LECTURE NOTES

Course No: AECO 341

AGRICULTURAL MARKETING

Compiled by

Dr. D. V. Sankara Rao

Prof. and Head
Dept. of Agril. Economics
Agricultural College
Bapatla

Dr.D. V. Subba Rao

Professor
Dept. of Agricultural Economics
College of Agriculture
Rajendranagar

&

Sri B Pratap Reddy

Assoc. Prof.
Dept. of Agril. Economics
S V Agricultural College, Tirupati
Lecture No-1
Market and Marketing – Meaning – Definitions – Components of market – Market
structure – Meaning – Components – Market conduct – Market performance

MARKET:
Meaning:
The word market comes from the latin word „marcatus‟ which means merchandise or
trade or a place where business is conducted.
Word „market‟ has been widely and variedly used to mean (a) a place or a building where
commodities are bought and sold, e.g., super market; (b) potential buyers and sellers of a
product, e.g., wheat market and cotton market; (c) potential buyers and sellers of a
country or region, e.g., Indian market and Asian market; (d) and organization which
provides facilities for exchange of commodities, e.g., Bombay stock exchange; and (e) a
phase or a course of commercial activity, e.g., a dull market or bright market.
There is an old English saying that two women and a goose may make a market.
However, in common parlance, a market includes any place where persons assemble for
the sale or purchase of commodities intended for satisfying human wants. Other terms
used for describing markets in India are Haats, Painths, Shandies and Bazar.
The word market in the economic sense carries a broad meaning. Some of the definitions
of market are given as follows:
1. A market is the sphere within which price determining forces operate.
2. A market is the area within which the forces of demand and supply converge to
establish a single price.
3. The term market means not a particular market place in which things are bought
and sold but the whole of any region in which buyers and sellers are in such a free
intercourse with one another that the prices of the same goods tend to equality,
easily and quickly.
4. Market means a social institution which performs activities and provides facilities
for exchanging commodities between buyers and sellers.
 5. Economically interpreted, the term market refers, not to a place but to a
acommodity or commodities and buyers and sellers who are in free intercourse
with one another.

A market exists when buyers wishing to exchange the money for a good or service are in
contact with the sellers who are willing to exchange goods or services for money. Thus,
a market is defined in terms of the existence of fundamental forces of supply and demand
and is not necessarily confined to a particular geographical location. The concept of a
market is basic to most of the contemporary economies, since in a free market economy,
this is the mechanism by which resources are allocated.
Components of a Market:
For a market to exist, certain conditions must be satisfied. These conditions should be
both necessary and sufficient. They may also be termed as the components of a market.
1. The existence of a good or commodity for transactions(physical existence is,
however, not necessary);
2. The existence of buyers and sellers;
3. Business relationship or intercourse between buyers and sellers; and
4. Demarcation of area such as place, region, country or the whole world. The
existence of perfect competition or a uniform price is not necessary.

Dimensions of a Market:
There are various dimensions of any specified market. These dimensions are:
1. Location
2. Area or coverage
3. Time span
4. Volume of transactions
5. Nature of transactions
6. Number of commodities
7. Degree of competition
8. Nature of commodities
9. Stage of marketing
10. Extent of public intervention
11. Type of population served
 12. Accrual of marketing margins
Any individual market may be classified in a twelve-dimensional space.

MARKET STRUCTURE
Meaning:
The term structure refers to something that has organization and dimension – shape, size
and design; and which is evolved for the purpose of performing a function. A function
modifies the structure, and the nature of the existing structure limits the performance of
functions.
By the term market structure we refer to the size and design of the market. It also
includes the manner of the operation of the market. Some of the expressions describing
the market structure are:
1. Market structure refers to those organizational characteristics of a market which
influence the nature of competition and pricing, and affect the conduct of business
firms;
2. Market structure refers to those characteristics of the market which affect the
traders‟ behavior and their performances;
3. Market structure is the formal organization of the functional activity of a
marketing institution.

An understanding and knowledge of the market structure is essential for identifying the
imperfections in the performance of a market.
Components of Market Structure:
The components of the market structure, which together determine the conduct and
performance of the market, are:
1. Concentration of Market Power:
The concentration of market power is an important element determining the
nature of competition and consequently of market conduct and performance. This
is measured by the number and size of firms existing in the market. The extent of
concentration represents the control of an individual firm or a group of firms over
the buying and selling of the produce. A high degree of market concentration
restricts the movement of goods between buyers and sellers at fair and
competitive prices, and creates an oligopoly or oligopsony situation in the market.
 2. Degree of Product Differentiation:
Whether or not the products are homogeneous affects the market structure. If
products are homogeneous, the price variations in the market will not be wide.
When products are heterogeneous, firms have the tendency to charge different
prices for their products. Everyone tries to prove that his product is superior to
the products of others.

3. Conditions for Entry of Firms in the Market:

Another dimension of the market structure is the restriction, if any, on the entry of
firms in the market. Sometimes, a few big firms do not allow new firms to enter
the market or make their entry difficult by their dominance in the market. There
may also be some government restrictions on the entry of firms.
4. Flow of Market Information:
A well-organized market intelligence information system helps all the buyers and
sellers to freely interact with one another in arriving at prices and striking deals.
5. Degree of Integration:
The behavior of an integrated market will be different from that of a market where
there is no integration either among the firms or of their activities

Firms plan their strategies in respect of the methods to be employed in determining

prices, increasing sales, co-ordinating with competing firms and adopting predatory
practices against rivals or potential entrants. The structural characteristics of the market
govern the behavior of the firms in planning strategies for their selling and buying
operations.
Dynamics of Market Structure – Conduct and performance:
The market structure determines the market conduct and performance. The term market
conduct refers to the patterns of behavior of firms, specially in relation to pricing and
their practices in adapting and adjusting to the market in which they function.
Specifically, market conduct includes:
(a) Market sharing and price setting policies;
(b) Policies aimed at coercing rivals; and
(c) Policies towards setting the quality of products.
The term market performance refers to the economic results that flow from the industry
as each firm pursues its particular line of conduct. Society has to decide the criteria for
satisfactory market performance. Some of the criteria for measuring market performance
and of the efficiency of the market structure are:
1. Efficiency in the use of resources, including real cost of performing various
functions;
2. The existence of monopoly or monopoly profits, including the relationship of
margins with the average cost of performing various functions;
3. Dynamic progressiveness of the system in adjusting the size and number of firms
in relation to the volume of business, in adopting technological innovations and in
finding and/or inventing new forms of products so as to maximize general social
welfare.
4. Whether or not the system aggravates the problem of inequalities in inter-
personal, inter-regional or inter-group incomes. For example, inequalities
increase under the following situations:
(a) A market intermediary may pocket a return greater than its real contribution to
the national product;
(b) Small farmers are discriminated against when they are offered a lower return
because of the low quantum of surplus;
(c) Inter-product price parity is substantially disturbed by new uses for some
products and wide variations and rigidities in the production pattern between
regions.

The market structure, therefore, has always to keep on adjusting to changing environment
if it has to satisfy the social goals. A static market structure soon becomes obsolete
becase of the changes in the physical, economic, institutional and technological factors.
For a satisfactory market performance, the market structure should keep pace with the
following changes:
1. Production Pattern:
Significant changes occur in the production pattern because of technological,
economic and institutional factors. The market structure should be re-oriented to
keep pace with such changes.
2. Demand Pattern:
 The demand for various products, specially in terms of form and quality, keeps on
changing because of change in incomes, the pattern of distribution among
consumers, and changes in their tastes and habits. The market structure should be
re-oriented to keep it in harmony with the changes in demand.
3. Costs and Patterns of Marketing Functions:
Marketing functions such as transportation, storage, financing and dissemination
of market information, have a great bearing on the type of market structure.
Government policies with regard to purchases, sales and subsidies affect the
performance of market functions. The market structure should keep on adjusting
to the changes in costs and government policy.
4. Technological Change in Industry:
Technological changes necessitate changes in the market structure through
adjustments in the scale of business, the number of firms, and in their financial
requirements.
Lecture No. 2
Agricultural Marketing – Meaning – Definition – Scope – Subject matter –
Importance of Agricultural Marketing in economic development.

AGRICULTURAL MARKETING:
Concept and Definition:
The term agricultural marketing is composed of two words-agriculture and marketing.
Agriculture, in the broadest sense, means activities aimed at the use of natural resources
for human welfare, i.e., it includes all the primary activities of production. But,
generally, it is used to mean growing and/or raising crops and livestock. Marketing
connotes a series of activities involved in moving the goods from the point of production
to the point of consumption. It includes all the activities involved in the creation of time,
place, form and possession utility.

According to Thomsen, the study of agricultural marketing, comprises all the operations,
and the agencies conducting them, involved in the movement of farm-produced foods,
raw materials and their derivatives, such as textiles, from the farms to the final
consumers, and the effects of such operations on farmers, middlemen and consumers.
This definition does not include the input side of agriculture.

Agricultural marketing is the study of all the activities, agencies and policies involved in
the procurement of farm inputs by the farmers and the movement of agricultural products
from the farms to the consumers. The agricultural marketing system is a link between the
farm and the non – farm sectors. It includes the organization of agricultural raw materials
supply to processing industries, the assessment of demand for farm inputs and raw
materials, and the policy relating to the marketing of farm products and inputs.

According to the National Commission on Agriculture (XII Report), agricultural

marketing is a process which starts with a decision to produce a saleable farm
commodity, and it involves all the aspects of market structure or system, both functional
and institutional, based on technical and economic considerations, and includes pre-and
post-harvest operations, assembling, grading, storage, transportation and distribution.

Objectives of the Study:

A study of the agricultural marketing system is necessary to an understanding of the
complexities involved and the identification of bottlenecks with a view to providing
efficient services in the transfer of farm products and inputs from producers to
consumers. An efficient marketing system minimizes costs, and benefits all the sections
of the society.

The expectations from the system vary from group to group; and, generally, the
objectives are in conflict. The efficiency and success of the system depends on how best
these conflicting objectives are reconciled.

Producers:
Producer-farmers want the marketing system to purchase their produce without loss of
time and provide the maximum share in the consumer‟s rupee. They want the maximum
possible price for their surplus produce from the system. Similarly, they want the system
to syupply them the inputs at the lowest possible price.

Consumers:
The consumers of agricultural products are interested in a marketing system that can
provide food and other items in the quantity and of the quality required by them at the
lowest possible price. However, this objective of marketing for consumers is contrary to
the objective of marketing for the farmer – producers.

Market Middlemen and Traders:

Market middlemen and traders are interested in a marketing system which provides them
a steady and increasing income from the purchase and sale of agricultural commodities.
This objective of market middlemen may be achieved by purchasing the agricultural
products from the farmers at low prices and selling them to consumers at high prices.
Government:
The objectives and expectations of all the three groups of society-producers, consumers
and market middlemen – conflict with one another. All the three groups are
indispensable to society. The government has to act as a watch-dog to safeguard the
interests of all the groups associated in marketing. It tries to provide the maximum share
to the producer in the consumer‟s rupee; food of the required quality to consumers at the
lowest possible price; and enough margin to market middlemen so that they may remain
in the trade and not think of going out of trade and jeopardize the whole marketing
mechanism. Thus, the government wants that the marketing system should be such as
may bring about the overall welfare to all the segments of society.

Scope and Subject Matter of Agricultural Marketing:

Agricultural marketing in a broader sense is concerned with the marketing of farm
products produced by farmers and of farm inputs required by them in the production of
these farm products. Thus, the subject of agricultural marketing includes product
marketing as well as input marketing.

The subject of output marketing is as old as civilization itself. The importance of output
marketing has become more conspicuous in the recent past with the increased marketable
surplus of the crops following the technological breakthrough. The farmers produce their
products for the markets. Farming becomes market-oriented. Input marketing is a
comparatively new subject. Farmers in the past used such farm sector inputs as local
seeds and farmyard manure. These inputs were available with them; the purchase of
inputs for production of crops from the market by the farmers was almost negligible. The
importance of farm inputs-improved seeds, fertilizers, insecticides and pesticides, farm
machinery, implements and credit-in the production of farm products has increased in
recent years. The new agricultural technology is input-responsive. Thus, the scope of
agricultural marketing must include both product marketing and input marketing. In this
book, the subject matter of agricultural marketing has been dealt with; both from the
theoretical and practical points of view. It covers what the system is, how it functions,
and how the given method or techniques may be modified to get the maximum benefits.
Specially, the subject of agricultural marketing includes marketing functions, agencies,
channels, efficiency and costs, price spread and market integration, producer‟s surplus,
government policy and research, training and statistics on agricultural marketing.

Difference in Marketing of Agricultural and Manufactured Goods:

The marketing of agricultural commodities is different from the marketing of
manufactured commodities because of the special characteristics of the agricultural sector
(demand and supply) which have a bearing on marketing. Because of these
characteristics, the subject of agricultural marketing has been treated as a separate
discipline – and this fact makes the subject somewhat complicated. These special
characteristics of the agricultural sector affect the supply and demand of agricultural
products in a manner different from that governing the supply and demand of
manufactured commodities. The special characteristics which the agricultural sector
possesses, and which are different from those of the manufactured sector, are:

1. Perishability of the Product:

Most farm products are perishable in nature; but the period of their perishability
varies from a few hours to a few months. To a large extent, the marketing of farm
products is virtually a race with death and decay. Their perishability makes it
almost impossible for producers to fix the reserve price for their farm-grown
products. The extent of perishability of farm products may be reduced by the
processing function; but they cannot be made non-perishable like manufactured
products. Nor can their supply be made regular.
2. Seasonality of Production:
Farm products are produced in a particular season; they cannot be produced
throughout the year. In the harvest season, prices fall. But the supply of
manufactured products can be adjusted or made uniform throughout the year.
Their prices therefore remain almost the same throughout the year.
3. Bulkiness of Products:
The characteristic of bulkiness of most farm products makes their transportation
and storage difficult and expensive. This fact also restricts the location of
production to somewhere near the place of consumption or processing. The price
 spread in bulky products is higher because of the higher costs of transportation
and storage.

4. Variation in Quality of Products:

There is a large variation in the quality of agricultural products, which makes their
grading and standardization somewhat difficult. There is no such problem in
manufactured goods, for they are products of uniform quality.
5. Irregular Supply of Agricultural Products:
The supply of agricultural products is uncertain and irregular because of the
dependence of agricultural production on natural conditions. With the varying
supply, the demand remaining almost constant, the prices of agricultural products
fluctuate substantially.
6. Small Size of Holdings and Scattered Production:
Farm products are produced throughout the length and breadth of the country and
most of the producers are of small size. This makes the estimation of supply
difficult and creates problems in marketing.
7. Processing:
Most of the farm products have to be processed before their consumption by the
ultimate consumers. This processing function increases the price spread of
agricultural commodities. Processing firms enjoy the advantage of monopsony,
oligopsony or duopsony in the market. This situation creates disincentives for the
producers and may have an adverse effect on production in the next year.

IMPORTANCE OF AGRICULTURAL MARKETING

Agricultural marketing plays an important role not only in stimulating production and
consumption, but in accelerating the pace of economic development. Its dynamic
functions are of primary importance in promoting economic development. For this
reason, it has been described as the most important multiplier of agricultural
development.
The importance of agricultural marketing in economic development has been indicated in
the paragraphs that follow.

Optimization of Resource use and Output Management:

An efficient agricultural marketing system leads to the optimization of resource use and
output management. An efficient marketing system can also contribute to an increase in
the marketable surplus by scaling down the losses arising out of inefficient processing,
storage and transportation. A well-designed system of marketing can effectively
distribute the available stock of modern inputs, and thereby sustain a faster rate of growth
in the agricultural sector.

Increase in Farm Income

An efficient marketing system ensures higher levels of income for the farmers by
reducing the number of middlemen or by restricting the commission on marketing
services and the malpractices adopted by them in the marketing of farm products. An
efficient system guarantees the farmers better prices for farm products and induces them
to invest their surpluses in the purchase of modern inputs so that productivity and
production may increase. This again results in an increase in the marketed surplus and
income of the farmers. If the producer does not have an easily accessible market-outlet
where he can sell his surplus produce, he has little incentive to produce more. The need
for providing adequate incentives for increased production is, therefore, very important,
and this can be made possible only by streamlining the marketing system.

Widening of Markets:
A well-knit marketing system widens the market for the products by taking them to
remote corners both within and outside the country, i.e., to areas far away from the
production points. The widening of the market helps in increasing the demand on a
continuous basis, and thereby guarantees a higher income to the producer.

Growth of Agro-based Industries:

An improved and efficient system of agricultural marketing helps in the growth of agro-
based industries and stimulates the overall development process of the economy. Many
industries depend on agriculture for the supply of raw materials.

Price Signals:
An efficient marketing system helps the farmers in planning their production in
accordance with the needs of the economy. This work is carried out through price
signals.

Adoption and Spread of New Technology

The marketing system helps the farmers in the adoption of new scientific and technical
knowledge. New technology requires higher investment and farmers would invest only if
they are assured of market clearance.

Employment:
The marketing system provides employment to millions of persons engaged in various
activities, such as packaging, transportation, storage and processing. Persons like
commission agents, brokers, traders, retailers, weighmen, hamals, packagers and
regulating staff are directly employed in the marketing system. This apart, several others
find employment in supplying goods and services required by the marketing system.

Addition to National Income:

Marketing activities add value to the product thereby increasing the nation‟s gross
national product and net national product.

Better Living:
The marketing system is essential for the success of the development programmes which
are designed to uplift the population as a whole. Any plan of economic development that
aims at diminishing the poverty of the agricultural population, reducing consumer food
prices, earning more foreign exchange or eliminating economic waste has, therefore, to
pay special attention to the development of an efficient marketing for food and
agricultural products.

Creation of Utility:
Marketing is productive, and is as necessary as the farm production. It is , in fact, a part
of production itself, for production is complete only when the product reaches a place in
the form and at the time required by the consumers. Marketing adds cost to the product;
but, at the same time, it adds utilities to the product. The following four types of utilities
of the product are created by marketing:
(a) Form Utility: The processing function adds form utility to the product by
changing the raw material into a finished form. With this change, the product
becomes more useful than it is in the form in which it is produced by the farmer.
For example, through processing, oilseeds are converted into oil, sugarcane into
sugar, cotton into cloth and wheat into flour and bread. The processed forms are
more useful than the original raw materials.
(b) Place Utility: The transportation function adds place utility to products by
shifting them to a place of need from the place of plenty. Products command
higher prices at the place of need than at the place of production because of the
increased utility of the product.
(c) Time Utility: The storage function adds time utility to the products by making
them available at the time when they are needed.
(d) Possession Utility: The marketing function of buying and selling helps in the
transfer of ownership from one person to another. Products are transferred
through marketing to persons having a higher utility from persons having a low
utility.
Lecture No.3
Classification of markets – On the basis of location, Area of coverage, time span,
volume of transaction, nature of transaction, number of commodities, degree of
competition, nature of commodities, stage of marketing, extent of public
intervention, type of population served, accrual of marketing margins

CLASSIFICATION OF MARKETS:

Markets may be classified on the basis of each of the twelve dimensions mentioned
below.

