.7 per cent. But its contribution gradually came down to 49.2 per cent in 1961-62 and then to 7.0 per cent in 1996. Total contribution of non-institutional source towards agricultural credit has gradually declined from 92.7 per cent in 1951-52 to 25.0 per cent in 1996.
The share of institutional sources to the total agricultural credit which was 7.3 per cent in 1951-52 gradually increased to 18.7 per cent in 1961-62 and then to 75.0 per cent in 1996. Out of these institutional sources, co-operatives contributed 40 per cent and commercial banks contributed 30.0 per cent of the total farm credit in 1996.
I. Non-Institutional Sources:
(i) Moneylenders:
From the very beginning moneylenders have been advancing a major share of farm credit.
Moneylenders are of two different types:
(a) Professional moneylenders
(b) Agriculturist moneylenders.
These moneylenders were supplying a major portion of agricultural credit (69.7 per cent in 1951-52) and indulged into malpractice like manipulation of accounts and charged exorbitant rate of interest on their loan- often 24 per cent and over.
Due to all these factors the share of moneylenders in total farm credit has declined sharply from 69.7 per cent in 1951-52 to 36.1 per cent in 1971 and then to only 16.1 per cent in 1981 and then to 7.0 per cent in 1995-96.
(ii) Traders and Commission agents:
Traders and commission agents are also advancing loan to the agriculturist for productive purposes before the maturity of crops and then force the farmers to sell their crops at very low prices and charge heavy commission. This type of loans is mostly advanced for cash crops.
The share of these traders in farm credit increased gradually from 5.5 per cent in 1951-52 to 8.8 per cent in 1961- 62 and then sharply declined to 5.0 per cent in 1996. Thus its importance has been declining in recent years.
(iii) Relatives:
Cultivators are also normally borrowing fund from their own relatives in times of their crisis both in terms of cash or kind. These loans are a kind of informal loans and carry no interest and are normally returned after harvest.
The importance of this source of farm credit is also declining as its share of agricultural credit has already declined from 14.2 per cent in 1951-52 to 8.7 per cent in 1981 and then to 3.0 per cent in 1995-96.
(iv) Landlords:
In India, small as well as marginal farmers and tenants are also taking loan from the landlords for meeting their financial requirements. This source has been following all the ill-practices followed by money-lenders, traders etc.
Sometimes landless workers are even forced to work as a bonded labour. The share of this source to rural credit has increased from 3.3 per cent in 1951-52 to 14.5 per cent in 1961-62 and then sharply declined to 8.8 per cent in 1981 and then to 10.0 per cent in 1995-96.
Thus, the non-institutional sources of farm credit have been facing serious loopholes like exorbitant rate of interest, loan for unproductive purposes, non-repayment of loan etc.
II. Institutional Sources:
The main motive of institutional credit is to assist the farmers in raising their agricultural productivity and maximising their income. Institutional credit is also not exploitative in character. The following are some of the important institutional sources of agricultural credit in India.
(i) Co-operative Credit Societies:
The cheapest and the best source of rural credit in India is definitely the co-operative finance. In India the active primary agricultural credit societies (PACS) cover nearly 86 per cent of the Indian villages and account for nearly 36 per cent of the total rural population of the country. The share of co-operatives in the total agricultural credit increased to nearly 40 per cent in 1996 as compared with only 3 per cent in 1951-52.
In 1993-94 nearly 88,000 primary agricultural credit societies (PACS) of India provided Rs 6461 crore as short term and medium term loans to the farmers. In 2006-2007, the same loan has increased to Rs 42,480 crore, which was financed by co-operative banks.
But these co-operatives have a long way to go. In some states like Bihar, West Bengal, Orissa and Rajasthan the co-operative movement did not spread much of its net world. Even in some places the working of the co-operatives had been wrecked hopelessly by unscrupulous and dishonest members leading to large scale sufferings of huge number of needy farmers.
(ii) Land Development Banks:
Land development banks are advancing long term co-operative credit for 15-20 years to the farmers against the mortgage of their lands for its permanent improvement, purchasing agricultural implements and for repaying old debts. The number of state land development banks (SLDBs) increased from 5 in 1950-51 to 19 as on June 1986 which again consisted of 2447 Primary Land Development Banks (PLDBs) branches.
The amount of loan sanctioned annually by these PLDB branches has increased from Rs 3 crore in 1950-51 to Rs. 2039 crore in 1993-94. But benefits from these land development banks could not reach to small farmers and only the big landlords have been taking all advantages out of it. At present there are 19 central and 733 primary LDBs. In 1997, these banks advanced loan worth Rs 1,744 crore.
(iii) Commercial Banks:
In the initial period, the commercial banks of our country have played a marginal role in advancing rural credit. In 1950-51, only 1 per cent of the agricultural credit was advanced by the commercial banks. But after the nationalisation of commercial banks in 1969, the commercial banks started to extend financial support both directly and indirectly and also for both short and medium periods.
With the help of “village adoption scheme” and service area approach the commercial banks started to meet the credit and other requirements of the farmers. They also sponsored various regional rural banks for extending credit to small and marginal farmers and rural artisans just to save them from the clutches of village moneylenders.
Till 1969, direct advances by the commercial banks were restricted to only Rs 44 crore. But as on March 2007 the amount of loan has increased to Rs 1,40,382 crore. During 2006-2007 commercial banks along with Regional Rural Banks extended nearly 79.1 per cent of the total institutional farm credit in our country.
Again in 1999-2000, disbursements of agricultural advances by public sector banks under Special Agricultural Credit Plan (SACP) were Rs 19,755 crore.
Commercial banks are finding difficulty in advancing loans to the farmers particularly in respect of lending techniques, security, recovery etc. and are expected to overcome these gradually. But the commercial banks are not very much interested to advance loan to small and marginal farmers and as on March 1997 their farm credit was restricted to only 13.5 per cent of total bank credit.
The share of commercial banks in total institutional credit to agriculture is almost 69.0 per cent in 2006-2007.
(iv) Regional Rural Banks:
As per the recommendations of working Group on Rural Banks the Regional Rural Banks (RRBs) were established in 1975 for supplementing the commercial banks and co-operatives in supplying rural credit. Since 1975 these Regional Rural Banks are advancing direct loans to small and marginal farmers, agricultural labourers and rural artisans etc. for productive purposes.
Till June 1996, in total 196 RRBs have been lending annually nearly Rs 1500 crore to the rural people and more than 90 per cent of these loans were also advanced to the weaker section.
At the end of 1988 these RRBs jointly advanced loan to the extent of Rs, 2,804 crore among 11 million persons lying below the poverty line. In 2006-2007, the RRBs have disbursed agricultural credit amounting to Rs 20,435 crore which is just 10.05 per cent of total institutional credit to agriculture.
(v) Government:
Another important source of agricultural credit is the Government of our country. These loans are known as taccavi loans and are lend by the Government during emergency or distress like famine, flood etc. The rate of interest charged against such loan is as low as 6 per cent.
