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Prelims Capsule


Small Farmers in India – Why is their financial condition similar to that of daily wage labourers?

Small Farmers in India – Why is their financial condition similar to that of daily wage labourers?


  • GS 3 || Economy || Agriculture || Agricultural Credit


  • One of the reasons for agrarian distress is the declining average size of farm holdings. Small farmers face several challenges in getting access to inputs and marketing facilities.
  • Several innovative institutional models are emerging and there are many opportunities for small and marginal farmers in India. A group or collective is one of the main institutional mechanisms to help the country’s marginal and small farmers.

Agricultural Credit and Financial Inclusion in Farming Sector

  • Agricultural credit becomes a strong force to enhance the production level, productivity, and income of the farmers, which play an important role to alleviate rural poverty.
    The need for agriculture creditarises because capital is one of the vital inputs for the development of agriculture.
    As we know that Indian economy is based on agriculture, so financial inclusion in agriculture may be a better way to empower the Indian farmer.
  • The rapid growth of Agriculturewill not only ensure continued food security but also aid in growth in industry and the GDP.
  • To sustain the growth in agriculture, required capital must be invested because capital is one of the vital inputscontributing to the success of all agricultural development programmes.
  • Therefore, financing for agriculture is an important task to fulfill the capital demand in Indian agriculture, and credit plays the catalyst rolein the process to accelerate agriculture including industries, business, and service sectors of the economy.

Steps taken to improve the condition of small farmers

Small Farmers Agribusiness Consortium (SFAC)

  • In the last decade, the Centre has encouraged farmer producer organizations (FPOs) to help farmers. Since 2011, it has intensively promoted FPOs under the Small Farmers’ Agri-Business Consortium (SFAC), NABARD, state governments, and NGOs.
  • Small Farmers Agribusiness Consortium (SFAC) is an Autonomous Society promoted by the Ministry of Agriculture, Cooperation and Farmers’ Welfare, Government of India. It was registered under the Societies Registration Act XXI in 1994.
  • SFAC has implemented the central schemes of the Government of India namely Venture Capital Assistance (VCA) and Equity Grant and Credit Guarantee Fund Scheme (EGCGS) for the economic inclusion of small and marginal farmers in agribusiness activities.

Farmer producer organizations (FPOs)

  • Experience shows a mixed performance of FPOs in the last decade. Some estimates show that 30 percent of these are operating viably while 20 percent are struggling to survive.
  • The remaining 50 percent are still in the initial phase of mobilization and business planning.
  • FPOs in Gujarat, Maharashtra and Madhya Pradesh, Rajasthan, and some other states have shown encouraging results and have been able to realize higher returns for their produce.
  • For example, tribal women in the Pali district of Rajasthan formed a producer company and they are getting higher prices for custard apples.
  • NABARD has undertaken a field study on the benefits of FPOs in Punjab and Madhya Pradesh. The study shows that in nascent FPOs, the proportion of farmer members contributing to FPOs activities is 20-30 percent while for the emerging and mature FPOs it is higher at about 40-50 percent.
  • In Maharashtra, some of the FPOs have organically evolved (OFPOs) when farmers have taken the lead to adopt market-oriented practices, develop cost-effective solutions in production and marketing.


  • The majority of Farmers are marginal:70% of India’s farmers have small and marginal landholdings, operating below one hectare.
    • Decreasing Area:Area under agriculture has been shrinking, it reduced from 159.5 million hectares (mn ha) in 2010-11 to 157 mn ha in 2015-16.
    • Increase in Land Holdings:The number of operational holdings has been rising (increased from 138.3 million to about 146 million) owing to the increasing population.
  • Unrewarding livelihood:On average, smaller holdings lose money as their household costs are higher than their earnings. According to the National Sample Survey Office (NSSO), the average income of farmers owning up to two hectares is Rs 5,240 a month.
  • Subsistence Farming:The smallest farms are afloat since they don’t pay for labour, relying entirely on the family, and consume much of what is produced.
  • Irregular Income:Farming is a seasonal affair, not a full-time job.
  • Most small and marginal farmers left out
    • In the last 10 years, agriculture credit increased by 500% but has not reached even 20% of the 12.56 crore small and marginal farmers.
    • Despite an increase in agri-credit, even today, 95% of tractors and other agri-implements sold in the country are being financed by non-banking financial companies, or NBFCs, at an 18% rate of interest; the banks’ long-term loans rate of interest for purchasing of the same is 11%.
    • RBI has also questioned agricultural households with the lowest landholding (up to two hectares) getting only about 15% of the subsidized outstanding loan from institutional sources (bank, co-operative society).
    • As in the Agriculture Census, 2015-16, the total number of small and marginal farmers’ households in the country stood at 12.56 crore.
    • These small and marginal holdings make up 1% of the total holdings.
    • Though the RBI had set a cap that out of a bank’s overall adjusted net bank credit, 18% must go to the agriculture sector, and within this, 8% must go to small and marginal farmers and 4.5% for indirect loans, bank advances routinely breach the limit.

Case Study

  • Of the 8,000 workers at the Sonalika plant in Hoshiarpur, 90% are marginal farmers and farm labourers of nearby villages.
  • This model of linking industry with employment for marginal farmers and farm labourers can be amplified pan-India, particularly in the backward areas.
  • The average farm size declined from 2.3 hectares (ha) in 1970-71 to 1.08 ha in 2015-16. The share of small and marginal farmers increased from 70 percent in 1980-81 to 86 percentin 2015-16.
  • At the state level, the average size of farm holdings in 2015-16 ranged from 3.62 ha in Punjab, 2.73 in Rajasthan, and 2.22 in Haryana to 0.75 in Tamil Nadu, 0.73 in Uttar Pradesh, 0.39 in Bihar, and 0.18 in Kerala.

Way Ahead

  • Encouraging Industrial Investment:Industrial investment should be encouraged in rural and backward areas by offering special incentives. This can ensure an additional income to minimize the dependency on the sole agriculture-based income.
  • Untapped Potential: Apart from part-time seasonal farming, a small farmer and a farm labourer have sufficient time to work and can earn Rs 12,000-Rs 15,000 a month easily after eight hours of labour in a nearby factory.
  • Promoting Exports:To increase export from these areas, 50% relaxation in railway freight as freight subsidy can be provided from dry ports.
  • Cluster Approach:Special incentives are being offered to develop industrial corridors and clusters but this model should be replicated in the rural and backward areas to provide job opportunities to nearby small and marginal farmers and farm labourers.
  • Decentralized Microenterprise Ecosystem:A distributed, micro-level factory that can produce solopreneurs and micro-enterprises has to be created and supported in the rural areas. For instance, the processing and packaging of vegetables for sale in urban malls can be one such micro-enterprise that is labour intensive.
  • Investment in Rural areas:Promotion of new industrial investment with a special incentive in backward areas to provide new jobs to rural India. Providing jobs to small, marginal farmers and farm labourers in nearby areas will minimize the rural-to-urban migration


  • On-ground reforms in the agriculture sector through central amended laws will take more time but it is time for a policy and framework to promote industrial investment in rural and backward areas as a job engine for small, marginal farmers and farm labourers.
  • It would be the real execution of sab ka Saath, sab ka Vikas (progress for all), covering more than 60% of the population of the country residing in rural and backward areas.

Mains model Question

  • Subsidies are often criticized that instead of offering solutions to the problems they become a problem. In the light of the above statement, discuss the issues surrounding the subsidy system in India.