1. On the basis of Location:

On the basis of the place of location or operation, markets are of the following
types:
a) Village Markets: A market which is located in a small village, where major
transactions take place among the buyers and sellers of a village is called a
village market.
b) Primary wholesale Markets: These markets are located in big towns near
the centers of production of agricultural commodities. In these markets, a
major part of the produce is brought for sale by the producer-farmers
themselves. Transactions in these markets usually take place between the
farmers and traders.
c) Secondary wholesale Markets: These markets are located generally in
district headquarters or important trade centers or near railway junctions. The
 major transactions in commodities take place between the village traders and
wholesalers. The bulk of the arrivals in these markets is from other markets.
The produce in these markets is handled in large quantities. There are,
therefore, specialized marketing agencies performing different marketing
functions, such as those of commission agents, brokers, weigh men, etc.
d) Terminal Markets: A terminal market is one where the produce is either
finally disposed of to the consumers or processors, or assembled for export.
Merchants are well organized and use modern methods of marketing.
Commodity exchanges exist in these markets, which provide facilities, for
forward trading in specific commodities. Such markets are located either in
metropolitan cities or in sea-ports – in Bombay, Madras, Calcutta and Delhi.
e) Seaboard Markets: Markets which are located near the seashore and are
meant mainly for the import and/or export of goods are known as seaboard
markets. Examples of these markets in India are Bombay, Madras, Calcutta.
2. On the Basis of Area/Coverage:
On the basis of the area from which buyers and sellers usually come for
transactions, markets may be classified into the following four classes:
a) Local or Village Markets: A market in which the buying and selling
activities are confined among the buyers and sellers drawn from the same
village or nearby villages. The village markets exist mostly for perishable
commodities in small lots, e.g., local milk market or vegetable market.
b) Regional Markets: A market in which buyers and sellers for a commodity
are drawn from a larger area than the local markets. Regional markets in
India usually exist for food grains.
c) National Markets: A market in which buyers and sellers are at the national
level. National markets are found for durable goods like jute and tea.
d) World Market: A market in which the buyers and sellers are drawn from the
whole world. These are the biggest markets from the area point of view.
These markets exist in the commodities which have a world-wide demand
and/or supply, such as coffee, machinery, gold, silver, etc. In recent years
many countries are moving towards a regime of liberal international trade in
agricultural products like raw cotton, sugar, rice and wheat.
3. On the Basis of Time Span:
 On this basis, markets are of the following types:
a) Short-period Markets: The markets which are held only for a few hours are
called short-period markets. The products dealt within these markets are of
highly perishable nature, such as fish, fresh vegetables, and liquid milk. In
these markets, the prices of commodities are governed mainly by the extent of
demand for, rather than by the supply of, the commodity.
b) Long-period Markets: These markets are held for a long period than the
short-period markets. The commodities traded in these markets are less
perishable and can be stored for some time; these are food grains and oilseeds.
The prices are governed both by the supply and demand forces.
c) Secular Markets: These are markets of permanent nature. The commodities
traded in these markets are durable in nature and can be stored for many years.
Examples are markets for machinery and manufactured goods.

4. On the Basis of Volume of Transactions:

There are two types of markets on the basis of volume of transactions at a time.
a) Wholesale Markets: A wholesale market is one in which commodities are
bought and sold in large lots or in bulk. Transactions in these markets take
place mainly between traders.
b) Retail Markets: A retail market is one in which commodities are bought by
and sold to the consumers as per their requirements. Transactions in these
markets take place between retailers and consumers. The retailers purchase in
wholesale market and sell in small lots to the consumers. These markets are
very near to the consumers.
5. On the Basis of Nature of Transactions:
The markets which are based on the types of transactions in which people are
engaged are of two types:
a) Spot or Cash Markets: A market in which goods are exchanged for money
immediately after the sale is called the spot or cash market.
b) Forward Markets: A market in which the purchase and sale of a commodity
takes place at time „t‟ but the exchange of the commodity takes place on some
specified date in future i.e., time t + 1. Sometimes even on the specified date
 in the future(t+1), there may not be any exchange of the commodity. Instead,
the differences in the purchase and sale prices are paid or taken.
6. On the Basis of Number of Commodities in which Transaction Takes place:
A market may be general or specialized on the basis of the number of
commodities in which transactions are completed:
a) General Markets: A market in which all types of commodities, such as food
grains, oilseeds, fiber crops, gur, etc., are bought and sold is known as general
market. These markets deal in a large number of commodities.

b) Specialized Markets: A market in which transactions take place only in one

or two commodities is known as a specialized market. For every group of
commodities, separate markets exist. The examples are food grain markets,
vegetable markets, wool market and cotton market.
7. On the Basis of Degree of Competition:
Each market can be placed on a continuous scale, starting from a perfectly
competitive point to a pure monopoly or monopsony situation. Extreme forms are
almost non-existent. Nevertheless, it is useful to know their characteristics. In
addition to these two extremes, various midpoints of this continuum have been
identified. On the basis of competition, markets may be classified into the
following categories:
Perfect Markets: A perfect market is one in which the following conditions hold
good:
a) There is a large number of buyers and sellers;
b) All the buyers and sellers in the market have perfect knowledge of demand,
supply and prices;
c) Prices at any one time are uniform over a geographical area, plus or minus the
cost of getting supplies from surplus to deficit areas;
d) The prices are uniform at any one place over periods of time, plus or minus
the cost of storage from one period to another;
e) The prices of different forms of a product are uniform, plus or minus the cost
of converting the product from one form to another.
 Imperfect Markets: The markets in which the conditions of perfect competition
are lacking are characterized as imperfect markets. The following situations, each
based on the degree of imperfection, may be identified:
a) Monopoly Market: Monopoly is a market situation in which there is only
one seller of a commodity. He exercises sole control over the quantity or
price of the commodity. In this market, the price of commodity is generally
higher than in other markets. Indian farmers operate in a monopoly market
when purchasing electricity for irrigation. When there is only one buyer of a
product the market is termed as a monopsony market.
b) Duopoly Market: A duopoly market is one which has only two sellers of a
commodity. They may mutually agree to charge a common price which is
higher than the hypothetical price in a common market. The market situation
in which there are only two buyers of a commodity is known as the duopsony
market.
c) Oligopoly Market: A market in which there are more than two but still a few
sellers of a commodity is termed as an oligopoly market. A market having a
few (more than two) buyers is known as oligopsony market.
d) Monopolistic competition: When a large number of sellers deal in
heterogeneous and differentiated form of a commodity, the situation is called
monopolistic competition. The difference is made conspicuous by different
trade marks on the product. Different prices prevail for the same basic
product. Examples of monopolistic competition faced by farmers may be
drawn from the input markets. For example, they have to choose between
various makes of insecticides, pumpsets, fertilizers and equipments.
8. On the Basis of Nature of Commodities:
On the basis of the type of goods dealt in, markets may be classified into the
following categories:
a) Commodity Markets: A market which deals in goods and raw materials,
such as wheat, barley, cotton, fertilizer, seed, etc., are termed as commodity
markets.
b) Capital Markets: The market in which bonds, shares and securities are
bought and sold are called capital markets; for example, money markets and
share markets.
9. On the Basis of Stage of Marketing:
On the basis of the stage of marketing, markets may be classified into two
categories:
a) Producing Markets: Those markets which mainly assemble the commodity
for further distribution to other markets are termed as producing markets.
Such markets are located in producing areas.
b) Consuming Markets: Markets which collect the produce for final disposal to
the consuming population are called consumer markets. Such markets are
generally located in areas where production is inadequate, or in thickly
populated urban centres.
10. On the Basis of Extent of Public Intervention:
Based on the extent of public intervention, markets may be placed in any one of
the following two classes:
a) Regulated Markets: Markets in which business is done in accordance with
the rules and regulations framed by the statutory market organization
representing different sections involved in markets. The marketing costs in
such markets are standardized and practices are regulated.
b) Unregulated Markets: These are the markets in which business is conducted
without any set rules and regulations. Traders frame the rules for the conduct
of the business and run the market. These markets suffer from many ills,
ranging from unstandardised charges for marketing functions to imperfections
in the determination of prices.
11. On the Basis of Type of Population Served:
On the basis of population served by a market, it can be classified as either urban
or rural market:
a) Urban Market: A market which serves mainly the population residing in an
urban area is called an urban market. The nature and quantum of demand for
agricultural products arising from the urban population is characterized as
urban market for farm products.
b) Rural Market: The word rural market usually refers to the demand
originating from the rural population. There is considerable difference in the
nature of embedded services required with a farm product between urban and
rural demands.
12. On the Basis of Accrual of Marketing Margins:
Markets can also be classified on the basis of as to whom the marketing margins
accrue. Over the years, there has been a considerable increase in the producers or
consumers co-operatives or other organizations handling marketing of various
products. Though private trade still handles bulk of the trade in farm products,
the co-operative marketing has increased its share in the trade of some agricultural
commodities like milk, fertilizers, sugarcane and sugar. In the case of marketing
activities undertaken by producers or consumers co-operatives, the marketing
margins are either negligible or shared amongst their members.
Lecture No. 4
Marketing functions – Meaning – Assembling – Grading and standardization –
Transportation – Storage – Processing – Packing – Distribution – Buying and
Selling – Financing – Risk bearing – Marketing intelligence

MARKETING FUNCTIONS
Any single activity performed in carrying a product from the point of its production to the
ultimate consumer may be termed as a marketing function. A marketing function may
have anyone or combination of three dimensions, viz., time, space and form.

The marketing functions involved in the movement of goods from the producer to its
ultimate consumer vary from commodity to commodity, market to market, the level of
economic development of the country or region, and the final form of the consumption.
The marketing functions may be classified in various ways. For example, Thomsen has
classified the marketing functions into three broad groups. These are:

1. Primary Functions : Assembling or procurement

Processing
Dispersion or Distribution
2. Secondary Functions : Packing or Packaging
Transportation
Grading, Standardization and
Quality Control
Storage and Warehousing
Price Determination or Discovery
 Risk Taking
Financing
Buying and Selling
Demand Creation
Dissemination of Market
Information

3. Tertiary Functions : Banking

Insurance
Communications – posts &
Telegraphs
Supply of Energy – Electricity

Kohls and Uhl have classified marketing functions as follows:

1. Physical Functions : Storage and Warehousing

Grading
Processing
Transportation
2. Exchange Functions : Buying
Selling
3. Facilitative Functions : Standardization of grades
Financing
Risk Taking
Dissemination of Market
Information

Huegy and Mitchell have classified marketing functions in a different way. According to
them, the classification is as follows:
1. Physical Movement Functions : Storage
Packing
Transportation
Grading
 Distribution
2. Ownership Movement Functions : Determining Need
Creating Demand
Finding Buyers and Sellers
Negotiation of Price
Rendering Advice
Transferring the Title to Goods
3. Market Management Functions : Formulating Policies
Financing
Providing organization
Supervision
Accounting
Securing Information

Packaging
Packaging is the first function performed in the marketing of agricultural commodities. It
is required for nearly all farm products at every stage of the marketing process. The type
of the container used in the packing of commodities varies with the type of the
commodity as well as with the stage of marketing. For example, gunny bags are used for
cereals, pulses and oilseeds when they are taken from the farm to the market. For
packing milk or milk products, plastic, polythene, tin or glass containers are used.
Wooden boxes or straw baskets are used for packing fruits and vegetables.

Meaning of Packing and Packaging:

Packing means, the wrapping and crating of goods before they are transported. Goods
have to be packed either to preserve them or for delivery to buyers. Packaging is a part
of packing, which means placing the goods in small packages like bags, boxes, bottles or
parcels for sale to the ultimate consumers. In other words, it means putting goods on the
market in the size and pack which are convenient for the buyers.

Advantages of Packing and Packaging:

Packaging is a very useful function in the marketing process of agricultural commodities.
Most of the commodities are packed with a view to preserving and protecting their
quality and quantity during the period of transit and storage. For some commodities,
packing acts as a powerful selling tool. The chief advantages of packing and packaging
are:
1. It protects the goods against breakage, spoilage, leakage or pilferage during their
movement from the production to the consumption point.
2. The packaging of some commodities involves compression, which reduces the
bulk like cotton, jute and wool.
3. It facilitates the handling of the commodity, specially such fruits as apples,
mangoes, etc., during storage and transportation.
4. It helps in quality-identification, product differentiation, branding and
advertisement of the product, e.g., Hima peas and Amul butter.
5. Packaging helps in reducing the marketing costs by reducing the handling and
retailing costs.
6. It helps in checking adulteration.
7. Packaging ensures cleanliness of the product.
8. Packaging with labeling facilitates the conveying of instructions to the buyers as
to how to use or preserve the commodity. The label shows the composition of the
product.
9. Packaging prolongs the storage quality of the products by providing protection
from the ill effects of weather, specially for fruits, vegetables and other perishable
goods.

TRANSPORTATION:
Transportation or the movement of products between places is one of the most
important marketing functions at every stage, i.e., right from the threshing floor to the
point of consumption. Most of the goods are not consumed where they are produced.
All agricultural commodities have to be brought from the farm to the local market and
from there to primary wholesale markets, secondary wholesale markets, retail markets
and ultimately to the consumers. The inputs from the factories must be taken to the
warehouses and from the warehouses to the wholesalers, retailers and finally to the
consumers(farmers). Transportation adds the place utility to goods.
Transport is an indispensable marketing function. Its importance has increased with
urbanization. For the development of trade in any commodity or in any area transport
is a sine qua non. Trade and transport go side by side; the one reinforces and
strengthens the other.
Advantages of Transport Function:
The main advantages of the transport function are:
1. Widening of the Market: Transport helps in the development or widening of
markets by bridging the gap between the producers and consumers located in
different areas. Without transport, the markets would have mainly been local
markets. The exchange of goods between different districts, regions or countries
would be impossible in the absence of this function. The example is the market
for Himachal or Kashmir apples. The producers are located mainly in Himachal
Pradesh and Jammu & Kashmir; but apples are consumed throughout the country.
2. Narrowing Price Difference Over Space: The transportation of goods from
surplus areas to the places of scarcity helps in checking price rises in the scarcity
areas and price falls in surplus areas thus reduces the spatial differences in prices.
3. Creation of Employment: The transport function provides employment to a
large number of persons through the construction of roads, loading and unloading,
plying of the means of transportation, etc.
4. Facilitation of Specialized Farming: Different areas of the country are suitable
for different crops, depending on their soil and agroclimatic conditions. Farmers
can go in for specialization in the commodity most suitable to their area, and
exchange the goods required by them from other areas at a cheaper price than
their own production cost.
5. Transformation of the Economy: Transportation helps in the transformation of
the economy from the subsistence stage to the developed commercial stage.
Industrial growth is stimulated by being fed with the raw material produced in
rural areas. Manufactured goods from industries to village or rural areas, too, can
be moved.
6. Mobility of the Factors of Production: Transport helps in increasing the
mobility of capital and labour from one area to another. Entrepreneurs get
opportunities for the investment of their capital in newly opened areas of the
 country, where the prospects of profit are very bright. Moreover, transportation
helps in the migration of people in search of better remunerative jobs.

Transportation Cost:
The transportation cost accounts for about 50 percent of the total cost of marketing. It is
higher when the produce is transported by bullock carts than when it is carried by other
means. The efficiency of transportation depends on the speed and the care with which
goods move from one place to another, the extent of the facilities provided, and the
degree of care with which goods are handled en route and at terminal stations. However,
there is a need for reducing the cost of transportation.

Factors affecting the cost of transportation:

Other things remaining the same, the transportation cost of a commodity depends on the
following factors:
1. Distance: With an increase in the distance over which a commodity is
transported, the total transportation cost increases; but the transportation cost per
unit quantity of the produce decreases after a certain distance.
2. Quantity of the Product: The transportation cost per unit quantity of a
commodity decreases with the increase in the volume. It will be less if a full
truckload is available than it would be if only a few quintals are transported.
3. Mode of Transportation: The cost of transportation varies with the mode of
transportation, e.g., bullock cart, tractor, truck, railway etc.
4. Condition of Road: The cost of transportation is less where metalled or tar roads
have been constructed than in places where graveled roads exist or where there
are no roads at all.
5. Nature of Products: The cost of transportation per unit is higher for the products
having the following characters:
a) Perishability (e.g., Vegetables);
b) Bulkinesss (e.g., straw);
c) Fragility (e.g. tomatoes);
d) Inflammability (e.g., Petrol);
e) Requirement of a special type of facility (for example, for livestock and milk).
 6. Availability of Return Journey consignment: If goods are also available for
transportation when a truck is to return to its starting place, the per unit cost of
transportation is less.
7. Risk Associated: The transportation cost is less if the produce is transported at
the owner‟s/sender‟s risk than when the risk is on the agency transporting the
produce.

Problems in Transportation of Agricultural Commodities:

The problems in the transportation of agricultural commodities are very serious because
of the special factors associated with them; for example, the perishability of the produce,
its bulkiness, the small quantity in which it is available, and a large number of suppliers
and purchasers. The following are some of the important problems arising out of the
transportation of agricultural commodities:
1. The means of transportation used are slow moving;
2. There are more losses/damages in transportation because of the use of poor
packaging material, overloading of the produce and poor handling, specially of
fruits and vegetables, at the time of loading and unloading;
3. The transportation cost per 100 rupees worth of the farm produce is higher than
that for other goods. This is so because of its bulky character and the prevailing
practice of fixing charges on the basis of weight or volume rather than on the
basis of its value;
4. There is lack of co-ordination between different transportation agencies, e.g., the
railways and truck companies. Some of the places are not connected by railway.
The produce is often transported for a part of the distance by rail and a part by
trucks or other means of transportation.
5. The multi-guage system of railways was also a serious problem in transportation
of goods by railways. However, now the country is moving towards a uni-guage
system which augurs well for marketing of farm products.

Suggestions for Improvement:

The following are some of the suggestions for effecting improvements in the transport
function and reducing transport costs:
1. There must be full utilization of the capacity of the transportation facility in terms
of the load. This would reduce the per quintal cost of transportation.
2. The transportation cost per quintal can be reduced by fixing the rate of
transportation for different means. At present, each agency charges what it likes
and not on the basis of any rational computation of the cost factor.
3. There should be a reduction in spoilage, damage, breakage and pilferage during
the period of movement as a result of better handling, packing and the use of the
proper types of wagons.
4. There should be a reduction in the barriers to inter-state movement of the produce.
If this happens, the time taken in transportation and the quantity of the fuel
consumed would be reduced.
5. A reduction in the bulk of the produce by processing it can help in minimizing the
transport cost. For example, milk may be processed into condensed milk, butter
or ghee and fruits into juices.
6. The speed and capacity of the vehicles used in transportation should be increased.
This can be done by research in respective areas. The speed and capacity of
bullock carts can be increased by:
a) The use of pneumatic tyres instead of the existing wooden and iron wheels;
b) The use of springs in the axle of the cart;
c) The development of atleast good all-weather roads in the areas.
7. It must be recogninsed that roads and railways are important components of
infrastructure; therefore, more public initiative in their expansion is called for.
Nearly 50 percent of the villages in the country are still not connected by roads.
This apart, there are sharp differences among the states. For example, in states
like Orissa, Rajasthan and Madhya Pradesh more than half of the villages are still
to be connected by link roads. The rail transport, though capable of transporting
agricultural commodities to longer distances in larger quantities with greater
speed but it also suffers from multi-guage system, shortages of wagon capacity
and congestion on trunk routes. Therefore, in the overall scheme of public
investment, development of this infrastructure should receive more allocation.
GRADING AND STANDARDIZATION
Grading and standardization is a marketing function which facilitates the movement of
produce. Without standardization the rule of caveat emptor (let the buyer beware)
prevails; and there is confusion and unfairness as well. Standardization is a term used in
a broader sense. Grade standards for commodities are laid down first and then the
commodities are sorted out according to the accepted standards.

Products are graded according to quality specifications. But if these quality

specifications vary from seller to seller, there would be a lot of confusion about its grade.
The top grade of one seller may be inferior to the second grade of another. This is why
buyers lose confidence in grading. To avoid this eventuality, it is necessary to have fixed
grade standards which are universally accepted and followed by all in the trade.