The share of the Government in the total agricultural credit has increased from 3.1 per cent in 1951-52 to 15.5 per cent in 1961-62 but then the share declined to only 5.0 per cent in 1996. During 1990-91, the state Governments had advanced nearly Rs 350 crore as short-term loan to agriculture. But the taccavi loan failed to become very much popular due to official red tapism and corruption.
Table 7.16(a) shows the flow of institutional credit to agriculture.

Change in Relative Share of Sources of Institutional Credit:
The relative share of the sources of institutional credit has been changing after the nationalisation of commercial banks, which can be seen from Table 7.16(a).
Table 7.16(a) reveals the changes in relative share of sources institutional credit. It is observed that after the nationalifiation of U commercial tanks of India in 1969, the commercial banks as a whole have increased consistently its share in institutional credit to agriculture sector from 38.4 per cent in 1980-81 to 75.8 per cent in 2008-09.
Resultantly, the relative share of co-operative societies declined from 61.6 per cent in 1980-81 to 15.3 per cent in 2008-09. Again, the share of co-operative societies in institutional credit increased to the level of 18.3 per cent and the Share Of commercial banks declined to 71.2 per cent in 2012-13. However, the RRBs have been contributing about 8 to 10 per cent of total institutional agricultural credit over the same Despite phenomenal increase in the volume of overall agricultural credit, there is a serious problem of over-dues which has been inhibiting credit expansion on the one hand and economic viability of the lending institutions especially the cooperatives and the RRBs, on the other hand. The waiver of agricultural loans in 1990 has further aggravated the problem of recovery.
In order to strengthen the co-operative credit structure of the country, the National Bank for Agricultural and Rural Development (NABARD) is contemplating an institutional strengthening programme. The Government has also introduced certain measures for revitalising the co-operatives on the recommendations of the Agricultural Credit Review Committee (1989).
These measures include amendment to state co-operative laws, augmenting the reserve base of the Primary Agricultural Credit Societies (PACS), holding elections of co-operative bodies, revitalising PACS by business development planning and formulating Deposit Insurance Guarantee Scheme for PACS.
In view of the increase in prices of agricultural inputs and with a view to enabling the NABARD to extend adequate credit support for the rabi crop operations, Reserve Bank of India has also announced additional lines of credit for short-term agricultural operations in January 1993.
Measures taken in 1998-99 to Improve Credit Flow to Agriculture:
In order to improve the flow of credit to agriculture, the Government has introduced the following measures in 1998-99:
(i) Procedural simplification for credit delivery has been made (as per R.V. Gupta Committee Report) through rationalisation of internal returns of banks.
(ii) More powers have been delegated to branch managers to raise the credit flow to agriculture.
(iii) Introduction of composite cash credit limit to farmers, introduction of new loan products with saving components, cash disbursement of loans, dispensation of no due certificate and discretion to banks on matters relating to margin security requirements for agricultural loans above Rs 10,000.
(iv) Introduction of at least one specialised agricultural bank in each state to cater to the needs of high tech.
(v) Introduction of cash credit facility.
(vi) Insuring Kisan Credit cards to farmers to draw cash for their production needs on the basis of the model scheme prepared by NABARD.
(vii) The Government has made arrangement for hassle free settlement of disputed cases of over dues.
(viii) To augment Rural Infrastructural Development Fund (RIDF) with a corpus of Rs 10,000 crore with NABARD to finance rural infrastructure development projects by states.
Thus the flow of institutional credit for agriculture and allied activities which was Rs 31,956 crore in 1997-98 is estimated to have increased to Rs 64,000 crore in 2001-02. The total credit now from all agencies is projected to reach the level of Rs 82,073 crore by 2002-03.
The total credit now to agriculture during the period 1997-2002 is likely to be of the order of Rs 2,33,700 crore which is close to the Ninth Plan projection of Rs 2,29,750 crore.
For the Tenth Plan period (2002-07) the credit flow into agriculture and allied activities from all banking agencies is projected at Rs 7,36,570 crore, which is more than three times the credit flow during the Ninth Plan.
Farm Credit Package:
The Government of India announced the “Farm credit package” in June 2004 which aimed at doubling the flow of institutional credit for agriculture in the ensuing three years. Accordingly, the credit to the farm sector got doubled during two years, i.e., from Rs 86,981 crore in 2003-04 to Rs 1, 80,486 crore in 2005-06, as against the stipulated time period of three years.
The credit flow continued to increase at Rs 2, 29,401 crore in 2006-07 and then to Rs 3, 84,514 crore in 2009-10 and finally to Rs 6, 07,375 crore in 2012-13.
Steps Taken to Raise Credit Flow to Agriculture:
In recent years, the Government has taken some definite steps for raising the credit flow to agricultural sector.
Credit
(i) Targeting:
Targeting practice is followed for raising the flow of agricultural credit.
(ii) Crop Loans:
Arrangement has been made to provide crop loan to formers. Accordingly, farmers have been availing of crop loans up to a principal amount of Rs 3, 00,000 at 7 per cent rate of interest.
(iii) Discouraging Distress Sale:
In order to discourage distress sale of crops by farmers, the benefit of interest subvention has been made available to small and marginal farmers having Kishan Credit Cards for a further period of up of six months (post-harvest) against negotiable were house receipts (NWRs) at the commercial rates.
(iv) Relief for Natural Calamities:
In order to provide relief to farmers on occurrence of natural calamities, interest subvention of 2 per cent will continue to be available to banks for the first year on the .
 Problems of Agricultural Credit in India:
Since independence, the institutional agricultural credit structure in Indiia was very poor. In the post-independence period, various attempts were made by the Government for enriching the institutional agricultural credit structure of the country leading to continuous growth in the base and sources of agricultural credit.
 loan amount on account of natural calamities and such restructured loans will attract normal rate of interest from the second year onwards as per the policy laid down by the RBI.
The following are some of these problems:
(i) Insufficiency:
In spite of expansion of rural credit structure, the volume of rural credit in the country is still insufficient as compared to its growing requirement arising out of increase in prices of agricultural inputs.
(ii) Inadequate Amount of Sanction:
The amount of loan sanctioned to the farmers by the agencies is also very much inadequate for meeting their different aspects of agricultural operations.
(iii) Dismal Recovery of loans:
Nearly 40-42% of the loans have remained unrecovered during the last 3-4 years.
(iv) Marginalization of small Holders:
In the matter of availability of credit ( from institutional sources) small holders are often marginalised. This is owing to their low capacity to offer collateral for loans.
(v) Unproductive Use of funds:
While on the one hand funds are scarce, on the other hand , unproductive use of credit by farmers for family functions to be a serious problem.
(vi) Red Tapism:
Formalities are so cumbersome in obtaining institutional loans that the farmers are often compelled to divert upon to the non- institutional sources.
