Financing for Sustainable Agriculture

Introduction:

Climate change and sustainability remain critical global issues, highlighted by an increase in extreme weather events such as droughts, floods, and wildfires, which disproportionately affect vulnerable communities. In this context, sustainable agriculture becomes essential, as it entails farming practices that fulfil current food needs while conserving resources for future generations. This approach advocates for environmentally protective methods, efficient resource use, and social equity among farmers. Achieving agricultural sustainability will require transforming traditional farming into technology-driven systems, improving processing techniques, and aligning crop production with climate-smart practices, all supported by adequate and timely financing.

Challenges faced by Indian Agricultural Sector:

• Low Productivity: – Indian agriculture suffers from low productivity compared to other crop-producing nations. This is largely due to inadequate seed replacement rates, inefficient fertiliser usage, and limited adoption of advanced agricultural technologies. Low productivity hinders the sector’s growth and its ability to ensure food security.

• Predominance of Small and Marginal Landholdings: – A significant portion of Indian farmers operate on small and fragmented landholdings. This creates challenges in achieving economies of scale, resulting in lower marketable surplus and bargaining power. The inability to invest in new technologies further limits productivity enhancements for these farmers.

• Dependence on Monsoons/Rainfall: – Approximately 45% of India’s agricultural land is rainfed, making the sector heavily reliant on the unpredictable monsoon. This dependence leads to inconsistent agricultural yields and exposes farmers to significant risks. Strengthening irrigation infrastructure and efficient water management are essential to mitigate these challenges.

• Inadequate Agricultural Processing Capacity: – Limited processing infrastructure results in substantial post-harvest losses, reducing farmer incomes and overall produce supply. Insufficient value addition means farmers often receive lower prices for raw products, restricting their access to domestic and international markets, thereby limiting export opportunities.

• Low Level of Farm Mechanisation: – The low level of mechanisation in Indian agriculture contributes to inefficiencies and labour shortages, particularly during peak seasons. As the average age of farmers increases, attracting younger generations and implementing modern farming techniques become critical for improving productivity and empowering women in agriculture.

Agriculture and Climate Change:

The agricultural sector in India faces significant challenges due to climate change, being at the intersection of three critical issues: ensuring food and nutrition security, adapting to climate impacts, and sustainably managing essential resources like water, energy, and land. Climate change is transforming traditional farming practices and influencing food choices globally. For example, South Korea’s napa cabbage, essential for kimchi, is under threat from rising temperatures, while French winemakers are worried about the future of Merlot due to increased heat. Similarly, shifting lobster populations off the US east coast are affecting local industries. These examples underscore the urgent need for the agriculture and food industry to adopt sustainable practices to mitigate climate change impacts.

Financing for Sustainable Agriculture:

Financing is crucial for the transition to sustainable agriculture, which often entails higher initial costs compared to conventional methods. Practices such as organic farming and climate-smart technologies provide long-term benefits but require affordable financing to become viable for many farmers. Access to financial resources is particularly limited for those in rural or underserved areas, necessitating a focus on equitable sustainable finance that supports environmentally friendly practices.

As of 2023-24, institutional credit to agriculture reached ₹25.10 lakh crore, highlighting the role of financing in agricultural growth. The Kisan Credit Card program has emerged as an essential tool for providing timely credit to approximately 7.4 crore farmers, but disparities in access remain a concern.

Traditional lending practices often fall short, given the seasonal nature of agriculture and delayed returns. To address this, flexible financial solutions tailored to farmers’ needs are necessary. Innovative options, like crop insurance against weather-related risks and blended finance models that leverage public funds for private investment, could help mobilize capital and distribute financial risks, fostering a more sustainable agricultural sector.

Solutions for Financing Sustainable Agriculture: Key Points

1. Role of Collectives: – Over 24,000 Farmer Producer Organisations (FPOs) have been established to support small and marginal farmers. FPOs enhance farmers’ bargaining power, improve access to sustainable technologies, and expand market opportunities. Loans to FPOs in agriculture up to ₹2 crore qualify as priority sector lending, increased to ₹5 crore with assured marketing.
2. Value Chain Financing: – Integrates stakeholders (farmers, traders, processors) to increase agricultural efficiency. Growing consumer demand for branded safe food necessitates enhanced financing for structured agricultural value chains.
3. Warehouse Financing: – Allows farmers to store produce until market prices are favourable, preventing low sales during peak harvests. Helps stabilize commodity prices and manage marketing risks; requires stronger third-party warehousing agencies for effectiveness.
4. Financing Technology Adoption: – Focuses on expanding irrigation, micro-irrigation, and mechanisation to boost productivity. Currently, only 9% of net sown area uses micro-irrigation; significant growth potential exists through initiatives like “Per Drop More Crop. “Protected cultivation can dramatically increase yields and conserve resources, with substantial opportunities for expansion.
5. Capital Formation through Government Schemes: – The government encourages agricultural investment via subsidy schemes and interest subventions. The ₹1 lakh crore Agri-Infrastructure Fund backs various programs (e.g., PM-KUSUM, SMAM) that strengthen agriculture.
6. Leveraging Technology: – Financial institutions should adopt technology and data analytics to enhance credit access and risk management. Collaborations with digital platforms can provide real-time agricultural data for better financial decision-making. The RBI’s Public Tech Platform aims to streamline digital information flow, significantly reducing loan processing times.

Conclusion:

Sustainable Agriculture in India faces multiple challenges, including low productivity, small landholdings, climate change impacts, and inadequate processing facilities. Financing plays a vital role in facilitating the transition to sustainable practices, with innovative solutions such as collectives, value chain financing, and technology adoption being crucial. Government schemes and technology enhancements further support agricultural growth by improving access to financing and resources. Addressing disparities in access to finance and creating flexible lending solutions will empower farmers and ensure long-term food security. Ultimately, a collaborative effort among stakeholders is essential for building a resilient and sustainable agricultural sector.