Meaning: Standardization means the determination of the standards to be established for

different commodities. Pyle has defined standardization as the determination of the basic
limits on grades or the establishment of model processes and methods of producing,
handling and selling goods and services.
Standards are established on the basis of certain characteristics-such as weight, size,
colour, appearance, texture, moisture content, staple length, amount of foreign matter,
ripeness, sweetness, taste, chemical content, etc. These characteristics, on the basis of
which products are standardized, are termed grade standards. Thus, standardization
means making the quality specifications of the grades uniform among buyers and sellers
over space and over time.

Grading means the sorting of the unlike lots of the produce into different lots according
to the quality specifications laid down. Each lot has substantially the same characteristics
in so far as quality is concerned. It is a method of dividing products into certain groups
or lots in accordance with predetermined standards. Grading follows standardization. It
is a sub-function of standardization.
Types of Grading
Grading may be done on the basis of fixed standards or variable standards. It is of three
types:
 1. Fixed Grading / Mandatory Grading: This means sorting out of goods
according to the size, quality and other characteristics which are of fixed
standards. These do not vary over time and space. It is obligatory for a person to
follow these grade standards if he wants to sell graded products. For a number of
agricultural commodities, grade standards have been fixed by the Agricultural
Marketing Advisor, Government of India, and it is compulsory to grade the
produce according to these grade specifications. Individuals are not free to
change these standards. The use of mandatory standards is compulsory for the
export of the agricultural commodities to various countries.
2. Permissive / Variable Grading: The goods are graded under this method
according to standards, which vary over time. The grade specifications in this
case are fixed over time and space, but changed every year according to the
quality of the produce in that year. Under this method, individual choice for
grading is permitted. In India, grading by this method is not permissible.
3. Centralized / Decentralized Grading: Based on the degree of supervision
exercised by the government agencies on grading of various farm products, the
programme can be categorized into centralized and decentralized grading.

Under the centralized grading system, an authorized packer either sets up his own
laboratory manned by qualified chemists or seeks access to an approved grading
laboratory set up for the purpose by the state authorities / co-operatives / associations /
private agencies. Grading in respect of commodities such as ghee, butter and vegetable
oils where elaborate testing facilities are needed for checking purity and assessing quality
has been placed under centralized grading system. In this system, the Directorate of
Marketing and Inspection exercises close supervision on grading work of approved
chemists through periodical inspection of the grading stations and the quality of the
graded produce.

The decentralized grading system is implemented by State Marketing Authorities under

the overall supervision and guidance of the Directorate of Marketing and Inspection.
This is followed in those commodities which do not require elaborate testing
arrangements for quality assessment. The examples are fruits, vegetables, eggs, cereals
and pulses. For these commodities, the grade of the produce is determined on the basis of
physical characteristics.

Advantages of Grading;
Grading offers the following advantages to different groups of persons:
1. Grading before sale enables farmers to get a higher price for their produce.
Studies during sixties and seventies revealed that on an average, the producers
obtained a premium of 12 paise per kg of tobacco at Ongloe (AP) and Rs. 9.40 per
quintal of kapas at Hubli (Karnataka). Graded apple fetched a premium price of
11.27 per cent over that of ungraded apples. Graded dasheri and desi mango
fetched a premium of Rs.31.50 and Rs.32.50 per quintal over the price of
ungraded mangoes. Grading also serves as an incentive to producers to market
the produce of better quality.
2. Grading facilitates marketing, for the size, color, qualities and other grade
designations of the product are well known to both the parties, and there is no
need on the part of the seller to give any assurance about the quality of the
product.
3. Grading widens the market for the product, for buying can take place between the
parties located at distant places on the telephone without any inspection of the
quality of the product.
4. Grading reduces the cost of marketing by minimizing the expenses on the
physical inspection of the produce, minimizing storage loses, reducing its bulk,
minimizing advertisement expenses and eliminating the cost of handling and
weighing at ever stage.
5. Grading makes it possible for the farmer –
a) To get easy finance when commodities are stored;
b) To get the claims settled by the railways and insurance companies;
c) To get storage place for the produce;
d) To get market information;
e) To pool the produce of different farmers;
f) To improve the “keeping” quality of the stored products by removing the
inferior goods from the good lot; and
g) To facilitate futures trading in a commodity.
 6. Grading helps consumers to get standard quality products at fair prices. It is
easier for them to compare the prices of different qualities of a product in the
market. It minimizes their purchasing risk, for they will not get a lower quality
product at the given price.
7. Grading contributes to market competition and pricing efficiency. The product
homogeneity resulting from grading can bring the market closer to perfect
competition, encourages price competition among sellers, and reduces
extraordinary profits.
Thus, the grading of product is beneficial to all the sections of society; i.e., the producers,
traders and consumers of the product.

Progress in India
To improve the quality of agricultural products in India, grading and marking were
introduced under an Act – The Agricultural Produce (Grading and Marking) Act, 1937.
The act authorizes the Central Government to frame rules relating to the fixing of grade
standards and the procedure to be adopted to grade the agricultural commodities included
in the schedule. The Act of 1937 was amended from time to time to widen its scope, so
that a number of commodities may be included under the changed circumstances.
Initially, only 19 commodities were included for grading purposes; but now there are 153
commodities in the schedule for which grade standards are available. The commodities
included in the schedule are foodgrains, fruits and vegetables, dairy products, tobacco,
coffee, oilseeds, edible oils, oilcakes, fruit products, cotton, sannhemp, edible nuts,
jiggery, lac, spices and condiments, essential oils, honey, besan, suji and maida.

The Agricultural Marketing Advisor to the Government of India (AMA) is the authority
empowered to implement the provisions of the Act, and suggest suitable modifications.
The Central Agricultural Marketing Department (Directorate of Marketing and
Inspection) maintains some staff for the inspection of the grading premises and the
collection of the samples of graded products from different points in the marketing
process. The collected samples are examined and analyzed either at the central Agmark
laboratory or at other laboratories set up in different parts of the country to test whether
the graded products conform to the standards of quality laid down in the Act. If the
sample is below standard, the necessary legal action against the party is taken, and the
graded product is removed from the market. The licence of the party, too, is cancelled.

STORAGE:

Meaning and Need:

Storage is an important marketing function, which involves holding and preserving goods
from the time they are produced until they are needed for consumption. Storage is an
exercise of human foresight by means of which commodities are protected from
deterioration, and surplus supplies in times of plenty are carried over to the season of
scarcity. The storage function, therefore, adds the time utility to products.

Agriculture is characterized by relatively large and irregular seasonal and year – to – year
fluctuations in production. The consumption of most farm products, on the other hand, is
relatively stable. These conflicting behaviors of demand and supply make it necessary
that large quantities of farm produce should be held for a considerable period of time.

The storage function is as old as man himself, and is performed at all levels in the trade.
Producers hold a part of their output on the farm. Traders store it to take price advantage.
Processing plants hold a reserve stock of their raw materials to run their plants on a
continuous basis. Retailers store various commodities to satisfy the consumers day – to –
day needs. Consumers, too, store foodgrains, depending on their financial status.

The storage of agricultural products is necessary for the following reasons:

1. Agricultural products are seasonally produced, but are required for consumption
throughout the year. The storage of goods, therefore, from the time of production
to the time of consumption, ensures a continuous flow of goods in the market;
2. Storage protects the quality of perishable and semi – perishable products from
deterioration;
3. Some of the goods, e.g., woolen garments, have a seasonal demand. To cope with
this demand, production on a continuous basis and storage become necessary;
4. It helps in the stabilization of prices by adjusting demand and supply;
 5. Storage is necessary for some period for the performance of other marketing
functions. For example, the produce has to be stored till arrangements for its
transportation are made, or during the process of buying and selling, or the
weighment of the produce after sale, and during its processing by the processor;
6. The storage of some farm commodities is necessary either for their ripening (e.g.,
banana, mango, etc.) or for improvement in their quality (e.g., rice, pickles,
cheese, tobacco, etc.); and
7. Storage provides employment and income through price advantages. For
example, middlemen store foodgrains by purchasing them at low prices in the
peak season and sell them in the other seasons when prices are higher.

Risks in Storage:
The storage of agricultural commodities involves three major types of risks. These are:
1. Quantity Loss: The risks of loss in quantity may arise during storage as a result
of the presence of rodents, insects and pests, theft, fire, etc. Dehydration too,
brings about an unavoidable loss in weight. It has been estimated that about 10
million tones of foodgrains are lost every year because of poor and faulty storage.
2. Quality Deterioration: The second important risk involved in the storage of
farm products is the deterioration in quality, which reduces the value of the stored
products. These losses may arise as a result of attack by insects and pests, the
presence of excessive moisture and temperature, or as a result of chemical
reaction during the period of storage. Dehydration of fruits, vegetables and meat
during storage may lower their sale value. Butter, if not properly stored, may
become rancid, which reduces its sale value. The loss in the quality of farm
products varies with their quality at the time of storage, the method of storage and
the period of storage.
3. Price Risk: This, too, is an important risk involved in the storage of farm
products. Prices do not always rise enough during the storage period to cover the
storage costs. At times they fall steeply, involving the owner in a substantial loss.
Farmers and traders generally store their products in anticipation of price rise and
they suffer when prices fall.
PROCESSING:
Processing is an important marketing function in the present-day marketing of
agricultural commodities. A little more than 100 years ago, it was a relatively
unimportant function in marketing. A large proportion of farm products was sold in an
unprocessed form, and a great deal of the processing was done by the consumers
themselves. At present, consumers are dependent upon processing for most of their
requirements. Many technological changes have occurred in the recent past, such as the
introduction of refrigeration, modern methods of milling and baking food grains, new
processing methods for dairy products, and modern methods of packing and preservation.
These technological changes have had a significant impact on the standard of living of
the consumers, on the economic and social organizations of society, and on the growth of
trade in the country.

Meaning:
The processing activity involves a change in the form of the commodity. This function
includes all of those essentially manufacturing activities which change the basic form of
the product. Processing converts the raw material and brings the products nearer to
human consumption. It is concerned with the addition of value to the product by
changing its form.

Advantages:
The processing of agricultural products is essential because very few farm products –
milk, eggs, fruits and vegetables – are consumed directly in the form in which they are
obtained by the producer – farmer. All other products have to be processed into a
consumable form. Processing is important, both for the producer – sellers and for
consumers. It increases the total revenue of the producer by regulating the supply against
the prevailing demand. It makes it possible for the consumer to have articles in the form
liked by him. The specific advantages of the processing function are:
1. It changes raw food and other farm products into edible, usable and palatable
forms. The value added by processing to the total value produced at the farm
level varies from product to product. It is nearly 7 percent for rice and wheat,
about 79 percent for cotton and 86 percent for tea. It is generally higher for
 commercial crops than for food crops. Examples of the products in this group
are: the processing of sugarcane to make sugar, gur, khandsari; oilseeds
processing to make oil; grinding of food grains to make flour; processing of
paddy into rice; and conversion of raw mango into pickles.
2. The processing function makes it possible for us to store perishable and semi –
perishable agricultural commodities which otherwise would be wasted and
facilitates the use of the surplus produce of one season in another season or year.
Examples of the processing of the products in this group are: drying, canning and
pickling of fruits and vegetables, frozen goods, conversion of milk into butter,
ghee and cheese and curing of meat with salting / smoking.
3. The processing activity generates employment. The baking industry, the canning
industry, the brewing and distilling industry, the confectionary industry, the sugar
industry, oil mills and rice mills provide employment to a large section of society.
4. Processing satisfies the needs of consumers at a lower cost. If it is done at the
door of the consumer, it is more costly than if it is done by a firm on large scale.
Processing saves the time of the consumers and relieves them of the difficulties
and botherations experienced in processing.
5. Processing serves as an adjunct to other marketing functions, such as
transportation, storage and merchandising.
6. Processing widens the market. Processed products can be taken to distant and
overseas markets at a lower cost.

BUYING AND SELLING:

Meaning:
Buying and selling is the most important activity in the marketing process. At every
stage, buyers and sellers come together, goods are transferred from seller to buyer, and
the possession utility is added to the commodities.
The number of times the selling-and-buying activity is performed depends on the length
of the marketing channel. In the shortest channel where no middleman is involved, this
activity takes place only once, i.e., the producer or farmer sells and the consumer
purchases. But, usually, in the case of farm commodities, selling/buying activities are
undertaken each time when the produce moves from the farmer to the primary
wholesaler, from the wholesaler to the retailer, and from the retailer to the consumer.
The buying activity involves the purchase of the right goods at the right place, at the right
time, in the right quantities and at the right price. It involves the problems of what to
buy, when to buy, from where to buy, how to buy and how to settle the prices and the
terms of purchase.
The selling activity involves personal or impersonal assistance to or persuasion of, a
prospective buyer to buy a commodity. The objective of selling is to dispose of the
goods at a satisfactory price. The prices of products, particularly of agricultural
commodities vary from place to place, from time to time, and with the quantity to be
sold. Selling, therefore, involves the problems of when to sell, where to sell, through
whom to sell, and whether to sell in one lot or in parts.
Methods:
The following methods of buying and selling of farm products are prevalent in Indian
markets:
(i) Under Cover of a Cloth (Hatha System)
By this method, the prices of the produce are settled by the buyer and the
commission agents of the seller by pressing/twisting the fingers of each other
under cover of a piece of cloth. Code symbols are associated with the twisting
of the fingers, and traders are familiar with these. The negotiations in this
manner continue till a final price is settled. When all the buyers have given
their offers, the name and offer price of the highest bidder is announced to the
seller by the commission agent.
This system provides opportunities for cheating the seller, for the seller is not
aware of the price that has been offered by other buyers; the commission
agent may not communicate the various prices to the seller, and may strike a
deal in favour of one who offers a somewhat lower price. This method has
been banned by the government because of the possibility of cheating, though
it continues to be used in some markets.

(ii) Private Negotiations:

By this method, prices are fixed by mutual agreement. This method is
common in unregulated markets or village markets.
Under this method, the individual buyer come to the shops of commission
agents at a time convenient to the latter and offer prices for the produce
 which, they think, are appropriate after the inspection of the sample. If the
price is accepted, the commission agent conveys the decision to the seller, and
the produce is given, after it has been weighed, to the buyer.
In villages, too, private negotiations take place directly between buyer and
seller. The sellers takes the sample to the buyer and asks him to quote the
price. If it is acceptable to the buyer, a contract is executed. This however, is
a slow and time-consuming process and is not suitable when either large
quantities have to be sold or a large number of buyers exist in the market. The
advantage of this method is that the seller gets a good price, for buyers are not
aware of the price offered by other buyers. Each buyer, therefore, tries to bid
the highest to get the produce.
(iii)Quotations on Samples taken by Commission Agent:
By this method the commission agent takes the sample of the produce to the
shops of the buyer instead of the buyer going to the shop of the commission
agent. The price is offered, based on the sample, by the prospective buyers.
The commission agent makes a number of rounds of prospective buyers until
none is ready to bid a price higher than the one offered by a particular buyer.
The produce is given to the one whose bid has been the highest.
(iv) Dara Sale Method
By this method, the produce in different lots is mixed and then sold as one lot.
The advantages of this method is that, within a short time, a large number of
lots are sold off. The disadvantage is that the produce of a good quality and
one of a poor quality fetch the same price. There is, therefore, a loss of
incentive to the farmer to cultivate good quality products. This method is
common for such crops as zeera in many markets of the country.
(v) Moghum Sale Method:
By this method, the sale of produce is effected on the basis of a verbal
understanding between buyers and sellers without any pre-settlement of price,
but on the distinct understanding that the price of the produce to be paid by
the buyer to the seller will be the one as prevailing in the market on that day,
or at the rate at which other sellers of the village sold the produce. This
method is common in villages, for farmers are indebted to the local money
 lenders. Often the buyer pays less than the prevailing market rate on the plea
of the poor quality of the produce.
(vi) Open Auction Method:
By this method, the prospective buyers gather at the shop of the commission
agent around the heap of the produce, examine it and offer bids loudly. The
produce is given to the highest bidder after taking the consent of the seller
farmer. This method is preferred to any other method because it ensures fair
dealing to all parties, and because the farmers with a superior quality of
produce receive a higher price. In most regulated markets, the sale of the
produce is permissible only by the open auction method.
The following are the merits of the open auction method:
a) A sale by this method inspires confidence among the buyers and sellers.
The seller is able to follow the bidding easily.
b) The auction serves as a meeting place for the supply of, and demand for,
goods.
c) It disposes of the market supply promptly.
d) A wide variety of goods are available to buyers for selection.
e) The auction method reduces the number of salesmen needed in the
process.
f) The buyers of small lots are not put to a disadvantage against the buyers of
large lots.
g) All the sections interested in the sale and purchase are well informed about
the prevailing prices and can take judicious decisions about the sale and
purchase of agricultural commodities.
h) The payment of the price of the goods is made immediately after the sale
if an auction has been completed.
The disadvantages of the open auction method are:
a) The auction method requires more time on the part of both the buyer and
the seller, for they have to wait for the day and time of the auction. An
open auction is a very time-consuming process because of the variation in
the quality of the various lots.
b) In big market centers, specially in the peak marketing season, the time
allotted for auction is short. Both the buyers and the sellers are in a hurry.
As a result, sellers may receive a low price.
c) In an open auction, buyers sometimes join hands. Active participation in
it is then reduced.
d) The auction leads to a “buyers‟ market”, for buyers have full information
about the supply of, and demand for, the product.
Some of the problems arising out of the open auction method may be
overcome if the grading of agricultural produce is adopted by the cultivators.
This will reduce the time involved in inspection and bidding for each lot
separately, and will result in increasing the overall efficiency of the marketing
system.
Three types of open auctions are prevalent in different markets. These are:
a) Phar System of Open Auction: By this method, one bid is given for all
the lots in a particular shop and all the lots are sold at that price. One
extreme case of this method is when one bid is given for the product in the
whole market.
b) Random Bid System of Open Auction: By this method, the commission
agent invites a few buyers when the produce is brought to his shop for
sale. All the prospective buyers are not informed. As a result, the
competition is poor. Sometimes, the commission agent informs only those
buyers who are either his relatives or whom he wants to oblige. Bidding
may continue simultaneously at a number of places to reduce competition.
c) Roster Bid System of Open Auction: This is a systematic method of open
auction. Bidding starts from a point in the market at a notified time about
which the prospective buyers are given information in advance. This
overcomes the defects existing in the previous two methods of open
auction. The bidding party, after the auction of the produce at one shop,
moves to the next in a clock-wise or anti-clockwise direction till the
auction of the produce at all shops is over, or the scheduled auction time
expires. On the following day, the auction starts from the next point, and
so on. This method is in vogue in most of the regulated markets. The
 auction is supervised by the auction clerk or the person nominated by the
market committee.
(vii) Close Tender System:
This method is similar to the open auction method, except that bids are invited
in the form of a close tender rather than by open announcement. The produce
displayed at the shop of the commission agent is allotted lot numbers. The
prospective buyers visit the shops, inspect the lots, offer a price for the lot
which they want to purchase on a slip of paper, and deposit the slip in a sealed
box lying at the commission agent‟s shop. When the auction time is over, the
slips are arranged according to the lot number, and the highest bidder is
informed by the commission agent that his bid has been accepted and that he
should take delivery of the produce.
Some of the regulated markets have adopted this method of sale, which is
time-saving and involves the minimum physical labour. There is no
possibility of collusion among the buyers because each has quoted the price
on the basis of his individual assessment of profit margins, taking into
consideration the price prevailing in terminal and other secondary markets.
The smooth functioning of this method depends on the efficiency of, and the
supervision exercised by, the market committee officials.
The methods employed for the sale of agricultural commodities in Indian
markets differ from market to market and also from commodity to
commodity. However, in regulated markets, either the open auction or the
close tender system is prevalent. In Tamil Nadu the buyers have adopted the
close tender system which, it is claimed, is quicker and tends to give a higher
price to the farmer than in the open auction system.