Suggestions for Removing Limitations of Agricultural Credit in India:
For effective modernisation of agricultural sector and also to stimulate its growth pattern, a broad based and simplified rural credit structure is very much desired and important. Accordingly, Prof. Darling has rightly observed, “A proper system of agricultural credit will not only lower the rate of interest but also imply a system in which productive loans will gradually replace the unproductive ones.”
Thus, in order to remove limitations and problems of agricultural credit in India the following measures may be suggested:
(i) To monitor the taccavi loan offered by the Government in a serious manner.
(ii) Co-operative credit societies should be organised to make it efficient and purposeful for delivering the best in terms of rural credit. Moreover, these societies may be transformed into a multi-purpose society with sufficient funding capacity.
(iii) Middlemen existing between credit agencies and borrowers should be eliminated.
(iv) Reserve Bank of India should arrange sufficient fund so that long term loans can be advanced to the farmers.
(v) Power and activities of the Mahajans and moneylenders should be checked so as to declare an end to the exploitation of farmers.

(vi) The Government should introduce the credit guarantee scheme so as to provide guarantee on behalf of the farmers for getting loans.
(vii) The banks should adopt procedural simplification for credit delivery through rationalisation of its working pattern.
(viii) The Government should issue Kisan credit cards to the farmers to draw cash for their production needs on the basis of the model scheme prepared by NABARD.
(ix) In order to check the fraud practices adopted by the farmer, for getting loans from different agencies by showing same tangible security, a credit card should be issued against each farmer which will show the details about the loans taken by them from different agencies.
(x) Credit should also monitor over the actual utilisation of loans by developing an effective supervisory mechanism.
 Conclusion to Agricultural Credit:
From the above analysis it has been revealed that the extent of agricultural credit in India is very much inadequate and the private non-institutional sources still remained very important in supplying credit to the farmers. Further, the major This has resulted a bad health to the institutional credit and thus these lending institutions will not be able to advance more credit for meeting the growing needs of our farmers. In-spite of that, these institutional sources nowadays are advancing more than 60 per cent of the required short term production ‘credit of the Indian farmers.
But the major portion of these credits is being appropriated by the 30 per cent of the middle and affluent farmers of India. At the end of the Seventh Plan, co-operatives, commercial Banks and RRBs extended credit facilities to the extent of Rs 14000 crore as compared with only Rs 24 crore in 1960-61.of institutional credit faced by lending institutions, particularly the co-operatives, is the unsatisfactory huge level of over-dues ranging between 40 to 47 per cent.
Problems of Rural Indebtedness:
It is basically these loans which have caused the problem of Rural Indebtedness- the problem which is not only shocking in size but also viciously cyclical.
Causes of Rural Indebtedness :-
* Poverty
* Ancestral debt ( farmers consider the repayment of ancestral loans as their religious and social obligation.)
* Sub- Division and fragmentation of Holdings.
*Uncertainty of Monsoon
* Illiteracy of Farmers
*Extravagance
*Litigation ( frequent litigation by the farmers, compounds their problem of indebtedness.
*Desperate sale (farmers  sale of his produce owing to his existing indebtedness)
How to Break the vicious circle of Rural Indebtedness:-
(1)Write-off old debts.
(2)Check on new Debts: (a) through discouraging unproductive loans.
(b)Encourage saving.
(c) Restrain the moneylenders.
(d) promote Institutional credit.
Recent Initiatives
Government of India & Reserve Bank of India: 
In order to increase credit flow to the agriculture sector, the policy of doubling of agricultural credit in three years was introduced in 2004-05. In order to expand the outreach of the banking services, banks made available basic banking ‘no-frills’ account with low or nil minimum balances as well as low or no charges in 2005. The regional rural banks were also specifically advised to allow limited overdraft facilities in ‘no-frills’ accounts without any collateral or linkage to any purpose.
National Agricultural Insurance Scheme (NAIS): NAIS is implemented since Rabi 1999-2000 season with the objectives to provide insurance coverage and financial support to the farmers in the event of failure of any of the notified crops as a result of natural calamities, pests and
diseases and to encourage the farmers to adopt progressive farming practices, high value in-puts and higher technology in agriculture and to help stabilize farm incomes particularly in disaster years.
Government of India & NABARD 
i. Rural Infrastructure Development Fund: RIDF was established in 1995-96 with a corpus of Rs. 2,000crores with the major objective of providing funds to state governments and state owned corporations to develop rural infrastructure such as rural roads, rural bridges, irrigation
works, soil conservation, flood protection, drinking water, infrastructure for rural education etc.
The total corpus of RIDF till 2007-08 (RIDF-I to RIDF-XIII) amounted to Rs.72, 000 crores with 2008-09 budget further adding the amount of RIDF XIV of Rs. 14,000 crores to this corpus.
The total sanctions and disbursements as on 30 June 2007 aggregated Rs. 61312.27crores and Rs.38581.82crores respectively.
ii.MicroFinance Innovations: The credit accessibility for the poor from conventional banking is limited due to lack of collaterals and information. Micro finance has emerged as an alternative financial vehicle that provides micro credit or small loans granted to the poor without any collateral. These loans are provided through micro finance institutions (MFIs). NABARD plays a key role in developing the MFIs by providing them refinance facility at low interest rates.
iii. Kisan Credit Card Schemes: The kisan credit cards (KCC) scheme was introduced in 1998-99 to facilitate short-term credit to farmers. Each farmer is given with a kisan credit card and a pass book for providing revolving cash credit facilities. NABARD provide refinance facility to commercial banks and cooperatives to provide credit under this scheme.
iv. Refinance under Swarnajayanti Gram Swarozgar Yojna (SGSY): NABARD provides refinance facility to institutions that support SGSY.
v.Co-operative Development Fund: 
NABARD has set up the cooperative development fund in 1993 with objective of strengthening the co-operative credit institutions in the areas of resource
mobilization, recovery position etc. the assistance is provided to cooperatives by way of soft loans or grants.
Weaknesses in Rural Credit Structure :
1.Overemphasis of Monetary Credit: The rural credit institutions have given overemphasis on the financial assistance to the cultivators. While the finance is very important factor but it should be complemented with the extension of services in form of guidance, expertise and counseling on agricultural issues.
2. Multiplicity of Institutions: The rural credit structure is based on multi agency credit system whereby there exist numerous organizations providing similar kind of financial services. There is
a lack of coordination in the system and the commercial viability is adversely affected in this scenario.
3. Lack of Motivation: In order to fill the gap that occurred due to the failure of rural cooperative societies Government gave increasing role to the commercial banks. However, commercial banks lack the desired skills and expertise in the agro-credit. The banks have enough financial resources but the service consultancy is not available. Thus, there is a failure to provide complete package of assistance to the farmers. Further, financial sector reforms have put pressure on banks to improve their financial position and so these banks are now concentrating on selected clientele of large borrowers
4. Financial Exclusion: Despite of a large network of the institutional credit system, it has not been able to adequately penetrate the informal rural financial markets and the non-institutional sources continue to play a dominant role in purveying the credit needs of the people residing in rural areas. The results of the All-India Debt and Investment Survey (AIDIS, 2002) also indicate that the share of the non-institutional sources, in the total credit of the cultivator households, hadincreased from 30.6 percent in 1991 to 38.9 percent in 2002.