MARKET INFORMATION:
Market information is an important marketing function which ensures the smooth and
efficient operation of the marketing system. Accurate, adequate and timely availability of
market information facilitates decision about when and where to market products.
Market information creates a competitive market process and checks the growth of
monopoly or profiteering by individuals. It is the lifeblood of a market.
Everyone engaged in production, and in the buying and selling of products is continually
in need of market information. This is more true where agricultural products are
concerned, for their prices fluctuate more widely than those of the products of other
sectors. Market information is essential for the government, for a smooth conduct of the
marketing business, and for the protection of all the groups of persons associated with
this. It is essential at all the stages of marketing, from the sale of the produce at the farm
until the goods reach the last consumer.
Meaning: Market information may be broadly defined as a communication or reception
of knowledge or intelligence. It includes all the facts, estimates, opinions and other
information which affect the marketing of goods and services.
Importance: Market information is useful for all sections of society which are
concerned with marketing. Its importance may be judged from the point of view of
individual groups. These groups are:
a) Farmer-Producers: Market information helps in improving the decision-making
power of the farmer. A farmer is required to decide when, where and through
whom he should sell his produce and buy his inputs. Price information helps him
to take these decisions.
b) Market Middlemen: Market middlemen need market information to plan the
purchase, storage and sale of goods. On the basis of this information, they are
able to know the pulse of the market, i.e., whether the market is active or sluggish,
the temperature of the market (whether prices are rising or falling), and market
pressure (whether supply is adequate, scarce or abundant). On the basis of these
data, they project their estimates and take decisions about whether to sell
immediately or to stock goods for some time, whether to sell into the local market
or to go in for import or export, whether to sell in their original form or process
them and then sell, and so on. The failure of a business may partly be attributed
to either the non-availability of market information or its inadequate availability
and interpretation. Co-operative marketing societies operating as commission
agents make use of market information for advising their members so that they
may take decisions about when to sell their product. Processors make use of
market information to plan their purchases so that they may run their plant
continuously and profitably.
 c) General Economy: Market information is also beneficial for the economy as a
whole. In a developed economy, there is need for a competitive market process
for a commodity, which regulates the prices of the product. The competitive
process contributes to the operational efficiency of the industry. However, a
perfectly competitive system is difficult to obtain; but the availability of market
information leads towards the competitive situation. In the absence of this
system, different prices will prevail, leading to the profiteering by specialized
agencies. The business of forward trading is based on the availability of market
information.
d) Government: Market information is essential for the government in framing its
agricultural policy relating to the regulation of markets, buffer stocking, import-
export, and administererd prices.

Types of Market Information:

Market information is of two types
a) Market Intellignece: This includes information relating to such facts as the prices
that prevailed in the past and market arrivals over time. These are essentially a
record of what has happened in the past. Market intelligence is therefore, of
historical nature. An analysis of the past helps us to take decision about the
future.
b) Market News: This term refers to current information about prices, arrivals and
changes in market conditions. This information helps the farmer in taking
decisions about when and where to sell his produce. The availability of market
news in time and with speed is of the utmost value. Sometimes, a person who
gets the first market news gains a substantial advantage over his fellow-traders
who receive it late. Market news quickly becomes obsolete and requires frequent
updating.
Criteria for Good Market Information:
Good market information must meet the following criteria so that it may be of maximum
advantage to the users:
a) Comprehensive: Market information must be complete and comprehensive. It
must cover all the agricultural commodities and their varieties, and all the
 geographical regions. It must cover prices, production, supply movements, stocks
and demand conditions.
b) Accuracy: The accuracy of market information is essential. The collection of
accurate market information is a tedious and expensive task under changing
market situations. There must be honesty in the collection of the information.
Constant efforts should be made to improve its accuracy. The information
reporter must be thoroughly acquainted with the market and the product so that he
may collect accurate information about them.
c) Relevance: Market information must be relevant in the sense that it must be
collected, arranged and disseminated, keeping in view the user‟s interest.
Generally, a lot of information that is collected is not used; the time and energy
spent on its collection, therefore, become a colossal waste. It is not enough to
simply collect a mass of data and report them through various media; the data
must be accurate and useful.
d) Confidentiality: There must be a sense of confidentiality among the firms for
whom the information has been collected. The information revealed under this
situation of confidentiality will be more correct and may assist in drawing policy
implications. The names of firms should not be leaked out.
e) Trustworthiness: Trustworthiness is another criterion of good market
information. The agency that collects it must create faith, and the users must trust
the organization which is making this information available to them.
f) Equal and Easy Accessibility: Every person engaged in marketing, whether big
or small, wholesaler, retailer, government or a private agency, must have equal
and easy access to the available information. There should not be any sort of
restriction on individuals in the use of this information.
g) Timeliness: Market information must be made available in time. For this
purpose, a speedy transmission is necessary. Late dissemination of market
information is of no use. Often, this information becomes stale, particularly when
it is disseminated too late to be of any use. A system for speedy dissemination of
information should be devised.

FINANCING:
There is a long interval between the time of production and consumption. Between these
two points, the ownership of commodities shifts many times – a fact which necessitates
financial arrangements. Middlemen need finance not only for the purchase of stocks, but
for the performance of various marketing functions, such as processing, storage,
packaging, transport and grading. The financing function of marketing involves the use
of capital to meet the financial requirements of the agencies engaged in various
marketing activities.
No business is possible nowadays without the financial support of other agencies because
the owned funds available with the producers and market middlemen (such as
wholesalers, retailers and processors) are not sufficient. The financial requirements
increase with the increase in the price of the produce and the cost of performing various
marketing services. In the words of Pyle: “Money or credit is the lubricant that facilitates
the marketing machine.”

Factors affecting Capital Requirements of an Agricultural Marketing Firm:

The capital requirements of a marketing agency for its marketing business varies with the
following factors:
(i) Nature and Volume of Business: Financial requirements for trading in high
value crops like cumin, chillies, cotton and oilseeds are higher than for trading
in foodgrains. For the wholesale business too, financial requirements are
higher than for retail business.
(ii) Necessity of Carrying Large Stocks: It is essential to carry over large stocks
throughout the year, of goods which are seasonally produced and marketed on
a wholesale basis.
(iii) Continuity of Business during Various Seasons: If business is continuous
throughout the year, the financial requirements will be greater than if business
is conducted only during a particular season.
(iv) Time Required between Production and Sale: Some goods are sold
immediately after production – perishables, for example – while others are
diposed for after a certain time – rice and cheese, for example. Financial
requirements in the marketing of the latter goods are, therefore higher.
(v) Terms of Payment for Purchase and Sale: The terms of transactions – whether
payment will be in cash, on credit or by instalments – affect the financial
requirements of the marketing middlemen.
(vi) Fluctuations in Prices: Financial requirements are higher for goods which
suffer frequent price fluctuations than for goods that are subject to less
frequent price fluctuations.
(vii) Risk-taking Capacity: The financial needs of the market middlemen vary
with their risk-taking capacity. A middleman with a low risk-taking capacity
often resorts to hedging, and needs less finance than a middleman who takes
risks.
(viii) General Conditions in the Economy: During the period of price fall or
recession, the financial requirements increase. The marketing agency has to
hold stocks for a longer period in anticipation of a price rise. Moreover, the
recovery of old bills tends to be slow. Whenever, therefore, a new product is
introduced, the dealer needs more finance temporarily till the demand for it
picks up in the economy.
The marketing finance required by the marketing middlemen is of two types – fixed
capital for land, buildings (shops and godowns), equipment and machinery
(weighbridge, grading equipment, etc.), and working capital which is required to meet
the marketing costs, purchase value, and salaries of the employees. The proportion of
working capital is higher than that of fixed capital. It is also necessary to make
arrangements for financing the farmers during the period between the production and
sale of their produce. This is necessary to improve their holding capacity and to
avoid the post-harvest sale of the produce when prices are low in the market.
Because of their acute financial needs, many farmers market their standing crops – of
fruits, for example – or borrow money in advance from local traders/commission
agents against their crops, and bind themselves to sell the crop through the
trader/commission agent. This checks their freedom to sell the produce in the open
market.
 To improve the financial position of the farmers and to strengthen their holding
capacity, the following steps have been taken by the government.
(i) Since July 1969, with the nationalization, commercial banks have started
financing the agricultural sector in a big way and meeting the increasing needs
of the farmers for production purposes.
(ii) The co-operatives, too, have developed and entered the field of agricultural
financing. An integrated scheme of credit and marketing has been introduced.
Under this scheme, co-operative credit societies can realize their credit,
together with the interest due on it, by the sale proceeds of the produce
directly by intimation to Co-operative Marketing Societies. These may make
the payments for the produce to the farmer after deducting their dues. A rapid
progress has been made in this area.
(iii) With the development of warehousing facilities in the country, farmers can
now meet 70 to 80 percent of their credit needs by placing the produce in the
warehouses. Banks extend the financing facility to farmers against the
mortgage of the warehouse receipt. This scheme has lessened the financial
problems of the farmers and of market middlemen. As a result, the tendency
to sell the produce immediately after the harvest should have been checked.
However, it has met with only limited success. So long as the interest rate
continues to be more than the intra-year rise in prices, storage cannot be a
profitable proposition.

NABARD in Agricultural Marketing Finance:

The National Bank for Agriculture and Rural Development (NABARD) was set up as an
apex organization in the sphere of rural finance. It provides refinancing support to
financial institutions for financing wide range of activities pertaining to agriculture and
rural development. NABARD in addition to providing refinance facilities for agricultural
production, also provides refinance facilities to financial institutions for development of
infrastructure, co-operative marketing, construction of warehouses and cold storages,
creation of transportation facilities, construction of market yards and processing of farm
products.
The refinance facilities available from NABARD in the sphere of agricultural marketing
are:
(i) Marketing of Produce – NABARD provides refinance support to the state co-
operative banks by way of short-term credit limits for assisting the co-
operative marketing societies to help the members in marketing of their
produce at remunerative prices and also to enabling them to repay their dues
to primary co-operative credit societies.
(ii) Construction of Godowns and Storage Facilities – NABARD provides
refinance support for financing of godowns and cold storages.
(iii) Construction of Market Yards – NABARD provides refinance support for
construction of market yards to co-operative and other banks. This also
includes construction of various amenities in the market yards like
construction of shops, platform, rest houses, canteen, bank and post-office
premises.
(iv) For Means of Transportation – NABARD makes available the refinance
facilities for financing bullock carts, hand carts and other means for
transportation of marketable surplus and inputs from fields to the markets.
(v) Establishing of processing Units – NABARD makes available the refinance
facilities for financing agro-based processing units such as rice mills, flour
mills, oil crushing, canning of fruits and vegetables and gur and khandsari
units.
Lecture No.5
Market functionaries – Producers – Middlemen (Merchant middlemen, Agent
middlemen, Speculative middlemen, Processors, Facilitative middlemen)-problem in
marketing of agricultural commodities

MARKET FUNCTIONARIES:
In the marketing of agricultural commodities, the following market
functionaries/marketing agencies are involved:

(i) PRODUCERS:
Most farmers or producers, perform one or more marketing functions. They sell
the surplus either in the village or in the market. Some farmers, especially the
 large ones, assemble the produce of small farmers, transport it to the nearby
market, sell it there and make a profit. This activity helps these farmers to
supplement their incomes. Frequent visits to markets and constant touch with
market functionaries, bring home to them a fair knowledge of market practices.
They have, thus, an access to market information, and are able to perform the
functions of market middlemen.
(ii) MIDDLEMEN
Middlemen are those individuals or business concerns which specialize in
performing the various marketing functions and rendering such services as are
involved in the marketing of goods. They do this at different stages in the
marketing process. The middlemen in foodgrain marketing may, therefore, be
classified as follows:
(a) Merchant Middlemen: Merchant middlemen are those individuals who take
title to the goods they handle. They buy and sell on their own and gain or
lose, depending on the difference in the sale and purchase prices. They may,
moreover, suffer loss with a fall in the price of the product. Merchant
middlemen are of two types:
Wholesalers: Wholesalers are those merchant middlemen who buy and sell
foodgrains in large quantities. They may buy either directly from farmers or
from other wholesalers. They sell foodgrains either in the same market or in
other markets. They sell to retailers, other wholesalers and processors. They
do not sell significant quantities to ultimate consumers. They own godowns
for the storage of the produce.
The wholesalers perform the following functions in marketing:
(a) They assemble the goods from various localities and areas to meet the
demands of buyers;
(b) they sort out the goods in different lots according to their quality and
prepare them for the market;
(c) They equalize the flow of goods by storing them in the peak arrival season
and releasing them in the off-season;
(d) They regulate the flow of goods by trading with buyers and sellers in
various markets;
 (e) They finance the farmers so that the latter may meet their requirements of
production inputs; and
(f) They assess the demand of prospective buyers and processors from time to
time, and plan the movement of the goods over space and time.
Retailers: Retailers buy goods from wholesalers and sell them to the
consumers in small quantities. They are producers‟ personal representatives
to consumers. Retailers are the closest to consumers in the marketing channel.

Itinerant Traders and Village Merchants: Itinerant traders are petty merchants
who move from village to village, and directly purchase the produce from the
cultivators. They transport it to the nearby primary or secondary market and
sell it there. Village merchants have their small establishments in villages.
They purchase the produce of those farmers who have either taken finance
from them or those who are not able to go to the market. Village merchants
also supply essential consumption goods to the farmers. They act as financers
of poor farmers. They often visit nearby markets and keep in touch with the
prevailing prices. They either sell the collected produce in the nearby market
or retain it for sale at a later date in the village itself.

(a) Agent Middlemen:

Agent middlemen act as representatives of their clients. They do not take title
to the produce and, therefore, do not own it. They merely negotiate the
purchase and/or sale. They sell services to their principals and not the goods
or commodities. They receive income in the form of commission or
brokerage. They serve as buyers or sellers in effective bargaining. Agent
middlemen are of two types
Commission Agents or Arhatias: A commission agent is a person operating
in the wholesale market who acts as the representative of either a seller or a
buyer. He is usually granted broad powers by those who consign goods or
who order the purchase. A commission agent takes over the physical handling
of the produce, arranges for its sale, collects the price from the buyer, deducts
his expenses and commission, and remits the balance to the seller. All these
facilities are extended to buyer-firms as well, if asked for.
 Commission Agents or Arhatias in unregulated markets are of two types,
Kaccha arhatias and pacca arhatias. Kaccha arhatias primarily act for the
sellers, including farmers. They sometimes provide advance money to
farmers and intinerant traders on the condition that the produce will be
disposed of through them. Kaccha arhatias charge arhat or commission in
addition to the normal rate of interest on the money they advance. A pacca
arhatia acts on behalf of the traders in the consuming market. The processors
(rice millers, oil millers and cotton or jute dealers) and big wholesalers in the
consuming markets employ pacca arhatias as their agents for the purchase of a
specified quantity of goods within a given price range.
In regulated markets, only one category of commission agent exists under the name of
„A‟ class trader. The commission agent keeps an establishment – a shop, a godown
and a rest house for his clients. He renders all facilities to his clients. He is,
therefore, preferred by the farmers to the co-operative marketing society for the
purpose of the sale of the farmer‟s produce. Commission agents extend the following
facilities to their clients:
(a) They advance 40 to 50 percent of the expected value of the crop as a loan to
farmers to enable them to meet their production expenses;
(b) They act as bankers of the farmers. They retain the sale proceeds, and pay to
the farmers as and when the latter require the money;
(c) They offer advice to farmers for purchase of inputs and sale of products;
(d) They provide empty bags to enable the farmers to bring their produce to the
market;
(e) They provide food and accommodation to the farmers and their animals when
the latter come to the market for the sale of their produce;
(f) They provide storage facility and advance loans against the stored product up
to 75 percent of its value;
(g) They arrange, if required by the farmer, for the transportation of the produce
from the village to the market; and
(h) They help the farmers in times of personal difficulties.

Brokers: Brokers render personal services to their clients in the market; but unlike
the commission agents, they do not have physical control of the product. The main
function of a broker is to bring together buyers and sellers on the same platform for
negotiations. Their charge is called brokerage. They may claim brokerage from the
buyer, the seller or both, depending on the market situation and the service rendered.
They render valuable service to the prospective buyers and sellers, for they have
complete knowledge of the market – of the quantity available and the prevailing
prices.
Brokers have no establishment in the market. They simply wander about in the
market and render services to clients. There is no risk to them. They do not render
any other service except to bring the buyers and sellers on the same platform. In most
regulated markets, brokers do not play any role because goods are sold by open
auction. Their number in food grain marketing trade is decreasing. But they still pay
a valuable role in the marketing of other agricultural commodities, such as gur, sugar, oil,
cottonseed and chillies.

(c)Speculative Middlemen
Those middlemen who take title to the product with a view to making a profit on it are
called speculative middlemen. They are not regular buyers or sellers of produce. They
specialize in risk – taking. They buy at low prices when arrivals are substantial and sell
in the off – season when prices are high. They do the minimum handling of goods. They
make profit from short-run as well as long-run price fluctuations.

Processors carry on their business either on their own or on custom basis. Some
processors employ agents to buy for them in the producing areas, store the produce and
process it throughout the year on continuous basis. They also engage in advertising
activity to create a demand for their processed products.

(d)Facilitative Middlemen
Some middlemen do not buy and sell directly but assist in the marketing process.
Marketing can take place even if they are not active. But the efficiency of the system
increases when they engage in business. These middlemen receive their income in the
form of fees or service charges from those who use their services. The important
facilitative middlemen are:
Hamals or Labourers: They physically move the goods in marketplace. They do
unloading from and the loading on to bullock carts or trucks. They assist in weighting
the bags. They perform cleaning, sieving, and refilling jobs and stitch the bags. Hamals
are the hub of the marketing wheel. Without their active co-operation, the marketing
system would not function smoothly.
Weighmen: They facilitate the correct weighment of the produce. They use a pan
balance when the quantity is small. Generally, the scalebeam balance is used. They get
payment for their services through the commission agent. The weighbridge system of
weighing also exists in big markets.
Graders: These middlemen sort out the product into different grades, based on some
defined characteristics, and arrange them for sale. They facilitate the process of prices
settlement between the buyer and the seller.
Transport Agency: This agency assists in the movement of the produce from one market
to another. The main transport means are the railways and trucks. Bullock carts or camel
carts or tractor trolleys are also used in villages for the transportation of food grains.
Communication Agency: It helps in the communication of the information about the
prices prevailing, and quantity available, in the market. Sometimes, the transactions take
place on the telephone. The post and telegraph, telephone, newspapers, the radio,
Television, Internet and informal links are the main communication channels in
agricultural marketing.
Advertising Agency: It enables prospective buyers to know the quality of the product and
decide about the purchase of commodities. Newspapers, the radio, cinema slides,
television and Internet are the main media for advertisements.
Auctioners: They help in exchange function by putting the produce for auction and
bidding by the buyers.
 Lecture No-6:
Remedial measures-Regulated markets-definition-important features of
regulated markets, functions, progress and defects

Agricultural Marketing is a process which starts with a decision to produce a saleable

farm
product and involves all aspects of market structure or system, both functional and
institutional, based on technical and economic consideration. Forms of government
intervention in agricultural marketing system consists of framing rules and regulation,
promote infrastructure development,administration of prices and influence supply and
demand. The remedial measures for the problems of marketing are classified into the
following types:
1. Reduction and regulation of market charges.
2. Organisation of cooperative marketing, and
3. Government legislations.

Though agricultural marketing is a State subject, the Government of India has an

important role to play in laying down general policy framework, framing of quality
standards, conducting survey and research studies and in providing guidance,
technical and financial support to the State Governments. The Central Government is
aided and advised by two organisations under its control, namely, the Directorate of
Marketing and Inspection (DMI) and the National Institute of Agricultural Marketing
(NIAM), Jaipur.

Directorate of Marketing and Inspection:

It is an attached office of the Ministry and is headed by the Agricultural Marketing
Adviser to the Government of India. The organisation setup of the DMI is as under:-
Head Office : Faridabad Branch Head Office : Nagpur Regional Office : Chennai,
Delhi, Guntur, and Mumbai.
Central Agmark Laboratory is located at Nagpur. Besides, there are 57 sub-offices
and 22 Regional Agmark Laboratories spread all over the country.

The main functions of the Directorate of Marketing and Inspection are :

Rendering Advice on Statutory Regulation, Development and management of
agricultural produce markets to the States/Union Territories; Promotion of grading
and standardization of agricultural and allied products under the Agricultural Produce
(Grading & Marketing) Act. 1937; Market Research, survey and Planning; Training
of personnel in agricultural marketing; and Administration of Cold Storage Order,
1980 (except regulatory functions) and Meat Food
Products Order, 1973.

National Institute of Agricultural Marketing has started functioning at Jaipur

(Rajasthan)
with effect from 8th August, 1988. to augment the agricultural marketing
infrastructure of the country through programmes of teaching, research and
consultancy services; to design and conduct training courses appropriate to the
specific identified needs of the personnel and enterprises and institutions that they
serve; to undertake research to demonstrate and replicate better management
techniques in the field of agricultural marketing; to provide consultancy services for
formulating investment projects and for problem solving advice; and l To offer
educational programmes in agricultural marketing for upplementing the existing
facilities.

Regulation and Management of Agricultural Produce Marketing

The DMI, as a central advisory organisation, has been providing technical assistance
and advice to the States in framing suitable market legislation. For this purpose, the
DMI has framed a “Model Act” which not only provides guidelines for framing of
legislation but also intends to bring about uniformity in State legislations. Due to
constant endeavour of DMI, all States and UTs except Manipur, Kerala, Andaman &
Nicobar Island, Lakshadweep and Dadra & Nagar Haveli have enacted legislation.
The Jammu & Kashmir Assembly has passed the Bill on Market Regulation in its
State. The DMI is pursuing with remaining States/UTs for enactment of necessary
legislation. Out of 7245 wholesale assembling markets in the country, 7062 markets
have been brought under the ambit of regulation as on 31st March 1998.

Market Research, Survey and Planning:

The DMI is presently conducting 20 market surveys for various commodities. The
NIAM has also taken up the formulation of State Master Plans for the Development
of agricultural
produce markets for Goa, Himachal Pradesh, Andhra Pradesh, Jammu and Kashmir
and Sikkim. Further,the Institute has taken up case studies on post-harvest
management of various commodities.
Grading and Standardisation:

The Agricultural Produce (Grading & Marking) Act,1937 empowers the Central
Government to fix quality standards, known as „AGMARK‟ standards and to
prescribe terms and conditions for using the seal of„AGMARK‟. So far, grade
standards have been notified for 159 agricultural and allied commodities. During the
year 1997-98, new grade standards have been formulated for five commodities viz.
Caraway seeds, Vermicelli, Macaroni and Spaghetti, Cloves, Mace and Large
Cardamom. As a result of special efforts initiated to increase grading under
„AGMARK‟, 271 new packers have been enrolled during 1998-99 up to September,
1998.

Cold Storage Order and Meat Food Products Order:

The Cold Storage Order, 1980 which was uniformly applicable throughout the
country except in the States of Haryana, Punjab, Uttar Pradesh and West Bengal. It
was promulgated under Section 3 of Essential Commodities Act, 1955 to ensure
hygienic and proper refrigeration conditions in the cold storages all over the country.
This has been repealed with effect from 27th May, 1997 with a view to remove the
controls laid down in the said Order in the areas of licensing,price control and
requisitioning of cold storage space etc. and allow functioning of free market
mechanism for demand based growth of cold storage industry in the country free
from all kinds of administrative interference.

The objective of the Meat Food Products Order, 1973 is to ensure quality control and
hygienic manufacturing conditions of meat food products for domestic consumption
and the Order is applicable all over the country. A total of 128 licenses have been
issued to the manufacturers operating under the Order upto Decemeber, 1997.
Publicity and Extension:
The DMI participated in „AGMARK‟ exhibitions during 1998-99 at Bangalore in the
India International Trade Fair, 1998. Talks on „AGMARK‟ were also organised by
AIR, Hyderabad during the year 1997-98.
High Power Committee on Agricultural Marketing:
A High Power Committee on Agricultural Marketing was constituted in January,
1992 under the
chairmanship of Shri Shankarlal Guru, The recommendations have been discussed in
the first meeting of Ministers-incharge of Agricultural Marketing of all States/UTs
held on 30th January, 1997 at New Delhi. The State/UTs have been directed to
implement the recommendations of the High Power Committee as early as possible.
Transfer of the Subject of Agricultural Marketing:
The Subject of Agricultural Marketing has been transferred to the Department of
Agriculture and
Cooperation, Ministry of Agriculture, Government of India with effect from 19th
December, 1998.

Working group on agricultural marketing infrastructure and policy required for

internal and external trade for the xi five year plan 2007-12, Planning Commission,
GOI, 2007

As the challenges facing the marketing system are quite different than what these
used to be about two decades before, the Working Group identified the bottlenecks in
the domestic marketing system, assessed the size of agricultural markets and supply
chain for different farm products and reviewed the working of agricultural markets
and wholesale mandies.

It reviewed the present status of marketing infrastructure at village haats, assembly

centres and terminal markets and projected the infrastructure requirements based on
the increases expected in marketed surplus of agricultural commodities. Based on the
comprehensive analysis of existing marketing and external trade system, current
policies and experience of implementation of various schemes during the past and the
X Five Year Plan period, the Group has come out with several recommendations.

The main focus of the Working Group in identifying its recommendations had been
on
(a) improving the efficiency of the marketing system and reducing the costs of
marketing, particularly the avoidable waste in the marketing chain; (b) to help value
addition at the farm and village level as well as at the secondary level for creating
employment in rural areas/small towns and for expansion of the demand for farm
products; (c) to develop markets but with less regulation; and (d) to segregate
products according to quality and increase quality consciousness both among the
farmers and actors along the value-chain.
The Working Group, while framing its recommendations, recognized that there are
three essential/necessary requirements for evolving an efficient agricultural marketing
system in India. These are (a) continuous evolution, perfection and transfer of science
and technological inputs in agricultural marketing; (b) introduction of „scale‟ in
agricultural marketing for reaping the benefits of economies of scale; and (c)
continuously refining and putting in place a conducive policy and regulatory
framework, including withdrawal of the state in many areas.
The recommendations include those relating to marketing system improvement,
strengthening of marketing infrastructure, investment needs, possible sources of funds
including that from the private sector, improvement in marketing information system
using ICT, human resource development in agricultural marketing, and measures
needed for promotion of exports. The Group has also suggested for reorientation of
the policy paradigm for boosting agricultural marketing and trade.

Regulated market
Under the traditional system of marketing of the agricultural products,
producer-sellers incurred a high marketing cost, and suffered from unauthorized
deductions of marketing charges and the prevalence of various malpractices. To
improve marketing conditions and with a view to creating fair competitive
conditions, the increase in the bargaining power of producer-sellers was
considered to be the most important prerequisite of orderly marketing. Most of
the defects and malpractices under, the then existing marketing system of
agricultural products have been more or less removed by the exercise of public
control over markets, i.e., by the establishment of regulated markets in country.
DEFINITION
A regulated market is one which aims at the elimination of the unhealthy and
unscrupulous practices, reducing marketing charges and providing facilities to
producer-sellers in the market. Any legislative measure designed to regulate the
marketing of agricultural produce in order to establish, improve and enforce
standard marketing practices and charges may be termed as one which aims at
the establishment of regulated markets. Regulated markets have been
established by State Governments and rules and regulations have been framed
for the conduct of their business
The establishment of regulated market is not intended at creating an alternative
marketing system. The basic objective has been to create conditions for efficient
performance of the private trade, through facilitating free and informal
competition. In regulated markets, the farmer is able to sell his marketed surplus
in the presence of several buyers through open and competitive bidding. The
legislation for the establishment of regulated markets does not make it
compulsory for the farmer to sell his produce in the regulated market make it
compulsory for the farmer to sell his produce in the regulated market
yard.Instead, voluntary action on the part of the farmers to take advantage of
such a market is assumed. The basic philosophy of the establishment regulated
markets is the elimination of malpractices in the system and assignment of
dominating power to the farmers or their representatives in the function of the
markets.
 Objectives
The specific objectives of regulated markets are :
1. to prevent the exploitation of farmers by overcoming the handicaps in the
marketing of their products ;
2. to make the marketing system most effective and efficient so that farmers
may get better prices for their produce, and the goods are made available to
consumers at reasonable prices ;
3. to provide incentive prices to farmers for inducing them to increase the
production both in quantitative and qualitative terms ;and
4. to promote an orderly marketing of agricultural produce by improving the
infrastructural facilities .
Important features of regulated markets
Under the provisions of the agricultural produce market act, the state government
gives its intention to bring a particular area under regulation by notifying market
areas, market yard, main assembling market and sub market yard, if any, under
the principle regulated market. the meaning of these terms is explained in the
following paragraph.
1. Market area: The area from which the produce naturally and abundantly
flows to a commercial centre, i.e., the market, and which assures adequate
business and income to the market committee
2. Principle assembling market: It is the main market which is declared as a
principal market yard on the basis of transactions and income generated for the
market committee
3. Sub market yard: It is sub yard of the principle assembling market. This is a
small market and does not generate sufficient income to declare as a principal
assembling market
4. Market yard: This is a specified portion of the market area where the sale,
purchase, storage and processing of any of the specified agricultural
commodities are carried out.

THE ANDHRA PRADESH (AGRICULTURAL PRODUCE AND LIVESTOCK)

MARKETS ACT, 1966. As per this act no persons shall, within a notified area , set
up, establish or use, or continue are allow to be continued, any place for the
purchase, sale, storage, weighment, curing, pressing or processing of any notified
agricultural produce or products of livestock or for the purchase or sale of livestock
except under and in accordance with the conditions of a license granted to him by
the market committee

MODEL ACT:The StateAgricultural Produce Marketing(Development

& Regulation Act, 2003) 9th September 2003

Salient Features of the Model Act on Agricultural Marketing

Background

Agricultural Markets in most parts of the Country are established and regulated under the State APMC
Acts. The whole geographical area in the State is divided and declared as a market area wherein the
markets are managed by the Market Committees constituted by the State Governments. Once a particular
area is declared as a market area and falls under the jurisdiction of a Market Committee, no person or
agency is allowed freely to carry on wholesale marketing activities.

An efficient agricultural marketing is essential for the development of the agricultural sector as it provides
outlets and incentives for increased production, the marketing system contributes greatly to the
commercialization of subsistence farmers. Worldwide Governments have recognized the importance of
liberalized agricultural markets. Task Force on Agricultural Marketing Reforms set up by the Ministry has
suggested promotion of new and competitive Agricultural Markets in private and cooperative sectors to
encourage direct marketing and contract farming programmes, facilitate industries and large trading
companies to undertake procurement of agricultural commodities directly from the farmer‟s fields and to
establish effective linkages between the farm production and retail chains. There is a necessity to integrate
farm production with national and international markets to enable farmers to undertake market driven
production plan and adoption of modern marketing practices.

If agricultural markets are to be developed in private and cooperative sectors and to be provided a level
competitive environment vis-à-vis regulated markets, the existing framework of State APMC Acts will
have to undergo a change. The State has to facilitate varying models of ownership of markets to accelerate
investment in the area and enable private investment in owning, establishing and operating markets.
Working of existing Government regulated markets also needs to be professionalized by promoting public
private partnership in their management. Appropriate legal framework is also required to promote direct
marketing and contract farming arrangements as alternative marketing mechanism. Therefore, there is a
need to formulate a new model law for agricultural market.

 Agricultural marketing is witnessing major changes world over, owing to liberalization of trade in
agricultural commodities. To benefit farming community for the new global market access
opportunities, the internal agricultural marketing system in the country needs to be integrated and
strengthened. In this context, Government of India in the Ministry of Agriculture appointed an
Expert Committee on 19th December 2000 followed by an Inter Ministerial Task Force to review
the present system of agricultural marketing in the country and to recommend measures to make
the system more efficient and competitive. The Committee and the Task Force in their Reports of
June 2001 and May 2002 respectively, have suggested various reforms relating to agricultural
marketing system as well as in policies and programs for development and strengthening of
agricultural marketing in the country. The reports have noted that the situation of control over
agricultural markets by the State has to be eased to facilitate greater participation of the private
sector, particularly to engender massive investments required for the development of marketing
infrastrure and supporting services.

 The recommendations contained in these Reports were discussed at the National Conference of
State Ministers organized by the Ministry of Agriculture, Govt. of India at Vigyan Bhavan, New
Delhi on 27th September 2002 and later by a Standing Committee of State Ministers constituted for
the purpose under the chairmanship of Sri Hukumdeo Narayan Yadav, Union Minister of State for
Agriculture on 29th January 2003. In the Conference as well as the Standing Committee, State
Governments expressed the view that reforms in the agricultural marketing sector were necessary
to move away from a regime of controls to one of regulation and competition. In view of
liberalization of trade and emergence of global markets, it was necessary to promote development
of a competitive marketing infrastructure in the country and to bring about professionalism in the
management of existing market yards and market fee structure. While promoting the alternative
marketing structure, however, Government needs to put in place adequate safeguards to avoid any
exploitation of farmers by the private trade and industries. For this, there was a need to formulate
model legislation on agricultural marketing.

 The draft model legislation titled the State Agricultural Produce Marketing (Development and
Regulation) Act, 2003, provides for establishment of Private Markets/ yards, Direct Purchase
Centres, Consumer/Farmers Markets for direct sale and promotion of Public Private Partnership in
the management and development of agricultural markets in the country. It also provides for
separate constitution for Special Markets for commodities like Onions, Fruits, Vegetables,
Flowers etc. A separate chapter has been included in the legislation to regulate and promote
contract-farming arrangements in the country. It provides for prohibition of commission agency in
any transaction of agricultural commodities with the producers. It redefines the role of present
Agricultural Produce Market Committee to promote alternative marketing system, contract
farming, direct marketing and farmers/consumers markets. It also redefines the role of State
 Agricultural Marketing Boards to promote standardization, grading, quality certification, market
led extension and training of farmers and market functionaries in marketing related areas.
Provision has also been made in the Act for constitution of State Agricultural Produce Marketing
Standards Bureau for promotion of Grading, Standardization and Quality Certification of
Agricultural Produce. This would facilitate pledge financing, E-trading, direct purchasing, export,
forward/future trading and introduction of negotiable warehousing receipt system in respect of
agricultural commodities.

 The Committee hopes that the model legislation will enable nationwide integration of agricultural
markets, facilitate emergence of competitive agricultural markets in private and cooperative
sectors, create environment conducive to massive investments in marketing related infrastructure
and lead to modernization and strengthening of existing markets.

Salient Features

1.The Title of the Act is changed to highlight the objective of development of agricultural marketing in
addition to its regulation under the Act. Accordingly, the Preamble of the Act is redrafted to provide for
development of efficient marketing system, promotion of agri-processing and agricultural exports and to
lay down procedures and systems for putting in place an effective infrastructure for the marketing of
agricultural produce.

2.Legal persons, growers and local authorities are permitted to apply for the establishment of new markets
for agricultural produce in any area. Under the existing law, markets are set up at the initiative of State
Governments alone. Consequently, in a market area, more than one market can be established by private
persons, farmers and consumers.

3.There will be no compulsion on the growers to sell their produce through existing markets administered
by the Agricultural Produce Market Committee (APMC). However, agriculturist who does not bring his
produce to the market area for sale will not be eligible for election to the APMC.

4.Separate provision is made for notification of „Special Markets‟ or „Special Commodities Markets‟ in any
market area for specified agricultural commodities to be operated in addition to existing markets.

5.The APMC have been made specifically responsible for:

 ensuring complete transparency in pricing system and transactions taking place in market area;
 providing market-led extension services to farmers;
 ensuring payment for agricultural produce sold by farmers on the same day;
 promoting agricultural processing including activities for value addition in agricultural produce;
and
 publicizing data on arrivals and rates of agricultural produce brought into the market area for sale.
  Setup and promote public private partnership in the management of agricultural markets.

6.Provision made for the appointment of Chief Executive Officer of the Market Committee from among the
professionals drawn from open market.

7. A new Chapter on „Contract Farming‟ added to provide for compulsory registration of all contract
farming sponsors, recording of contract farming agreements, resolution of disputes, if any, arising out of
such agreement, exemption from levy of market fee on produce covered by contract farming agreements
and to provide for indemnity to producers‟ title/ possession over his land from any claim arising out of the
agreement.

8.Model specification of contract farming agreements provided in the Addendum to the model law.

9.Provision made for direct sale of farm produce to contract farming sponsor from farmers‟ field without
the necessity of routing it through notified markets.

10.Provision made for imposition of single point levy of market fee on the sale of notified agricultural
commodities in any market area and discretion provided to the State Government to fix graded levy of
market fee on different types of sales.

11.Licensing of market functionaries is dispensed with and a time bound procedure for registration is laid
down. Registration for market functionaries provided to operate in one or more than one market areas.

12.Commission agency in any transaction relating to notified agricultural produce involving an agriculturist
is prohibited and there will be no deduction towards commission from the sale proceeds payable to
agriculturist seller.

13.Provision made for the purchase of agricultural produce through private yards or directly from
agriculturists in one or more than one market area.

14.Provision made for the establishment of consumers‟/ farmers‟ market to facilitate direct sale of
agricultural produce to consumers.

15.Provision made for resolving of disputes, if any, arising between private market/ consumer market and
Market Committee.

16.State Governments conferred power to exempt any agricultural produce brought for sale in market area,
from payment of market fee.

17.Market Committees permitted to use its funds among others to create facilities like grading,
standardization and quality certification; to create infrastructure on its own or through public private
partnership for post harvest handling of agricultural produce and development of modern marketing
system.

18.For the Chairmanship of State Agricultural Marketing Board, two options provided namely Minister in-
charge of Agricultural Marketing as ex-officio or alternatively to be elected by the Chairman/ members of
Market Committees.

19.The State Agricultural Marketing Board made specifically responsible for:

(i) setting up of a separate marketing extension cell in the Board to provide market-led extension services
to farmers;

(ii) promoting grading, standardization and quality certification of notified agricultural produce and for the
purpose to set up a separate Agricultural Produce Marketing Standards Bureau.

20.Funds of the State Agricultural Marketing Board permitted to be utilized for promoting either on its own
or through public private partnership, for the following:

 market survey, research, grading, standardization, quality certification, etc.;

 Development of quality testing and communication infrastructure.
 Development of media, cyber and long distance infrastructure relevant to marketing of agricultural
and allied commodities

Powers, duties and functions of the Market Committee

(1) Subject to the provisions of this Act, it shall be the duty of the Market
Committee
.
(i) to implement the provisions of this Act., the rules and the bye-laws
made thereunder in the market area;

to provide such facilities for marketing of agricultural produce therein as

the Director/Managing Director/Board or the State Government may from
time to time direct;

to do such other acts as may be required in relation to the superintendence,

direction and control of market or for regulating marketing of agricultural
 produce in any place in the market area, and for the purposes connected
with the matters aforesaid, and for that purpose may exercise such powers
and discharge such functions as may be provided by or under this Act.

and to do all such other acts to bring about complete transparency in

pricing system and transactions taking place in market area.