5. High Interest Rates: The rate of interest charged by rural financial institutions (RFIs) from farmers continues to be considerably higher than those charged by financial institutions from urban consumers. The owners of small or marginal farms, which are non-viable or viable at the margin, and self-employed in the informal sector, cannot afford to bear the level of interest charged by RFIs.
6. Procedural Delays: There is a problem of considerable delays in processing of loan
applications and collaterals. Thus farmers shy away from institutional financing and increase their dependency upon non-institutional sources.
7. Poor Recoveries: Banks are shying away from rural financing mainly because of poor recoveries which is inflicting the system. It is ironical that the recoveries position is adverse amongst rich farmers than amongst the small farmers. The political decisions of waiving off loans are further putting pressures on the financial system.

Suggestions for Improving Institutional Rural Credit System: 
1. Financial Discipline to Improve Recovery: A national consensus among political parties should be evolved for not politicizing the RFIs and resist from announcement of loan or interest waiver schemes and giving calls for not repaying the institutional loans. However, given the risk involved in the agriculture credit the recovery system should be flexible and humane.
2.Revamping the Cooperative Credit Structure: 
The Cooperative Credit Structure should be
strengthened to make use of its wider reach. These have to be recapitalised so as to provide funds for improving their financial positions. There is a need of capacity building, human resource
development, institutional restructuring to ensure democratic functioning, and improving the regulatory regime to empower the Reserve Bank of India (RBI) to enforce prudent financial management.
3. Better Physical, Social and Economic Infrastructure: 
The long term policy framework needs to be designed to improve infrastructure facilities so as to boost rural economic growth. This requires increased public expenditure on social infrastructure (like education, availability of drinking water, health facilities), physical infrastructure (like roads, power) and economic Infrastructure like (irrigation, modern agricultural techniques). These measures would help to
improve the debt paying capacity of rural poor and provide greater opportunities to RFIs.
4. Financial cum Consultancy Approach: 
RFIs needs to provide extension services like consultancy about seeds, availability and use of modern inputs, marketing strategies etc to the cultivators so that a holistic package of assistance can be provided to them.
5. Group Approach to Lending: The lending to homogenous farmer’s groups needs to be organized to improve credit delivery. This would help to improve recovery because of peer pressure. Further, group lending tends to be cost-effective. Involving NGOs or rural educated youths in organizing farmers or rural families in groups, scrutinizing applications, disbursement of loan and effecting recoveries would help RFIs in reducing lending costs.
6. Autonomy to RRBs: RRBs should be given more autonomy and flexibility in planning and lending policies, so that their comparative advantage in rural lending is restored.
7. Greater involvement of Micro Finance Organizations: The banks need to involve microfinance agencies like SHGs, NGOs etc. and other grass root level financial intermediaries who have better understanding of the credit needs and recovery situations.
8. Technological Up Gradation: Technological improvements like computerization can be
critical in building up a reliable credit information system and database on customers, reducing transaction costs and facilitating better pricing of risk, improving the efficiency of the financial
system, and thereby increasing the access of un-banked rural people in an efficient manner.
9. Information Dissemination to Rural Poor:  counseling, awareness and financial
education regarding the benefits of institutional financing are important for effective expansion of financial services in rural areas. To do this, banks may utilize the services of nongovernmental organizations, village youth clubs, village panchayats, farmer clubs and self-help groups into confidence.

Balanced and Unbalanced Growth Theory

Balanced Vs. Unbalanced Growth for Economic Development:-

Having critically examined the comparative analysis of balanced and unbalanced growth strategies, a logical question arises: which of these two strategies provide greater stimulus of economic growth?
The unbiased and impartial opinion is that there is no need to the debate on the controversy.
It is strictly based on empirical evidence and political motivation. While Paul Streeten contends that it is possible to reformulate the choice between balanced and unbalanced growth.
But Ashok Mathur argues that, “balanced and unbalanced growth need not be mutually conflicting and an optimum strategy of development should combine some elements of balance as well as unbalance.”
Both the theories are based on the theory of Big Push which advocates investment to break the vicious circle of poverty. The balanced growth aims at the development of all sectors simultaneously but unbalanced growth recommends that the investment should be made only in leading sectors of the economy.
Underdeveloped countries have insufficient resources in men, material and money for simultaneous investment in number of complementary industries. The investment made in selected sectors leads to new investment opportunities. The aim is to keep alive rather than to eliminate the disequilibrium by maintaining tensions and disproportions.
Balanced growth aims at harmony, consistency and equilibrium whereas unbalanced growth suggests the creation of disharmony, inconsistency and disequilibrium. The implementation of balanced growth requires huge amount of capital.
On the other hand, unbalanced growth requires less amount of capital, making investment in only leading sectors. Balanced growth is long term strategy because the development of all the sectors of economy is possible only in long run period. But the unbalanced growth is a short term strategy as the development of few leading sectors is possible in short span of period.
The doctrine of balanced growth and unbalanced growth have two common problems on relating to role of state and the role of supply limitations and supply inelasticity’s. The private enterprise is only incapable of taking investment decisions in underdeveloped countries. Therefore, balanced growth presupposes planning. In unbalanced growth strategy, the states play a pioneer role in encouraging SOC investments, there by creating disequilibrium.
If the development starts via Investment in DPA, political pressures force the state to undertake investment in SOC. The theory of balanced growth is mainly concerned with the lack of demand and neglects the role of supply limitations.
This is not true as underdeveloped country lacks in supply of capital, skills, infrastructures and other resources which are- inelastic in supply. Similarly, unbalanced growth doctrine also neglects the role of supply limitations and supply in elasticity’s. Under such situations, a judicious compromise has to be made between the benefits from balanced growth and unbalanced growth.
There is no second opinion that the developing countries are wedded to democracy who should try to control the twin evils of inflation and adverse balance of payments during the course of pursuing any strategy of economic development. The need of the hour is that it should be done to make the doctrine effective as a vehicle of economic development with added strength and vigour.
In this context, Prof. Meier has rightly observed that, “From the discussion we may also now recognize that the phrases balanced growth and unbalanced growth initially caught on too readily, and that each approach has been overdrawn. After much reconsideration, each approach has become so highly qualified that the controversy is essentially barren.
Instead of seeking to generalize either approach we should more appropriately look to the conditions under which each can claim some validity. It may be concluded that while a newly developing country should aim at balance in an investment criterion, this objective will be attained only by initially following, in most case, a policy of unbalanced investment.”
Strategies of Balanced and Unbalanced Economic Growth
Strategies of Balanced and Unbalanced Economic Growth!