(2) Without prejudice to the generality of the forgoing provisions :-

(a) Market Committee may

(i) maintain and manage the market yards and sub-market yards within the
market area;

(ii) provide the necessary facilities for the marketing of agricultural

produce within the market yards and outside the market yards and within
the sub-market yards and outside the sub-market yards in the market area;

(iii) register or refuse registration to market functionaries and renew,

suspend or cancel such registration, supervise the conduct of the market
functionaries and enforce conditions of Registration;

(iv) regulate or supervise the auction of notified agricultural produce in

accordance with the provision and procedure laid down under the rules
made under this Act or bye-laws of the Market Committee ;

(v) conduct or supervise the auction of notified agricultural produce in

accordance with the procedure 1aid down under the rules made under this
Act or bye-laws of the Market Committee ;

(vi) regulate the making, carrying out and enforcement or cancellation of

agreements of sales, Weighment, delivery, payment and all other matters
relating to the market of notified agricultural produce in the manner
prescribed;

(vii) provide for the settlement of all disputes between the seller and the
buyer arising out on any kind of transaction connected with the marketing
of notified agricultural produce and all matters ancillary thereto;

(viii) take all possible steps to prevent adulteration of notified agricultural

produce;

 make arrangements for employing by rotation, Weighmen and

hammals for weighing and transporting of goods in respect of
transactions held in the market yard/ sub yards.
 Set up and promote public private partnership in management of
the Agricultural Markets.

 To promote public private partnership for carrying out extension

activities in its area viz., collection, maintenance and
dissemination of information in respect of production, sale
storage, processing, prices and movement of notified agricultural
produce;

 take measures for the prevention of purchases and sales below the
minimum support prices as fixed by the Government from time to
time;

 levy, take, recover and receive rates, charges, fees and other sums
of money to which the Market Committee is entitled;

 employ the necessary number of officers and servants for the

efficient implementation of the provisions of this Act, the rules
and the bye-laws as prescribed;

 regulate the entry of persons and vehicles, traffic into the market
yard and sub-market yard vesting in the Market Committee;

 prosecute persons for violating the provisions of this Act, the

rules and the bye-laws and compound such offences;

 acquire land and dispose of any movable or immovable property

for the purpose of efficiently carrying out its duties;

 impose penalties on persons who contravenes the provisions of

this Act, the rules or the bye-laws or the orders or directions
issued under this Act, the rules or the bye-laws by the Market
Committee , its Chairman or by any officer duly authorised in this
behalf;

 institute or defend any suit, prosecution, action, proceeding,

application or arbitration and compromise such suit, action
proceeding, application or arbitration;

 Pay, pension, allowances, gratuities, contribution towards leave

allowance, pensions or provident fund of the officers and servants
employed by the Market Committee in the manner prescribed;
 administer Market Committee fund referred to in section-58 and
maintain the account thereof in the prescribed manner;

 keep a set of standard weights and measure in each principal

market yard and sub-market yard against which Weighment and
measurement may be checked;

 inspect and verify scales, weights and measures in use in a market

area and also the books of accounts and other documents
maintained by the market functionaries in such manner as may be
prescribed;

 arrange to obtain fitness (health) certificate from veterinary doctor

in respect of animals, cattle birds etc., which are bought or sold in
the market yards/market area;.

 carry out publicity about the benefits of regulation, the system of

transaction, facilities provided in the market yard etc. through
such means as poster, pamphlets, hoardings, cinema slides, film
shows, group meetings, electronic media etc., or through any
other means considered more effective or necessary;

 ensure payment in respect of transactions which take place in the

market yard to be made on the same day to the seller, and in
default to seize the agricultural produce in question along with
other property of the person concerned and to arrange for re-sale
thereof and in the event of loss, to recover the same from the
original buyer together with charges for recovery of the losses, if
any, from the original buyer and effect payment of the price of the
agricultural produce to the seller;

 recover the charges in respect of Weighmen and hammals and

distribute the same to Weighmen and hammals if not paid by the
purchaser/seller as the ease may be;

 with the prior sanction of the State Government/

Director/Managing Director undertake the constructions of
godowns, roads and such other infrastructure in the market
yard/sub yard and market area as may be required to facilitate
movement of agricultural produce to the market for benefit of
producer sellers and traders operating in the market area.

 collect and maintain information in respect of production, sale,

storage, processing, prices and movement of notified agricultural
produce and disseminate such information as directed by the
Director;
  with a view to maintain stability in the market (a) take suitable
measures to ensure that traders do not buy agricultural produce
beyond their capacity and avoid risk to the sellers in disposing of
the produce; and (b) grant licences only after obtaining necessary
security in cash as bank guarantee according to the capacity of the
buyers;

 to promote and undertake agricultural processing including

activity for value addition in agriculture produce.

(3) With the prior sanction of the Director/Managing Director, the Market
Committee may undertake the following:

(i) construction of roads, godowns and other infrastructure in the market

area to facilitate marketing of agricultural produce and for the purpose give
grant or advance funds to the Board, the Public Works Department or any
other Department or undertaking of the State Government or any other
agency authorized by the Director/ Managing Director.

(ii) maintain stocks of fertilizer, pesticides, improved seeds, agricultural

equipments, inputs for sale.

(iii) to provide on rent storage facilities for stocking of agricultural produce

to agriculturists.

(iv) to give grant for maintenance of the "Goshalas" recognized by the

State Govt.

(4) In addition to above the Market Committee shall also be responsible for

(i) the maintenance of proper checks on all receipts and payment by its
officers;

(ii) the proper execution of all works chargeable to the Market Committee
fund

(iii) keeping a copy of this Act and of the rules and notifications issued
thereunder and of its bye-laws, open to inspection free of charge at its
office; and

(iv) arranging for preventive measures against spread of contagious cattle

disease.
 (5) To promote and encourage e-trading, market committee may establish
regulatory system, create infrastructure and undertake other activities and
steps needed thereto.

Lecture no:7: Cooperative marketing- meaning-structure- Functions of

cooperative marketing societies-National Agricultural Cooperative Marketing
Federation (NAFED) and State Agricultural Cooperative Marketing
Federations(MARKFED)- State Trading-objectives-Types of state trading.
------------------------------------------------------------------------------------------------------------
---------
Cooperative Marketing-meaning:
Co operative marketing organizations are association of producers for the collective
marketing of their produce and for securing for the members the advantages that result
from large-scale business which an individual cultivator cannot secure because if his
small marketable surplus.
In a co operative marketing society, the control of the organization is in the hands of the
farmers, and each member has one vote irrespective of the number of shares purchased
by him. The profit earned by the society is distributed among the members on the basis of
the quantity of the produce marketed by him. In other words, co operative marketing
societies are established for the purpose collectively marketing the products of the
member farmers. It emphasizes the concept of commercialization. Its economic motives
and character distinguish it from other associations. These societies resemble private
business organization in the method of their operations: but they differ from the
capitalistic system chiefly in their motives and organizations
Functions:
The main functions of co operative marketing societies are:
i) To market the produce of the members of the society at fair prices;
ii) To safeguard the members for excessive marketing costs and malpractices;
iii) To make credit facilities available to the members against the security of the
produce brought for sale;
iv) To make arrangements for the scientific storage of the members‟ produce;
v) To provide facilities of the grading and market information which may help them
to get a good price for their produce
 vi) To introduce the system of pooling so as to acquire a better bargaining power than
the individual members having a small quantity of produce for marketing
purposes;
vii) To act as an agent of the government for the procurement of food grains and for
the implementation of the price support policy
viii) To arrange for the export of the produce of the members so that they may get
better returns;
ix) To make arrangements for the transport of the produce of the members from the
villages to the market on collective basis and bring about a reduction in the
transportation; and
x) To arrange for the supply of the inputs required by the farmers, such as improved
seeds, fertilizers, insecticides and pesticides.

The advantages that co-operative marketing can confer on the farmer are multifarious,
some of which are listed below.

1. Increases bargaining strength of the farmers

Many of the defects of the present agricultural marketing system arise because often one
ignorant and illiterate farmer (as an individual) has to face well-organised mass of clever
intermediaries. If the farmers join hands and for a co-operative, naturally they will be less
prone to exploitation and malpractices. Instead of marketing their produce separately,
they will market it together through one agency.
2. Direct dealing with final buyers
The co-operatives can altogether skip the intermediaries and enter into direct relations
with the final buyers. This practice will eliminate exploiters and ensure fair prices to both
the producers and the consumers.
3. Provision of credit
The marketing co-operative societies provide credit to the farmers to save them from the
necessity of selling their produce immediately after harvesting. This ensures better
returns to the farmers.
4. Easier and cheaper transport
Bulk transport of agricultural produce by the societies is often easier and cheaper.
Sometimes the societies have their own means of transport.
5. Storage facilities
The co-operative marketing societies generally have storage facilities. Thus the farmers
can wait for better prices.
6. Grading and standardization
This task can be done more easily for a co-operative agency than for an individual
farmer. For this purpose, they can seek assistance from the government or can even
evolve their own grading arrangements.
7. Market intelligence
The co-operatives can arrange to obtain data on market prices, demand and supply and
other related information from the markets on a regular basis and can plan their activities
accordingly.
8. Influencing marketing prices
Wherever strong marketing co-operative are operative, they have bargained for and have
achieved, better prices for their agricultural produce.
9. Provision of inputs and consumer goods
The co-operative marketing societies can easily arrange for bulk purchase of agricultural
inputs, like seeds, manures fertilizers etc. and consumer goods at relatively lower price
and can then distribute them to the members.
10. Processing of agricultural produce
The co-operative societies can undertake processing activities like crushing seeds,
ginning 'and pressing of cotton, etc. In addition to all these advantages, the co-operative
marketing system can arouse the spirit of self-confidence and collective action in the
farmers without which the programme of agricultural development, howsoever well
conceived and implemented, holds no promise to success.
Cooperative Marketing System in India
Though the above measures have improved the system of agricultural marketing to some
extent, a major part of the benefits has been derived by large farmers, who have adequate
marketable surplus. However, the small and marginal farmers continue to sell a major
part of their produce to moneylenders to meet their credit needs and these moneylenders
offer them very low prices. Therefore it is essential to form cooperatives of the small and
marginal farmers to enable them to obtain fair prices for their produce
National Agricultural Cooperative Marketing Federation (NAFED)

Objectives of Nafed:

The objectives of the NAFED shall be

1) to organise, promote and develop marketing, processing and storage of

agricultural, horticultural and forest produce,
2) to distribute agricultural machinery, implements and other inputs,
3) undertake inter-State, import and export trade, wholesale or retail as the case may
be and
4) to act and assist for technical advice in agricultural production for the promotion
and the working of its members and cooperative marketing, processing and supply
societies in India.

In furtherance of these objectives, the NAFED may undertake one or more of the
following functions/activities :

1. to facilitate, coordinate and promote the marketing and trading activities of the
cooperative institutions in agricultural and other commodities, articles and goods;
2. to undertake or promote on its own or on behalf of its member Institutions or the
Government or Government Organisations, Inter-State and international trade
and commerce and undertake, wherever necessary, sale, purchase, import, export
and distribution of agricultural commodities, horticultural and forest produce.
3. to undertake purchase, sale and supply of agricultural products, marketing and
processing requisites, such as manure, seeds, fertiliser, agricultural implements
and machinery, packing machinery, construction requisites, processing
machinery for agricultural commodities, forest produce, dairy, wool and other
animal products;
4. to act as warehouseman under the Warehousing Act and own and construct its
own godowns and cold storages;
5. to act as agent of any Government agency or cooperative institution, for the
purchase, sale, storage and distribution of agricultural, horticultural, forest and
 animal husbandry produce, wool, agricultural requisites and other consumer
goods;
6. to act as insurance agent and to undertake all such work which is incidental to the
same;
7. to organise consultancy work in various fields for the benefit of the cooperative
institutions in general and for its members in particular;
8. to undertake manufacture of agricultural machinery and implements, processing,
packing, etc. and other production requisites and consumer articles.
9. to set up storage units for storing various commodities and goods, by itself or in
collaboration with any other agency in India or abroad;
10. to maintain transport units of its own or in collaboration with any other
organisation in India or abroad for movement of goods on land, sea, air etc.;
11. to collaborate with any international agency or a foreign body for development of
cooperative marketing, processing and other activities for mutual advantage in
India or abroad;
12. to undertake marketing research and dissemination of market intelligence;
13. to subscribe to the share capital of other cooperative institutions as well as other
public, joint and private sector enterprises if and when considered necessary for
fulfilling the objectives of NAFED.
14. to arrange for the training of employees of marketing/processing/supply
cooperative societies;
15. to maintain common cadres/pools of managerial/technical personnel required by
the marketing/processing/supply cooperative societies;
16. to establish processing units for processing of agricultural, horticultural and
forest produce and wool;
17. to undertake grading, packing and standardisation of agricultural produce and
other articles;
18. to acquire, take on lease or hire, lands, buildings, fixtures and vehicles and to
sell, give on lease or hire them for the business of NAFED.
19. to advance loans to its members and other cooperative institutions on the security
of goods or otherwise;
20. to guarantee loans or advances or give undertakings to any Society or Company
in which the Federation has a shareholding or financial involvement as a
 promoter to be able to assist its development or expansion or for starting any
industrial undertaking by such societies/companies;
21. to guarantee loans or advances or give undertakings on behalf of any such
society or company as mentioned above to any financing institutions:
22. to do all such things or undertake such other business or activities as may be
incidental or conducive to the attainment of any or all of the above objects.

Andhra Pradesh State Agricultural Cooperative Marketing

Federation(APMARKFED )

ORGANISATION:
A.P. Markfed (Andhra Pradesh State Co-operative Marketing Federation Ltd ) was
established in the year 1957 with head-quarters at Hyderabad. It is a federation of
Marketing Co-operative Societies in A.P.

Main Objective :

The main objective is of helping the farmers to secure better price for their produce by
taking care of their market needs and providing agricultural inputs. Against this objective
the Markfed's present activity consists of sale of farm inputs like chemical fertilizers,
pesticides & seeds, maintenance of godowns & procurement of Agricultural commodities
through its member societies.

MEMBER ORGANISATIONS:
The total membership of the organisation at present is 1475. The break up of the
membership is as follows:

Member Organisations No's

District Co-operative Marketing Societies 22
Primary Agricultural Co-operative Societies 1451
Andhra Pradesh Co-operative bank 1
Government of Andhra Pradesh 1
Total 1475

District Co-operative Marketing Societies and Primary Agricultural Co-operative

Societies help in the supply of inputs to the farmers and marketing the commodities
produced by the farmers.

The Andhra Pradesh Co-operative bank help in financing the activities of the District Co-
operative Marketing Societies and Primary Agricultural Co-operative Societies.

What is a State trading enterprise?

State trading is a common feature of many economies where agriculture is an important

sector of trade. Thus, State trading enterprises are found in developed countries with
significant agricultural trading interests, as well as in agriculturally-based developing
countries. The heavy emphasis on agriculture in State trading activities would seem to
indicate governments' belief that State trading is an appropriate means of implementing
agriculture-related policy objectives, such as providing price support for important
agricultural products or ensuring food security. In the area of industrial goods, State
trading may arise as a by-product of the nationalization of an ailing industry or as a
means of pursuing government policies on products or industries considered to have
strategic importance.

Objectives:
The objectives of state trading are:
i) To make available supplies of essential commodities to consumers at reasonable
prices on a regular basis;
ii) To ensure a fair price of the produce to the farmers so that there may be an
adequate incentive to increase production;
iii) To minimize violent price fluctuations occurring as a result of seasonal variations
in supply and demand;
iv) To arrange for the supply of such inputs as fertilizers and insecticides so that the
tempo of increased production is maintained;
v) To undertake the procurement and maintenance of buffer stock, and their
distribution, whenever and wherever necessary;
vi) To arrange for storage, transportation, packing and processing;
vii) To conduct surveys and provide the required statistics to the government so that it
may improve the conditions of the farmers; and
viii) To check hoarding, black marketing and profiteering.

Types of state trading:

State trading may be partial or complete, depending upon the extent of intervention
desired by the government.
i) Partial state trading
 In partial state trading, private traders and government coexist. Traders are
free to buy and sell in the market. The government may place some
restrictions on them, such as declaration of stocks, limits on the stock which
can be held at a point of time and submission of regular accounts. The
government enters the market for the purchase of commodity directly from
producers at notified procurement price. It undertakes the distribution of
commodities to consumer through a net work of fair price shops. In this way,
it safeguards the interest of producers and consumers alike, and keeps a check
on the undesirable activities of traders.
ii) Complete state trading
This is extreme form of trading adopted by the government when partial state
trading fails to ensure fair prices to producers and make goods available to
consumers at responsible prices. The purchase and sale of commodities is
undertaken entirely by the government or its agencies. Private traders are not
allowed to enter the market for purchase or sale. The government remains the
sole purchaser and distributor of the commodity.
Complete state trading necessitates the outlay of huge finance, and the
provision of storage facilities at important production and consumption
centers, and calls for appointment of efficient men so that the purchase and
distribution functions of professional traders may be effectively taken over by
a governmental agency. In India, complete whole sale trade in wheat was
taken over by the government in 1973; but it had to be given up very soon.
Lecture No-8:

Warehousing-meaning- warehousing in india- Central Warehousing

Corporation(CWC)- working of warehouses -advantages- State Warehousing
Corporations (SWC)- Food Corporation of India(FCI)- objectives- functions

Meaning:
Warehousing: warehouses are scientific storage structures especially constructed
for the protection of quantity and quality of stored products
Warehousing may be defined as the assumption of responsibility for the storage
of goods. It may be called the protector of national health, for the produce stored
in warehouses is preserved and protected against rodents, insects and pests. and
against the ill-effect of moisture and dampness.
The warehousing scheme in India is an integrated scheme of scientific
storage, rural credit, price stabilization and market intelligence and is intended to
supplement the efforts of co-operative institutions.
The important functions of warehouses are :
1.Scientific storage: Here, a large bulk of agricultural commodities may be
stored. The product is protected against quantitative and qualitative losses by the
use of such methods of preservation as are necessary.
2.Financing: Nationalized banks advance credit on the security of Warehouse
receipt issued for the stored products to the extent of 75 % of their value
3.Price stabilization: Warehouses help in price stabilization of agricultural
commodities by checking the tendency to making post-harvest sales among the
farmers. Warehouse helps in staggering the supplies throughout the year. Thus
helps in stabilization of agricultural prices.
4. Market intelligence: Warehouses also offer the facility of market information
to persons who hold their produce in them. They inform them about the prices
prevailing in the period, and advice them when to market their products.
This facility helps in preventing distress sales for immediate money needs
or because of lack of proper storage facilities. It gives the producer holding
 power; he can wait for the emergence of favourable market conditions and get the
best value for his product

Warehousing in India:
In 1928, the Royal commission on agriculture underscored the need for a
Warehousing system in India. The central banking enquiry committee, 1931, too,
drew attention to this need. The Reserve bank of India emphasized the need for
Warehouses as early as in 1944, and proposed that every state government enact
legislation to regulate the functioning of warehouses. The All India Rural Credit
Survey Committee of the Reserve Bank of India (set up in 1951 and submitted its
report in 1954) also made comprehensive recommendations for the development
of Warehousing as an integrated scheme of rural credit and marketing. As a result
of the recommendations of the committee, the Government of India enacted the
Agricultural produce (Development and Warehousing) corporation act, 1956. The
act provided for:
a) The establishment of a National Co-operative Development and
Warehousing board ( which was set up on 1st September, 1956);
b) The establishment of central Warehousing corporation (Which was
established on 2 nd march, 1957); and
c) The establishment of state Warehousing Corporation in all states in the
country (which were established in various states between July 1957
and August 1958).

Central Warehousing Corporation:

Central Warehousing Corporation(CWC) is a premier warehousing agency in
India, established during 1957 providing logistics support to the agricultural sector, and
one of the biggest public warehouse operators in the country offering logistics services to
a diverse group of clients. CWC is operating 475 Warehouses across the country with a
storage capacity of 10.3 million tonnes providing warehousing services for a wide range
of products ranging from agricultural produce to sophisticated industrial products.

Warehousing activities of CWC include

 foodgrain warehouses,
  industrial warehousing,
 custom bonded warehouses,
 container freight stations,
 inland clearance depots and aircargo complexes.
 Apart from storage and handling, CWC also offers services in the area of clearing
& forwarding, handling & transporation, procurement & distribution,
disinfestation services, fumigation services and other ancillary activities.
 CWC also offers consultancy services/ training for the construction of
warehousing infrastructure to different agencies.

Functions:
 To acquire and build godowns and Warehouses at suitable places in India.

To run Warehouses for storage of agricultural produce, seeds, fertilizers and notified
commodities for individuals, co-operatives and other institutions.
 To act as an agent of the govt. for purchase, sale, storage and distribution of the
above commodities.

 To arrange facilities for the transport of above commodities.

 To subscribe to the share capital of SWC.

State Warehousing Corporation: SWCs were operating1440 Warehouses with total

capacity of over 131.38 lakh tones.The total share capital of the SWC is contributed
equally by the concerned state govt. and CWC.The area of operation of the SWC are
centres of district importance
A.P. State Warehousing Corporation: The A.P.State Warehouse Corporation was
established in August, 1958 under Sub-Section 1, Section 18 of the Warehousing
Corporation Act, 1958 (Central Amended Act of 1962) enacted by the Parliament.
APSWC is a Corporation having 50% Share Capital by Central Warehousing Corporation
and 50% share capital by the Govt. of A.P. It has its Corporate Office at Hyderabad with
8 Regional Offices and 135 Warehouses scattered all over the state.

 The Warehousing Scheme envisages providing storage facilities for food grains and
other agriculture commodities, seeds, manures and fertilizers to minimize losses and
deterioration in storage.
  The scheme also aims to enable farmers to have easy and cheap credit facilities from
Banks against pledge of the Warehouse Receipt to improve the holding capacity of the
producer to avoid distress sales in harvesting seasons.
 To realize the above objectives, the Warehousing Corporation is empowered to a
acquire and build Warehouses for storage of agricultural produce, seeds, fertilizers and
other notified commodities .
 to act as an agent of the Central Warehousing Corporation or of the Government, for
the purpose of purchases, sales storage, distribution etc., of agricultural commodities in
time of need.

ORGANIZATIONAL SET UP OF THE CORPORATION :

According to Section20(a) of the Warehousing Corporation Act 1962, the General
Superintendence and Management of the affairs of the State Warehousing Corporation
are vested in a Board consisting of 11 Directors of whom 5 are nominated by the Central
Warehousing Corporation, The remaining 6 Directors are from the State. The Chairman
of the Board is appointed by the State Government with the prior approval of the Central
Warehousing Corporation.

FOOD CORPORATION OF INDIA

An efficient management of the food economy with a view to ensuring an equitable
distribution of grains of food grains at reasonable prices to the vulnerable sections of
society is essential in the present socio-economic environment of the country. The
government felt the necessity of an organization which can act as its main agency for
handling food grains., acquire a commanding position in the food grain trade as a
countervailing force to the speculative activities of private trades and, at the same time,
work on commercial lines. Towards the end of 1964, Parliament decided to transfer the
government‟s function of trading in food grains to the public sector. Legislation was
enacted; and the food corporation India (FCI)WAS BORN ON January 1,1965.

Food Corporation of India was setup on 14th January 1965 under Food Corporations Act
1964 to implement the following objectives of the National Food Policy :

i. Effective price support operations for safeguarding the interests of the farmers
ii. Distribution of foodgrains throughout the country for Public Distribution System
iii. Maintaining satisfactory level of operational and buffer stocks of foodgrains to ensure
National Food Security

It is the largest Corporation in India and probably the largest supply chain management in
Asia. It operates through 5 zonal offices and 24 regional offices. Each year, the Food
Corporation of India purchases roughly 15-20 per cent of India's wheat output and 12-15
per cent of its rice output. The purchases are made from the farmers at the rates declared
by the Govt. of India.

The Food Corporation of India initially operated in the southern part of the country.
Later, it extended its services throughout the country. Today, the FCI is unrivalled food
marketing agency, serving the interest of both the farmers and consumers. Its market
operations prevent the speculative trader from acting against the interests of the farmers
by assuring him a remunerative price for his produce, it ensures a prompt and
uninterrupted supply of food grains to the vulnerable sections of the society all over the
country. Operationally the FCI reaches the remotest corners of the country through its
vast network of offices and storage centers. Financially, it is one of the largest public
sector undertakings, with an annual turnover of over Rs.25400 crores.
FUCTIONS:
The main functions of the Food Corporation of India are:
a) To produce a sizable portion of the marketable surplus of foodgrains and other
agricultural commodities at incentive prices from the farmers on behalf the central and
state governments
b) To make timely releases of the stocks to public distribution system(Fair price shops and
controlled item shops)so that consumer prices may not raise unduly and unnecessarily
c) To minimise seasonal price fluctuations and inter regional price variation in agricultural
commodities by establishing a purchasing and distribution network and
d) To build up a sizable buffer stock of food grains to meet the situation that may arise as
result of short falls in internal procurement and imports

Lecture No 9:
Quality control-Agricultural products-AGMARK-CODEX -need of CODEX
certification- Relevance
---------------------------------------------------------------------------------------------------------
QUALITY CONTROL
To ensure the confidence of consumers, it is essential that grading is done in accordance
with the standards that have been set. For this purpose, the inspection of the goods at
regular intervals by a third party is essential.
Inspection involves the testing of graded goods with a view to determining
whether they conform to the prescribed standards. It ensures quality control. For the
purposes of inspection, samples of product are drawn at various stages- from the
manufacturer, the market middleman or the consumer at his door steps- and are tested in
the laboratory. These inspections are carried out by inspectors appointed by the
government, and not by a producer or a buyer.

Regular inspection creates confidence among the buyers. Producers, too, know that there
is someone who checks the standards of the produce graded by them. This avoids the
temptation of adopting such malpractices in the grading as mixing of the inferior grade
produce, etc. after laboratory tests, if the produce is below standards, the licence of the
grader is cancelled and legal action is initiated against him.
There were 566 approved grading and/or testing laboratories in the
country at end of March, 1984. Their number increased to 633 in 1990-91 and further
to700 in 1991-92. Presently, there are111 state-owned grading laboratories, 549
laboratories of the licensees (private packers), nine laboratories in co-operative sector and
49 private and commercial laboratories with a total of 718 approved grading and/or
testing laboratories in the country which are engaged in the analysis in the analysis and
determination of AGMARK grades.
QUALITY CONTROL- AGRICULTURAL PRODUCTS
The graded products according to the standards fixed by the Agriculture Marketing
Advisor, Government of India, bear the label „AGMARK‟.
AGMARK is the abbreviation of Agriculture Marketing. It the
quality certification marks under the Central Agricultural Produce (Grading and
Marketing) Act, 1937. This label indicates that the purity and the quality of the product
on the basis of the standards that have been laid down. The labels of different colours are
used to indicate bthe grade of the product. The AGMARK labels are printed on the
special quality paper and issued by the Agriculture Marketing Advisor. They are serially
numbered, and the firm is required to maintain the account of the labels, which are issued
to the grader, in a register. It is a voluntary scheme. Interested traders and manufacturers
are given licence to grade their products under AGMARK quality certification mark.
AGMARK label is attached to the container of the product in such
a way that it is not possible to remove the contents of the package with out tampering the
AGMARK label. Each AGMARK package bears the date of the packing and date of
expiry of the product. AGMARK products are pretested and certified for the quality.
AGMARK products are of assured quality and different from adulterated and spurious
goods. If any AGMARK product purchased by the consumer is found to be defective, the
consumer gets the product replaced or gets the money back as per the procedure laid out.
There are about 14,000 licensees manufacturing and marketing their products under
AGMARK quality certification marks.
"Agmark grading" means grading of an article in accordance with the grade standards
prescribed under the provisions of the Act;
"Agmark label" means the label specifying name of commodity, grade designation and
bearing prescribed insignia;
"Agmark replica" means a grade designation mark in lieu of Agmark label consisting of
prescribed design with the word "AGMARK" and the Certificate of Authorisation
number;

"Certificate of Agmark Grading" means a certificate in specified proforma issued by an

authorised Officer of the Directorate of Marketing and Inspection or a person
designated by the approved laboratory to issue the same in respect of agmark graded
consignment meant for export.

GROUPWISE LIST OF THE COMMODITIES FOR WHICH AGMARK GRADE

STANDARDS HAVE BEEN FORMULATED UNDER THE AGRICULTURAL
PRODUCE
(GRADING AND MARKING) ACT, 1937 (as on 31-03-2011)
Name of the Group: No. of commodities notified
1. Food grain and allied products 30
2. Fruits and Vegetables 44
3. Spices and condiments 26
4. Edible Nuts 8
5. Oil Seeds 15
6. Vegetable Oils and Fats 19
7. Oil cakes 8
8. Essential oils 8
9. Fibre crops 5
10. Live stock, Dairy and 10
poultry products
11. Other products 32
TOTAL 205

MANUFACTURED PRODUCTS
 Manufactured products are grades in accordance with the standards laid down by
the Indian Standards Institution, now Bureau of Indian Standards and bear the ISI label.
Manufacturers have to use proper ingredients in specified proportions and follow the
technique of manufacture given in the standards laid down by the Indian Standards
Institution. The ISI label is an indicator of the good quality of the product.

Quality management in food:

(a) HACCP

Indian manufacturers need to upgrade the quality of the products by adopting

HACCP (Hazard Analysis and Critical Control Point), a food safety system, which is
an internationally recognized auditing method. HACCP focuses on chemical, physical
and microbial hazards.
HACCP and Risk Analysis is a modern concept of quality management applied to
food items. The concept of HACCP gained recognition and acceptance globally as a
system of choice for good safety due to following reasons:
i. To identify food safety hazards for different farm products and their
process of production.
ii. To accept responsibility for food safety instead of relying upon
compliance with official regulation and inspection by food safety
inspectors.
iii. Necessity of creating awareness among people to realize their role and
responsibility for food safety.
iv. To improve the design of food products and process for achieving safe
food, and
v. To prepare food companies for future HACCP bases food safety
regulations and trade specifications.

International food safety standards are developed by the Codex Alimentarius

Commission (CODEX) . This is a joint commission of FAO and WHO and recognizes
HACCP based system for food. As per the WTO requirement, only Codex standards are
acceptable for international trade. Therefore, Codex-HACCP is minimum international
standard for trade among countries in future. Based on this analysis, appropriate action
can be taken to ensure that the areas identified as critical control points are kept under
control and are not allowed to endanger the items produced.
There are seven principles of Codex-HACCP:
i. Conduct a hazard analysis
ii. Determine the critical control points (CCPs)
iii. Establish critical limit
iv. Establish a system to monitor control the CCP
v. Establish the corrective action o be taken when the monitoring indicates that a
particular CCP is not under control
vi. Establish procedure for verification to confirm that the HACCP system is working
effectively.
 vii. Establish documentation concerning all procedures and records
appropriate to these principles and their application.
Food safety is analyzed in terms of hazards and risks. A hazard is the capacity of a
thing to cause harm under certain conditions. The probability that a defined harm will
occur is the risk associated with that hazard. The hazards may be physical, chemical
or micro-biological and can occur at any stage from raw material to the consumption
by the consumer.

The benefits of testing food by HACCP are:

i. Avoids human sufferings;
ii. Reduces burden form over burdened health care system;
iii. Increases the export of food products;
iv. Attracts more foreign tourists; and
v. Increases earning potential of citizens.
Lecture No-10:
Producer’s surplus- Meaning- Marketable surplus- Marketed surplus-importance-
Factors influencing marketable surplus- Marketing channels- Definition
------------------------------------------------------------------------------------------------------------
----

PRODUCERS SURPLUS OF AGRICULTURAL COMMODITIES

In any developing economy, the producer‟s surplus of agricultural product plays a

significant rote. This is the quantity which is actually made available to the non-

producing population of the country. From the marketing point of view, this surplus is

more important than the total production of commodities. The arrangements for

marketing and the expansion of markets have to be made only for the surplus quanit6ty

available with the farmers and not for the total production.

The rate at which agricultural production expands determines the pace of

agricultural development, while the growth in the marketable surplus determines the pace

of economic development. An increase in production must be accompanied by an

increase in the marketable surplus for the economic development of the country. Though

the marketing system is more concerned with the surplus which enters or is likely to enter

the market, the quantum of total production is essential for this surplus. The larger the

production of a commodity, the greater the surplus of that commodity and vice versa.

The commodity, the marketed and marketable surplus helps the policy-makers as

well as the traders in the following areas.

(i) Framing Sound Price Policies : Price support programmes are an integral part

of agricultural policies necessary for stimulating agricultural production. The

knowledge of quantum of marketable surplus helps in framing these polices.

 (ii) Developing Proper Procurement and Purchase Strategies: The procurement

policy for feeding the public distribution system has to take into account the

quantum and behaviour of marketable and marketed surplus. Similarly, the

traders, processors and exporters have to decide their purchase strategies on

the basis of marketed quantities.

(iii) Checking Undue Price Fluctuations : A knowledge of the magnitude and

extent of the surplus helps in the minimization of price fluctuations in

agricultural commodities because it enables the government and the traders to

make proper arrangements for the movement of produce from one area, where

they are in surplus, to another area which is deficient.

(iv) Advanced estimates of the surpluses of such commodities which have the

potential of external trade are useful in decisions related to the export and

import of the commodity. If surplus is expected to be less than what is

necessary, the country can plan for imports and if surplus is expected to be

more than what is necessary, avenues for exporting such a surplus can be

explored.

(v) Development of Transport and Storage System: The knowledge of marketed

surplus helps in developing adequate capacity of transport and storage system

to handle it.

MEANING AND TYPES OF PRODUCERS SURPLUS

The producers surplus is the quantity of produce which is or can be made

available by the farmers to the non-farm population. The producers surplus is of two

types.
1. Marketable Surplus

The marketable surplus is that quantity of the produce which can be made

available to the non-farm population of the country. It is a theoretical concept of surplus.

The marketable surplus is the residual left with the producers farmers after meeting his

requirement for family consumption, farm needs for seeds and feed for cattle, payment to

labour in kind, payment to artisans, blacksmith, potter and mechanic payment to landlord

as rent and social and religious payments in kind. This may be expressed as follows :

MS = P - C

where

MS = Marketable surplus

P =Total production, and

C = Total requirements (family consumption, farm needs, payment

to labour, artisans, landlord and payment for social and religious work)

2. Marketed Surplus

Marketed surplus is that quantity of the produce which the producer farmer

actually sells in the market, irrespective of the requirements for family consumption, farm

needs and other payments. The marketed surplus may be more, less or equal to the

marketable surplus.

Whether the marketed surplus increases with the increase in production has been

under continual theoretical security. It has been argued that poor and subsistence farmers

sell that part of the produce which is necessary to enable them to meet their cash
obligations. This results in distress sale on some farms. In such a situation any increase in

the production of marginal and small farms should first result in increased on-farm

consumption.

An increase in the real income of farmers also has a positive effect on on-farm

consumption because of positive income of farmers also has a positive effect on on-farm

consumption because of positive income elasticity. Since the contribution of this group to

the total marketed quantity is not substantial the overall effect of increase in production

must lead to an increase in the marketed surplus.

RELATIONSHIP BETWEEN MARKETED SURPLUS AND

MARKETABLE SURPLUS

The marketed surplus may be more, less or equal to the marketable surplus,

depending upon the condition of the farmer and type of the crop. The relationship

between the two terms may be stated as follows.

>
Marketed surplus < surplus
=

1. The marketed surplus is more than the marketable surplus when the farmer retains

a smaller quantity of the crop than his actual requirements for family and farm

needs. This is true especially for small and marginal farmers, whose need for cash

is more pressing and immediate. This situation of selling more than the

marketable surplus is termed as distress or forced sale. Such farmers generally

buy the produce from the market in a later period to meet their family and/or farm

requirements. The quantity of distress sale increased with the fall in the price of

the product. A lower price means that a larger quantity will be sold to meet some

fixed cash requirements.

 2. The marketed surplus is less than the marketable surplus when the farmers retains

some of the surplus produce. This situation holds true under the following

conditions.

(a) Large farmers generally sell less than the marketable surplus because of their

better retention capacity. They retain extra produce in the hope that they would

get a higher price in the later period. Sometimes, farmers retain the produce even

up to the next production season.

(b) Farmers may substitute one crop for another crop either for family consumption

purpose or for feeding their livestock because of the variation in prices. With the

fall in the price of the crop relative to a competing crop, the farmers may consume

more of the first and less of the second crop.

3. The marketed surplus may be equal to the marketable surplus when the farmer

neither retains more nor less than his requirement. This holds true for perishable

commodities and of the average farmer.

FACTORS AFFECTING MARKETABLE SURPLUS

The marketable surplus differs from region to region and within the same region,

from crop to crop. It also varies from farm to farm. On a particular farm, the quantity of

marketable surplus depends on the following factors.

i. Size of holding : There is positive relationship between the size of the

holding and the marketable surplus.

ii. Production : The higher the production on a farm, the larger will be

the marketable surplus and vice versa.

iii. Price of the Commodity : The price of the commodity and the

marketable surplus have a positive as well as a negative relationship,

depending upon whether one considers the short and long run or the

micro and macro levels.

iv. Size of family : The larger the number of members in a family the

smaller the surplus on the farm.

v. Requirement of Seed and Feed : The higher the requirement for

these uses, the smaller the marketable surplus of the crop.

vi. Nature of Commodity : The marketable surplus of non-food crops is

generally higher than that for food crops. For example,in the case of

cotton, jute and rubber, the quantity retained for family consumption is

either negligible or very small part of the total output. For these crops,

a very large proportion of total output is marketable surplus. Even

among food crops, for such commodities like sugarcane, spices and

oilseeds which require some processing before final consumption the

marketable surplus as a proportion of total output is larger than that for

other food crops.

vii. Consumption Habits : The quantity of output retained by the farm

family depends on the consumption habits, for example, in Punjab,

rice forms a relatively small production of total cereals consumed by

farm-families compared to those in southern or eastern states.

Therefore, out of a given output of paddy/rice, Punjab farmers sell a

greater proportion than that sold by rice eating farmers of other states.
 The functional relationship between the marketed surplus of a crop and factors

affecting the marketed surplus may be expressed as :

M = f (x1, x2, x3, .......)

Where

M = Total marketed surplus of a crop in quintals

x1 = Size of holding in hectars

x2 = Size of family in adult units

x3 = Total production of the crop in quintals

x4 = Price of the crop

the other factors may be specified..

RELATIONSHIP BETWEEN PRICES AND MARKETABLE SURPLUS

Two main hypotheses have been advanced to explain the relationship between

prices and the marketable surplus of foodgrains.

1. INVERSE RELATIONSHIP : There is an inverse relationship between prices and

the marketable surplus. This hypothesis was presented by P.N. Mathur and M. Ezetkiel.