Currently, there are, among the development specialists, two major schools of thought regarding the strategy of economic development that should be adopted in developing countries. On the one side, there are economists like Ragnar Nurkse and Rosenstein-Rodan who are of the view that the strategy of investment should be so designed as to ensure a balanced devel¬opment of the various sectors of the economy.
They, therefore, advocate simultaneous investment in a number of industries so that there is a balanced growth of different industries. Economists, like H.W. Singer and A.O. Hirschman, on the other side, believe that for rapid economic growth there should be concentration of investment in certain strategic industries rather than an even distribution of investment among the various industries. In other words, in the view of these latter economists, unbalanced growth is more conducive to economic development than a bal¬anced one. We may now consider both these views at some length.
Strategy of Balanced Growth:
We also pointed out how difficult it was to break this vicious circle. We explained there how the vicious circle of poverty operates both on supply and demand sides of capital formation. Nurkse put forward the doctrine of balanced growth in order to break the vicious circle of poverty on the demand side of capital formation. It will be useful to have again a cursory look at this vicious circle.

In an underdeveloped country, the level of per capita income is low which means that the people’s purchasing power is low. Owing to small incomes and low purchasing power their demand for consumer goods is low.
As a result of low demand for goods, the inducement for investment is less and capital equipment per capita (i.e., per worker) is small. Since the amount of capital per capita is small, productivity per worker is low. Low per capita productivity means low per capita income, i.e., poverty.
This completes the vicious circle of poverty. In a poor country, the size of the market for goods is small so that sufficient opportunities for profitable investment in industries are lacking. This is the main reason for lack of inducement to invest which we discuss presently.
Size of Market and Inducement to Invest:
Investment means the expenditure on the making and installation of capital goods, e.g.,. construction of factories and the making of machines and their installation, execution of irrigation and power projects, the construction of roads, railway, etc. Obviously, an entrepreneur will be induced to invest in factories, machinery, etc., if he expects sufficient return on his investment. Businessmen will have incentive to invest only from a motive of earning a profit.
It is the expectation of profit which is a fundamental factor influencing the amount of investment in a country at a given time. In a poor country, the low level of investment is due to low expectations of profit because of less demand for goods or a small size of the market. Let us understand clearly why there is less inducement to invest in a poor country. It is easily understandable that, in under-developed countries, there is a great need for capital for economic development.
People are too poor even to have two square meals a day or a reasonable housing accommodation or clothing to cover their bodies. Hence, there is an urgent need for large-scale production of consumers’ goods, but it cannot be done without the production and use of capital goods in large quantities. Agricultural improvements, the establishment and ex¬pansion of industries, the optimum use of the natural resources and harnessing the natural re¬sources into the service of the people, all require capital. The need for capital can be great but the inducement to invest can be weak.
The level of investment depends not on the need for capital but on the inducement to invest in the form of attraction to earn profit from the capital invested. Without reasonable expectation of profit, much capital will not flow into investment.
The quantity of profitable investment in a country depends on the size of the market. Adam Smith said, “Division of labour is limited by the size of the market.” We can say in the same manner .that inducement to invest depends on the size of the market, that is, on the level of demand. The small size of the market or the low level of demand for the products concerned discourages the entrepreneurs from investment in industries.
This will be clear from an illustration. In a modern dairy, milking, filling up bottles and their loading all these operations are done with the aid of automatic machinery.

Will the instal¬lation of such machinery in every Indian town be profitable for individual entrepreneurs?
Obviously, it will not be profitable. Per capita income being low in India, the demand for milk in each town will be too small to make the full use of such automatic machinery. Such costly plant and machinery will remain mostly idle and there will be work for such machinery only for a few hours during a week. This means a great waste of valuable capital asset.

Which entrepreneur dare start such a business?

As an inducement to invest, the entrepreneurs should be sure that the capital equipment will be profitably employed. This will be possible only if the machinery can be kept in continuous use, and this cannot be done unless there is sufficient demand for the product made by this machinery.

Take another example. Suppose a cloth of a special design is very attractive and it can fetch a very high price. But it will not be economical to install a big machine to make a cloth of a special design, because owing to its high price and low incomes of the people, there will not be sufficient demand for this type of cloth, i.e., the market will be too small.
In America, the cars are cheap but they are very expensive in India. What is the reason? The one reason is that the demand for cars in India as compared with that in America is so small that manu¬facturers of cars cannot be induced to make them in large quantities which would have made them cheap on account of the economies of scale. Examples can be multiplied. The conclusion is clear that inducement to invest depends on the size of the market or the purchasing power of the people.
It may be clearly understood that in the underdeveloped countries, demand for consumer goods cannot be increased merely by the expansion of money supply in the country. The real demand will increase only if there is increase in the productivity per worker and as a result thereof there is increase in the real per capita income. But mere expansion of money supply and thus putting more money into people’s pockets demand can increase only in the form of money which will result in inflation or higher prices, but not increase in the real aggregate demand.
Similarly, the demand for goods or the size of the market cannot be large merely because size of a country is big or its population is large. If the purchasing power of the people is low because of their extreme poverty, the demand for goods in that country will be small or the size of the market will be small even though the country is big in size or its population is large.
Further, in poor countries, where the people’s purchasing power is low on account of low per capita income, the demand for goods, and hence the size of the market, cannot be increased by high pressure salesmanship and vigorous advertising campaigns. There should be enough people to buy them. Thus, it is clear that, in the under-developed countries, the demand for goods, or the size of the market, cannot be increased by increasing money supply, or by increase in population or by salesmanship and advertisement or the large size of the country.
The size of the market can be increased only by increasing productivity. As Nurkse puts it, “The crucial determinant of the size of the market is productivity.” Increase in productivity will increase people’s incomes and hence their purchasing power. The level of people’s income in any country can be raised and consequently their purchas¬ing power can be increased by increasing productivity and aggregate output or, in other words, by increasing productive employment.
A situation of higher productivity, the greater employment and incomes and high purchasing power of the people will provide a profitable field for invest¬ment. It may be said that the size of the market can be enlarged by lowering the price of the products. But this is no solution of the problem. The real solution of the problem is only an increase in productivity of the people by raising productive-employment. Only as a result of increase in productivity, there is increase in income and increase in purchasing power which will increase demand and enlarge the size of the market.
Say’s law propounded by classical economists, tells us that production or supply creates its own demand, But this law cannot be accepted in the sense that the production of cloth creates its own demand because the workers engaged in the making of cloth will not spend their entire earnings on the purchase of cloth. In the same way, production of shoes cannot create its own demand.
The reason lies in the variety of man’s demands. How¬ever, Say’s law can be applied to some extent to the developing countries. If, in the developing countries, investment is made simultaneously in a large number of industries, incomes of a large number of workers engaged in these industries will increase.
This will create demand for goods produced by one another. In other words, if investment is made simultaneously in a number of industries and production is increased, the supply will create its own demand. The Say’s law will hold good in such a situation.
Thus, we see that investment in a particular industry and the resultant production or supply cannot create its own demand but simultaneous investment in a number of industries can. As Nurkse puts it, “An increase in production over a wide range of consumables, so proportioned as to correspond with the pattern of consumers’ preference, does create its own demand.”
Nurksian Strategy of Balanced Growth:

We have explained above how, in the underdeveloped countries, the small size of the market or the limited demand for goods acts as a hindrance in the way of their economic growth or capital formation. When an entrepreneur wants to set up a factory or install plant and ma¬chinery, he makes sure whether there is enough demand for the goods he proposes to manu¬facture and whether the investment will be profitable.
We have seen that owing to low demand for industrial goods investment is discouraged because of low profitability. That is why the vicious circle of poverty operates on the demand side of capital formation. The people in the under-developed countries are poor and their per capita income is low.
This keeps the demand limited and size of the market small. Since the market is small, the entrepreneurs are discouraged from investment in plant and machinery in which only large-scale production is possible and economical.
The result is that capital formation in the country is discouraged. Owing to lack of capital, productivity is low and since productivity per worker is low, the per capita income is low which means there is poverty. This is how the vicious circle of poverty operates in the under-developed countries. According to Nurkse, it is the vicious circle operating in the underdeveloped countries, which stands in the way of their economic development, and accordingly, if this vicious circle can be broken, economic development will follow.

The operation of the vicious circle can also be described thus:
Inducement to invest depends ultimately upon demand, i.e., the size of the market. And the size of the market in turn depends upon productivity, because the capacity to buy is ultimately based on the capacity to produce. Productivity, in its turn, largely depends on the use of capital. But, for an entrepreneur, the small size of the market will limit the use of capital so that productivity will remain low, thus keeping the size of the market small. The vicious circle will then repeat itself. This vicious circle of poverty, according to Nurkse, can be broken by a simultaneous investment in a large number of industries i.e., by a balanced economic growth.
We have explained above how Say’s law cannot be helpful in underdeveloped countries, if investment is made only in one industry. The output of any single industry newly set up with capital equipment cannot create its own demand.
Human wants being diverse, the people engaged in the new industry will not wish to spend all their income on their own products. Suppose a shoe manufacturing industry is set up. If in the rest of the economy, nothing happens to increase productivity and employment, and hence the buying power of the people, the market for the additional output of shoes is likely to be deficient.
People outside the shoe industry will not give up the consumption of essential food, clothing, etc., to create a sufficient demand for shoes every year. The supply of shoes is likely to outrun demand, and if investment is confined only to one particular industry, it cannot prove fruitful.
But if investment is made simultaneously in a large number of industries, it will provide work for a large number of people producing diverse commodities. It will increase their income and they will be in a position to buy the consumer goods made by one another.
This is how supply can create its own demand (as Say’s Law asserts) through the strategy of balanced growth. The workers employed in different industries become customers of one another’s goods and demand is increased or the size of the market is enlarged.
The expansion of one industry helps in the expansion of others and there is all round growth. This is how the difficulty arising from small size of the market is overcome and the obstacle in the way of economic growth cleared. In Nurkse’s words; “The difficulty caused by the small size of the market relates to individual investment incentives in any single line of production taken by itself.
At least in principle, the difficulty vanishes in the case of different industries. Here is an escape from the deadlock; here the result is an overall enlargement of the market. People, working with more and better tools in a number of complementary projects become each other’s customers. Most industries catering for mass consumption are complementary in the sense that they provide a market for, and thus support, each other. This basic complementarity stems in the last analysis from the diversity of human wants. The case for balanced growth rests on the need for a balanced diet.”
Taken separately, a number of industries may be unprofitable so that the private profit motive would not suffice to induce investment in these industries. However, undertaken together in a synchronized manner, a balanced increase in production would enlarge the size of the market for each firm or industry so that “synchronized undertaking” would become profitable. This wave of capital investment in a number of different industries is called by Nurkse as “balanced growth.”
In this way, as we have already said, the hindrance to economic growth owing to the small size of the market is removed. The aggregate demand is increased owing to simultaneous in¬vestment in a large number of industries, because the incomes go up and productivity levels of persons employed in different industries go up.
Hence, the under-development equilibrium trap and the vicious circle of poverty can be broken by balanced growth. If once this circle is broken then, since there is circular connection, this circle will turn from poverty to balanced growth and to all-round development of the economy. In this way, the circle can be given beneficial form.
Now the question arises: Which industries should be selected for investment? The answer is to be found in the above solution offered by Nurkse. Investment should be made simulta¬neously in such industries the manufactured products of which are in accordance with the demand or the preferences of the consumers or on which the persons engaged in different industries would spend their incomes.
There should be investment in a large number of com¬plementary industries in the sense that persons employed in them become each other’s customers. Only by a simultaneous investment in such industries, production or supply will create its own demand.
Then the question is: How is it to be made sure that simultaneous investment in a large number of industries is actually made? Nurkse answers that, if in the country there are dynamic and constructive entrepreneurs and industrialists, they can be induced to make investment si¬multaneously in different industries.
If there is lack of such entrepreneurs, then the government can take the work of balanced growth in its own hands. That is, the government can itself make simultaneous investment in several industries and can thus increase people’s incomes and pro¬ductivity.
As a result of investment in several industries, it will be possible to increase the use of capital goods in large quantities which will raise the level of productivity and there will be a large increase in the aggregate output of consumer’s goods and services.
As a result of this, the level of national income will rise which will help to raise the standards of living of the people? In this way, the poverty of the people will be eliminated. What is needed to remove the poverty of the people is to launch an attack on the various sectors of the economy simul-taneously. This will remove the obstacle arising from limited demand or narrowness of the market and the inducement to investment will increase.
External Economies and Balanced Growth:
It seems to be proper to refer in this con¬nection to external economies. When one industry creates demand for another, it will be prof¬itable to the other industry. When one industry benefits from the growth of another industry, then we say that external economies are available from one industry to another.
We have seen above that it proves profitable to make investment in complementary industries, because people engaged in such industries become one another’s customers or create demand for one another. It is clear, therefore that the doctrine of balanced growth is based on the concept of external economies.
It is to be noted that here we do not use the term ‘external economies’ in the sense in which Marshall used it. By ‘external economies’ Marshall meant those economies which arise from the localisation of a certain industry in a particular place and these economies are enjoyed by each firm in the industry by the establishment of numerous firms there.
But in development economics, by external economies we mean those benefits which accrue to other industries by the establishment of new industries or the expansion of the existing industries. We have seen above how, according to Nurkse’s doctrine of balanced growth, these benefits accrue to the other industries by the establishment of new industries or the expansion of old industries through simultaneous investment in such industries in the form of increased demand or extension of the market.
In fact, the increasing returns which arise from the process of economic growth, are mainly due to the creation of external economies in the form of extension of the market or increase in demand and not due to the external economies mentioned by Marshall such as technical information from the journals, improvement in the technical skill of labour, development in the means of communi¬cation and transport, etc. which arise from the location of an industry in a particular place.
It is worthwhile knowing whether, in the balanced growth, investment will be made in agriculture or not. Nurkse has not discussed this point in his book ‘Problems of Capital Formation in Under-developed Countries.’ But later on he made it clear that in his balanced growth strategy, appropriate investment will be made in agriculture.
Thus, he has not ignored agricultural devel¬opment in his doctrine of balanced growth. In fact, investment in agriculture is implied in his book referred to above, because he has said that investment would be made in such industries simultaneously as produce goods conforming to consumer’s demand or preferences.
Since when, in the under-developed countries, people will get employment in the various industries, they mostly spend their incomes on the food-grains, investment in agriculture will be necessary to meet their demand and to promote balanced growth.
Nurkse has also not made in his doctrine of balanced growth whether investment should be made in capital goods industries and social overhead capital like transport and communica¬tions to promote balanced growth.
Actually, Nurkse has suggested investment in consumer goods industries. But how will the machinery and capital equipment required in these industries are obtained? If they are not to be imported from abroad, they will have to be produced in the country and for that purpose investment will have to be made in their production.
Thus, we see if the doctrine of balanced growth to be fully implemented, then investment will have to be made in consumer goods industries, agriculture, capital goods industries and social overhead capital. But when investment is to be made in all such sectors and industries, then, in order to bring about balanced economic growth, large quantities of resources will be required. It is doubtful if the under-developed countries have the means to mobilise resources in such large quantities.
A Critique of Balanced Growth Doctrine:
Prof. Hans Singer and Albert Hirschman, eminent American economists, have criticized Nurkse’s doctrine of balanced growth. They contend that what is needed is not balanced growth, but a strategy of judiciously-planned unbalanced growth.
According to Singer, balanced growth cannot solve the problem of the under-developed countries, nor do they have sufficient resources to achieve balanced growth. Singer maintains that balanced growth doctrine might be better expressed as follows: “As hundred flowers may grow whereas a single flower would wither away for lack of nourishment.” But where are the resources to grow hundred flowers? Singer argues that the slogan “stop thinking piecemeal and start thinking big” is a sound advice for under-developed countries but he also feels that there are “several areas of doubt” about the balanced growth theory in its Nurksian form.
First, if the balanced growth doctrine is interpreted to advise the under-developed countries to embark on a large and varied package of industrial investment with no attention to agricultural productivity, it can lead to trouble.
At the initial stages of development, as the income grows with new industrial investment and employment, the relatively greater demand would be created for food and other agricultural goods. In order to sustain industrial investment, the agricultural productivity would have to be greatly raised.
Thus, the big push in industry must be accompanied by a big push in agriculture as well, if the country is not to run short of foodstuffs and agri-cultural raw materials during the transition to an industrialised society.
But when we start talking about varied investment package for industry and “major additional blocks of investment in agriculture” at the same time, we run into serious doubts about the capacity of under-developed countries to follow the balanced growth path.
According to Marcus Fleming, “Whereas the balanced growth doctrine assumes that the relationship between industries is for the most part complementary, the limitation of factor supply assures that the relationship is for the most part competitive.” Singer adds: “The resources required for carrying out the policy of balanced growth…are of such an order of magnitude that a country disposing of such resources would in fact not be under-developed.”
Investment may be of whatever type, it necessarily induces some additional investment and some other productive activities. According to Singer, the expansion of social overhead capital and the growth of consumer goods industries and improvement of production techniques in them to raise productivity cannot take place simultaneously, because the under-developed countries have only limited capabilities of making use of their resources.
In the under-developed countries, not only are the resources and the capabilities to bring about balanced growth lacking but, according to Hirschman, balanced growth is not even desirable. His view is that if economic growth is to be accelerated, it will have to be brought about by unbalanced growth.
If we promote growth by creating imbalances in the economy, the growth will be accelerated, because it will produce such incentives and pressures which will encourage development in the private sector. “The balanced growth doctrine is premature rather than wrong.” Singer concludes. It is applicable to a subsequent stage of self-sustained growth rather than to the breaking of a deadlock.
For launching growth “it may well be a better development strategy to concentrate available resources on those types of investment which help to make the economic system more elastic, more capable of expansion under the stimulus of expanded markets and expanding demand”. He mentions investments in social overhead capital and removal of special bottlenecks as examples of such “strategic” in¬vestment.
The fundamental trouble with the balanced growth doctrine, according to Singer, is its failure to come to grip with the true problem of under-developed countries, the shortage of resources. “Think Big” is a sound advice to under-developed countries, but “Act Big” is unwise counsel if it spurs them to bite more than they can possibly chew.
Moreover, the balanced growth doctrine assumes that an under-developed country starts from a scratch. In reality, every under-developed country starts from a position that reflects previous investment and previous development. Thus, at any point of time, there are some highly desirable investment programmes which are not in themselves balanced investment packages but which represent unbalanced in¬vestment to complement existing imbalances.
Hirschman’s Strategy of Unbalanced Growth:
Professor Albert Hirschman in his book, “Strategy of Economic Development,” carried Singer’s idea further and contended that deliberate unbalancing of an economy, in accordance with a predetermined strategy, was the best way of achieving economic growth.
Like Singer, he argues that balanced growth theory requires huge amounts of precisely those abilities which have been identified as likely to be very limited in supply in the under-developed countries. He characterises the balanced growth doctrine as “the application to underdevelopment of a therapy originally devised for an underemployment situation” by J.M. Keynes. In an advanced country, during depression, “industries, machines, managers, and workers as well as the con¬sumption habits” are all present, while in under-developed countries this is obviously not so.
As an under-developed country is incapable of financing and managing simultaneously a balanced “investment package” in industry and the needed investment in agriculture, in order to give a big push to lift an under-developed economy from a position of stagnation, Hirschman prescribes big push in strategic selected industries or sectors of the economy.
After all, he points out the industrialised countries did not get to where they are now through “balanced growth.” True, if you compared the economy of the United States in 1950 with the situation in 1850, you will find that many things have grown, but not everything grew at the same rate throughout the whole century. Development has proceeded “with growth being communicated from the leading sectors of the economy to the followers, from one industry to another; from one firm to another.”
According to Professor Hirschman, the real scarcity in under-developed countries is not the resources themselves “but the ability to bring them into play.” He divides the initial invest¬ment into two related activities: (a) directly productive activities (DPA) and (b) social overhead capital (SOC).
An under-developed country may follow the method of unbalanced growth by undertaking initial investment either in social overhead capital or the directly productive activities. Whichever the type of investments it will yield an ‘extra dividend’ of induced decisions resulting in additional investment and output. He contends that social overhead capital, and directly pro-ductive activities cannot be expanded simultaneously because of the limited ability to utilise resources.
Thus, the planning problem is to determine the sequence of expansion that will maxi¬mize induced decision-making. Balanced growth (of social overhead capital and directly pro¬ductive activities) is not only unattainable in most under-developed countries it may also not be desirable. The rate of growth is likely to be faster with crucial imbalances precisely because of “the incentives and pressures” it sets up.
Hirschman’s Illustration of Balanced and Unbalanced Growth Paths:
Now, should we choose ‘development via excess capacity of SOC or ‘development via shortage of SOC? According to Hirschman, the se-quence/of development which is vigorously self-pro¬pelling’ should be adopted. We may explain the ra¬tionale behind this contention with the help of Hirschman’s diagram as shown in Fig. 49.1.
In this diagram, the units of investment in SOC are meas¬ured along the vertical axis, while the units of in¬vestment in DPA are measured along the horizontal axis. The curves, I, II, III are the isoquants, re¬flecting the different combinations of SOC and DPA that result in the same gross national products at a given time.
As we move successively from curve I to II to III, we reach a higher level of gross national product. For the sake of analytical simplicity, the curves have been drawn in such a way that their op¬timal points lie on the 45° line. In fact, this line gives the locus of balanced growth of DPA and SOC.
As¬suming that balanced growth of SOC and DPA is not possible because of the inherent limited ability of the under-developed countries to utilise resources, we have to determine that sequence of development which maximises induced decision-making.
Let us first consider the sequence of development via excess capacity of SOC. The path of development assumed by the economy would then be given by the heavy line A—>A1—>B —> B2—>C. Starting from A, the increase in SOC to A1 invites increase in DPA till the balance is achieved at B. With the increased gross national product, the government may undertake further investment in SOC to B2. This in turn will induce the DPA to increase to the point C.
If, on other hand, the economy adopts the sequence of development via shortage of SOC, the course followed by the economy would be the one shown by the dotted line AB1BC1C. In this case to start with, we increase DPA from A to B1. To restore balance, this will be followed by the increase in SOC from B1 to B. If there is a further increase in DPA to C1, SOC will have to follow suit until balance is restored at C.
It needs to be noted that unbalanced growth via both the paths yields an “extra dividend” of “induced easy-to-take or compelled decisions resulting in additional investment and output”. However, the sequence of development via excess capacity of SOC is what Hirschman calls “self-propelling” in the sense that it is more continuous and smooth.
The second path i.e., ‘development via shortage of SOC lacks this attribute since it may take some time for the political pressure to be generated so that the adjustment in SOC is delayed. And thus the DPA cost of producing an amount of output is pushed up. In Hirschman’s terminology, the ‘development via excess SOC is basically a permissive sequence, while the development via shortage of SOC is essentially a compulsive sequence.
Having demonstrated the virtues of strategic imbalances, we are left with the problem of discovering what kind of imbalance is likely to be most effective. Any particular investment project may have both “forward linkage” (that is, it may encourage investment in subsequent stages of production) and “backward linkage” (that is, it may encourage investment in earlier stages of production).
The task is to find the projects with greatest “total linkage.” The projects, with the greatest total linkage, will vary from country to country and from time to time and can be discovered only by empirical studies of the “input-output tables”.
In determining the sequence of projects, planning authorities should also give attention to the alteration of “pressure-creating” and pressure-relieving” investments. In countries with vig¬orously expanding private enterprise sectors, the government’s function can be largely limited to “pressure-relieving.”
As private investment takes place, shortages and bottlenecks will appear in transport, public utilities, education, and other activities traditionally assigned (in whole or in part to public enterprises in such societies). Government ought not to feel “restless and slighted” when confined” to this “induced role”.
Where expansion through private investment is not assured, the government’s role must be more active. For example, it might build an iron and steel plant. “It is interesting to note,” says Hirschman, “that the industry with the highest combined linkage score is iron and steel.
Perhaps the under-developed countries are not foolish and exclusively prestige-motivated in attributing prime importance to this industry, because of the high total linkage effects of iron and steel industry.” The building of it by the government will lead to a spurt of investment and production in a variety of fields both in the stages before and after this industry.
In this way, it accelerates economic growth. The investment in iron and steel industry will reveal deficiencies in the preceding and succeeding sectors of industry that the government must fill up. To remove these deficiencies and obstacles, further investment will be stimulated. When these deficiencies are filled up, further private investment will take place, and so the process of growth goes on.
The foregoing discussion leads us to the conclusion that the balanced growth doctrine is neither attainable nor desirable. On the other hand, for rapid economic development the under¬developed countries should rely largely on judiciously-planned unbalanced growth. In fact, under Mahalanobis strategy of development, India has been following this course.
A Critique of Unbalanced Growth Strategy:
The strategy of unbalanced growth has come in for severe criticism. First, it has been pointed out that unbalanced growth strategy is based on wrong assumption that only factor constraining economic growth is the scarcity of decision-making ability in respect of investment.
According to it all that is needed for accelerating growth in less developed countries is to provide inducements and incentives to private enterprise to undertake investment projects. Once this is done, supply of financial resources will adequately flow into investment projects.
This is not a realistic assumption to make in the context of the developing economies. In the developing countries supply of financial resources is scare due to low rate of saving and this hampers economic growth. Hischman paid little attention to overcome thus bottleneck to accelerate growth. Thus, not only the supplies of physical resources are limited but also the availability of financial resources for funding the developmental projects is scarce.
Hirschman’s unbalanced growth strategy has also been criticised on the ground that it will generate inflationary pressures in the economy. Whether more investment is undertaken in social overhead capital (SOC) or directly productive activities (DPO) incomes of the people will rise which will lead to the increased demand for consumer goods, especially food-grains. If sufficient investment in agriculture and other consumer goods is not made, it will cause rise in prices as was actually witnessed in India during the second and third five year plans.
Thirdly, it has been pointed out that in case response from private enterprises to the in-ducements and pressures created by unbalanced growth strategy is not adequate imbalances will be created in the economy without causing expansion in the other linked sectors resulting in excess capacity in some industries or sectors. This excess capacity represents waste of resources.
Lastly, it has been pointed out by Paul Streeten that unbalanced growth strategy neglects the possibility of resistances for adjustment to imbalances created by the unbalanced growth strategy. These resistances to growth may occur in a variety of forms.
There may come into existence monopolies which have vested interests in restricting expansion in output. In the back¬ground of imbalances and shortages private enterprises which are interested in making quick profits will be more willing to raise prices of products rather than expanding their quantities. As Paul Streetion emphasise “the theory of unbalanced growth concentrates on stimuli to ex¬pansion and tends to neglect or minimise resistances caused by unbalanced growth.”
We however conclude that despite some shortcomings in the unbalanced growth strategy, laying stress on the decision-making ability for accelerating economic growth and on the need for building up social overhead capital, Hirschman has made a valuable contribution to devel¬opment economics.