They postulate that the farmers cash requirements are nearly fixed and given the price

level, the marketed portion of the output is determined. This implies that the farmers

consumption is a residual and that the marketed surplus is inversely proportional to the

price level. This behaviour assumes that farmers have inelastic cash requirements

The argument is that, in the poor economy of underdeveloped countries farmers

sell that quantity of the output which gives them the amount of money they need to
satisfy their cash requirements ; they retain the balance of output for their own

consumption purpose. With a rise in the prices of foodgrains, they sell a smaller quantity

of foodgrains to get the cash they need and vice versa. In other words, with a rise in price,

farmers sell a smaller, and with the fall in price they sell a larger quantity. Olson and

Krishnan have argued that the marketed surplus varies inversely with the market price.

They contend that a higher price for a subsistence crop may increase thte producers real

income sufficiently to ensure that the income effect on demand for the consumption of

the crop outweighs the price effect or production and consumption.

POSITIVE RELATIONSHIP : V.M. Dandekar and Rajkrishna put forward the case of a

positive relationship between prices and the marketed surplus of foodgrains in India.

This relationship is based on the assumption that farmers are price conscious. With a

rise in the prices of foodgrains, farmers are tempted to sell more and retain less. As a

result, there is increased surplus. The converse, too, holds true.

MARKETING CHANNELS

Marketing channels are routes through which agricultural products move from

producers to consumers. The length of the channel varies from commodity to

commodity, depending on the quant9ity to be moved, the form of consumer demand and

degree of regional specialization in production.

DEFINITION

A marketing channel may be defined in different ways according to Moore at al

the chain of intermediaries through whom the various foodgrains pass from producers to

consumers constitutes their marketing channels. Kohls and Uh/2 have defined marketing

channels as alternative routes of product flows from producers to consumers.

FACTORS AFFECTING LENGTH OF MARKETING CHANNELS

Marketing channels for agricultural products vary from product to product

country to country, lot to lot and time to time. For example, the marketing channels for

fruits are different from those for foodgrains. Packagers play a crucial role in the

marketing of fruits. The level of the development of a society or country determines the

final form in which consumers demand the product. For example, consumers in

developed countries demand more processed foods in a packed form. Wheat has to be

supplied in the form of bread.

MARKETING CHANNELS OF DISTRIBUTION

The course taken in the transfer of the title of a commodity constitutes its channel
of distribution. (OR) It is the route taken by a product in its passage from its first owner
i.e. producer to the last owner, the ultimate consumer.
Important channels of distribution :
1. Producer or manufacturer – Retailer – Consumer.

2. Producer or manufacturer – Consumer.

3. Producer or manufacturer – Wholesaler – Retailer – Consumer.

4. Producer – Commission agent.

Wholesaler is most important functionary in the chain of distribution of goods.

Definitions of Marketing Channels
1. According to Moore et al. “The chain of intermediaries through whom the
various food grains pass from producers to consumers constitutes their marketing
channels”.

2. Kohls and Uhl have defined marketing channels as alternative routes of product
flows from producers to consumers.
Factors considered while choosing a Channel:
1. Nature of the product.

2. Price of the product.

3. No. of units of sale.

4. Characteristics of the user.

5. Buyers and their buying units.

 Low priced articles with small units of sale are distributed through retailers.

 High price special items like radios, sewing machines etc are sold by manufactures
and then agents.

 Public services like gas, electricity and transport are usually sold directly to the
consumer.
Lecture : 11
Market integration-definition-types of market integration-horizontal, vertical and
conglomeration-markeing efficiency-meaning-definitions-technical or physical or
operational efficiency-pricing or allocative efficiency

MARKET INTEGRATION

Kohis and Uhl have defined “Market integration as process which refers to the
expansion of firms by consolidating additional marketing functions and activities under a
single management”.
Eg: - 1. Setting up of milk processing plant.
2. Establishment of wholesale facilities by retailers.
 Integration shows the relationship of firms in a market.

 Integration influences market conduct of firms and consequently their marketing

efficiency.

 Markets differ in the extent of integration.

Types of market integration :

1. Horizontal integration :
 When a firm gains control over other firms, performing similar marketing functions.
Some marketing agencies (say, sellers) combine to form a union with a view to
reducing their effective number and the extent of competition in the market.

 Horizontal integration is advantageous for the members who join the group.

 If farmers join hands and form cooperatives, they are able to sell their produce in
bulk and reduce their cost of marketing.

 Horizontal integration of selling firms is not in the interests of consumers or buyers.

2. Vertical integration :

 Occurs when a firm performs more than one activity in the sequence of the
marketing process.

 It is linking together of two a more functions within a single firm or under a single
ownership.

Eg: - 1. If a firm assumes the functions of the commission agent as well as retailing.
2. Floor mill which engages in retailing activity as well.
o Vertical integration leads to some economies in the cost of marketing.

o Enjoys greater market power while reducing the number of middlemen.

There are two types of vertical integration

a). Forward integration :
Eg: Wholesaler assuming the function of retailing i.e. assuming another function.
b). Backward Integration:
Eg: Processing firm assumes the function of assembling / purchasing the produce from
villages.
Firms often expand both vertically and horizontally. Eg: Modern retail stocks.
Horizontal : Expanding either retail stores or number of commodities they deal.
Vertical : Operate their own wholesale, purchasing and processing establishment.

3. Conglomeration:
A combination of agencies or activities not directly related to each other, may
when it operates under a united management, be termed a conglomeration.
Eg: Hindustan Lever Ltd. Delhi cloth and General mill (cloth & vanaspati).

MARKETING EFFICIENCY
Marketing efficiency is essentially the degree of market performance. It is a
broad and dynamic concept.
Def: - If is the ratio of market output (satisfaction) to marketing input (cost of resources).
An increase in ratio represents improved efficiency and vice versa.
Components of marketing efficiency :
1. Effectiveness with which a marketing service is performed.

2. The cost at which the service is provided.

3. The effect of this cost and the method of performing the service as production and
consumption. i.e. effect of (1) & (2), last two are more important.

Assessment of marketing efficiency :

1. Technical or Physical or Operational efficiency: It pertains to the cost of
performing a function; Efficiency is increased when the cost of performing a
function per unit of out put is reduced.

Eg: - Storage processing, handling etc.

2. Pricing / Allocative efficiency : System is able to allocate farm products either
over time, across the space or among the traders, processors and consumers at a point
of time in such as way that no other allocation would make producers and consumers
better off. This is achieved via pricing the product at different stages, places, times
among different users. Pricing efficiency refers to the structural characteristics of the
marketing system, when the sellers are able to get the true value of their produce and
the consumers receive true worth of their money.
The above two types are mutually reinforcing in the long run.
Emperical Assessment of Marketing Efficiency :
A reduction in the cost for the same level of satisfaction or an increase in the
satisfaction at a given cost results in the improvement in efficiency. (Khols and Uhl.)
O
E = ---- 100
I
E = level of efficiency
O = value added to the marketing system.
I = real cost of marketing
Shepherd „s formula of marketing efficiency :

V
ME = --- - 1 100
I
 ME = Index of marketing efficiency
V = Value of the goods sold or price paid by the consumer (Retail price)
I = Total marketing cost or input of marketing.
This method eliminates the problem of measurement of value added.
Lecture : 12
Marketing cost-margins-price spreads-factors affecting the costs of marketing-
reasons for higher marketing costs of agricultural commodities- ways of reducing
marketing costs for farm products.

Marketing Costs
The movement of products from the producers to the ultimate consumers involves
costs, taxes, and cess which are called marketing costs. These costs vary with the
channels through which a particular commodity passes through.
Eg: - Cost of packing, transport, weighment, loading, unloading, losses and spoilages.

Marketing costs would normally include :

i. Handling charges at local point

ii. Assembling charges

iii. Transport and storage costs

iv. Handling by wholesale and retailer charges to customers

v. Expenses on secondary service like financing, risk taking and market intelligence

vi. Profit margins taken out by different agencies.

vii. Producer‟s share in consumer‟s rupee :
PF
Ps = ---- x 100
Pr

Where,
Ps = Producer‟s share
PF = Price received by the farmer
Pr = Retail price paid by the consumer

Total cost of marketing of commodity,

C = Cf + Cm1 + Cm2 + . . . + Cmn
Where, C= Total cost of marketing of the commodity
Cf = Cost paid by the producer from the time the produce leaves till he sells it
 Cmi= Cost incurred by the ith middlemen in the process of buying and selling the
products.

Market Margins
Margin refers to the difference between the price paid and received by a specific
marketing agency, such as a single retailer, or by any type of marketing agency such as
retailers or assemblers or by any combination of marketing agencies such as the
marketing system as a whole.
Absolute margin is expressed in rupees. A percentage margin is the absolute
difference in price (absolute margin) divided by the selling price.
Mark-up is the absolute margin divided by the buying price or price paid.

Marketing margin of a Middleman : There alternative measures may be used.

The three alternative measures which may be used in estimating market margins
are.
(a) Absolute margin of ith middlemen (Ami)

= PRi PPi + Cmi

(b) Percentage margin of ith middlemen (Pmi)

PRi - (PPi + Cmi)

--------------------- X 100
PRi

(c) Mark-up of ith middleman (M2)

PRi - (PPi + Cmi)

-------------------- X 100
Ppi

Where,
PRi = Total value of receipts per unit (sale price)
Ppi = Purchase value of goods per unit (purchase price)
Cmi = Cost incurred on marketing per unit.
 The margin includes profit to the middlemen and returns to storage, interest on
capital, overheads and establishment expenditure.
Sum of Average Gross margins method :
The average gross margins of all the intermediaries are added to obtain the total
marketing margin as well as the break up of the consumer‟s rupee :
n Si - Pi
MT = ∑ ---------
i=1 Oi

MT = Total marketing margin.

Si = Sale value of a product for ith firm
Pi = value paid by the ith firm
Qi = Quantity of the product handled by its firm
i = 1, 2, . . . . n (No. of firms involved in the marketing channel).

Concepts of Marketing Margins :

 Complex because it is difficult to follow the path of the channel for a given
quantity of the channel for a given quantity of the commodity.

 It is still difficult to estimate in respect of commodities subjected to processing.

Two methods are identified :

1. Concurrent margin method :

 This method stresses on the difference in price that prevails for a

commodity at successive stages of marketing at a given point of time.

2. Lagged Margin Method :

 This method takes into account the time that elapses between buying and
selling of a commodity by the intermediaries and also between the farmer
and the ultimate consumer.
  Lagged margin indicates the difference of price received by an agency and
the one paid by the same agency in purchasing in equivalent quantity of
commodity.

PRICE SPREAD
 The difference between the price paid by the consumer and price received by the
farmer.

 It involves various costs incurred by various intermediaries and their margins.

 Marketing costs are the actual expenses required in bringing goods and services
from the producer to the consumer.

Price Spread in Groundnut Marketing

Marketing channel :
Producer – wholesaler – Decorticating unit – Oil miller – Retailer – Consumer :
(Rs 1 q)
S.No. Marketing channel Amount
%
1. Producers sale price Rs/g 1119.50 80
2. Wholesaler Purchase price 1119.50
Marketing cost 3.5.25 2.51
Margin 71.00 5.06
3 Decorticating unit PP 1225.75
MC 31.62 2.25
MM 40.0 2.85
4 Oil miller PP 1297.35 -
MC 44.55 3.17
MC 32.50 2.32
5 Retailer PP 1374.40
MC 13.00 0.86
MM 16.80 1.20
6 Consumer‟s purchase price 1404.20 100
Objectives of Studying Marketing Costs :
1. To ascertain which intermediaries are involved between producer and consumer.

2. To ascertain the total cost of marketing process of commodity.

3. To compare the price paid by the consumer with the price received by the
producer.

4. To see whether there is any alternative to reduce the cost of marketing.

Reasons for High Marketing Costs :

1. High transportation costs

2. Consumption pattern – Bulk transport to deficit areas.

3. Lack of storage facilities.

4. Bulkiness of the produce.

5. Volume of the products handled.

6. Absence of facilities for grading.

7. Perishable nature of the produce.

8. Costly and inadequate finance.

9. Seasonal supply.

10. Unfair trade practices.

11. Business losses.

12. Production in anticipation of demand and high prices.

13. Cost of risk.

14. Sales service.

Factors Affecting Marketing costs

 1. Perish ability

2. Losses in storage and transportation

3. Volume of the product handled

Volume of the More – less cost

Volume of the Less – more cost
4. Regularity in supply : Costless irregular in supply – cost is more

5. Packaging : Costly (depends on the type of packing)

6. Extent of adoption of grading

7. Necessity of demand creation (advertisement)

8. Bulkiness

9. Need for retailing : (more retailing – more costly)

10. Necessity of storage

11. Extent of Risk

12. Facilities extended by dealers to consumers. (Return facility, home delivery,

credit facility, entertainment)

Ways of reducing marketing costs of farm products.

1. Increased efficiency in a wide range of activities between produces and

consumers such as increasing the volume of business, improved handling methods
in pre-packing, storage and transportation, adopting new managerial techniques
and changes in marketing practices such as value addition, retailing etc.

2. Reducing profits in marketing at various stages.

3. Reducing the risks adopting hedging.

4. Improvements in marketing intelligence.

5. Increasing the competition in marketing of farm products.

Lecture : 13
Characteristics of agricultural product prices-agricultural price stabilization-need
for agricultural price policy- commission for Agricultural cost and Prices (CACP)-
administered prices- minimum support price, procurement price and issue price.

Characteristics of Agricultural product prices

In agricultural based economies like India, prices of farm products undergo wide
variations than in industrial goods. They have profound effect on the economy. The
characteristics of agricultural product prices are presented below to design appropriate
price policy.
i. Production and supply of agricultural products cannot be adjusted quickly to
changes in prices or demand.
ii. Variability in cost of production from region to region.
iii. Wide variation in quality of products and hence prices.
iv. The prices of farm products in general exhibit co-movement at least within a
group.
v. The prices of farm products vary across space.
vi. The prices of farm products in general remail low in the post-harvest period.
vii. There are multiple prices in the same market at a point of time.

Agricultural Price Stabilization

Price instability does great harm to agriculture. Government takes the
responsibility to stabilize agricultural prices. The objectives of price stabilization assures
reasonable level of living, keeping parity with other sectors, adjustment of production to
demand as well as stabilization of general price level in relation to world prices.
Concerned by the spiraling prices of agriculture and food articles, the government is
likely to set up a price stabilisation fund along with a market intervention plan for key
agricultural products. A proposal to this effect is currently under the consideration of the
Ministry of Agriculture. This move by the government comes at a time, when inflation
has been on a ten month high at 5.92%, mainly on account of rising food and agricultural
products. With the proposed market intervention plan, the government would be able to
step in when prices of a particular product rises beyond a threshold limit or fall below a
floor price. Various state governments have similar plans for farm products.

Need for Agricultural Price Policy

Agricultural Price Policy has special significance when there is a maladjustment in
demand and supply and jump up and down the equilibrium price level. Several
government interventions were initiated to protect farmers and consumers. Government
undertakes the following measures.
1. Procurement operations.

2. Public distribution at fixed issue prices, rationing, restrictions on movement of

food grains from one place to another place i.e. state to state.

3. Maximum controlled prices, assured minimum prices, statutory minimum prices,

ban on exports, stepping up of imports, regulation of futures trading.

4. Minimum price for sugarcane to sugar factories.

5. Floor and ceiling prices, controls on futures trading and imports have been the
major policy measures taken for regulation of prices of raw cotton and jute.

6. History of Agricultural price policy :

Agricultural Price policy 1947 – 1965 i.e before setting up of APC

Food grains prices committee, was set up in 1964 to determine producer prices of
rice & wheat on all India basis for 1964 season subsequently. Food grain policy
committee, 1966 was established. The important aspects pertaing to foodgrains are :
(i).Controls on the movement, (ii).Compulsory levy procurement (iii). Fixation of
maximum statutory prices of food grains, (iv). Rationing, either statutory or informal.
Other crops covered are sugarcane, cotton, jute and oil seeds.

CACP: Commission for Agricultural Costs and Prices,

Agricultural Price Commission, APC was established in 1965 on the
recommendations of Foodgrains Policy committee under the chairmanship of L.K. Jha.
The APC has been renamed as CACP on similar lines as has been done to the industry
in 1985. The significant contributions during 1965-77 were
a. MSP : Chief function is to set a floor to the downward fluctuations in the market
prices. It is a insurance against price uncertainty.

b. Maximum Ceiling Prices : APC has not favoured maximum or ceiling prices for
agricultural commodities. In the case of food grains, the states were unable to
enforce legally fixed maximum prices. Private stocks tended to go underground.

Cotton : Price of several varieties ruled well above the ceiling prices in all the
years.
c. Procurement Prices : Always higher than MSP. Government procures for deficit
states and vulnerable sections of population. APC takes into account market
prices, minimum prices announced in the season, marketing and processing costs,
the likely impact of levels of procurement prices on farmer‟s own cost of living,
cost of production of the agricultural based industries, and the external
competitiveness of the commodities concerned.

d. Issue Prices : These are below open market prices and always higher than
procurement prices. Food grains prices supplied through fair price shops and
rationing at subsidized rates are issue prices. The practice led to several
malpractices and uneconomic use of imported grains(wheat) shifted towards
coarse grains. APC favoured levy on producers on acreage basis for procurement.

Administered Prices :
Prices fixed by the government with the objective of protecting farmers against a decline
in prices during the year of bumper production, protecting consumers from excessive
price increases and ensuring procurement for buffer stocks or operation of PDS. These
are three types :
1. Minimum Support Price, (MSP) : Price fixed by the government to protect
farmers against excessive fall in prices.

2. Procurement Price : Refers to the price at which government procures from

producers to maintain buffer stocks and feed Public Distribution System.
 3. Issue Price : Price at which the commodity is made available to consumers at fair
price shops. It is always higher than procurement price.

Determination of Administered Prices :

Demand and supply forces determine market prices. Administered prices are the
prices fixed by the government under varied circumstances. Government makes a
commitment to purchase all the produce offered for sale through MSP. Government buys
at its discretion without any compulsion to meet its obligation procurement price. When
procurement is done under compulsion from the millers, the procurement price is called
levy price. Government considers various issues suggested by CACP on fixation of
prices.
Lecture : 14

Risks on marketing-meaning-types of risks- measures to minimize risks-

speculation-hedging-future trading-meaning-commodities for future trading-
services rendered by a forward market-dangers of forward market-contract
farming/contract farming-Price forecasting

RISKS IN MARKETING

Risk is inherent in all marketing transactions. Fire, rodents, quality deterioration, price
fall, change in tastes, habits or fashion, placing the commodity in the wrong hands or area
are all also associated with marketing risk. Hardy has defined risk as uncertainty about
cost, loss or damage. The longer the time lags between production and consumption, the
greater the risk. Most of the risk is taken by market middlemen. The bearer of the risk
may be better off or worse-off. A risk cannot be eliminated because it also carries profit.

Types of Risk : The risks associated with marketing are of three types, namely physical
risk, price and institutional risk.

i. Physical risk includes loss of quantity and quality. It may be due to fire, flood,
earthquake, rodents, pests, excessive moisture or temperature, careless handling,
improper storage, looting or arson.
ii. Price risk associates with fluctuation in price from year to year or within the year.
iii. Institutional risks include the risks arising out of a change in the government
budget policy, imposition of levies price controls etc.

Measures to Minimize Risks :

a. Reduction in Physical loss through fire proof storage, proper packing and better
transportation.

b. Transfer of physical losses to Insurance companies.

c. Minimization of price risks through.

 Fixation of minimum and maximum price by government.

  Dissemination of price information to all sections of society over space and time.

 Effective system of advertising and create a favourable atmosphere for the

commodity.

 Operation of speculation and hedging : Futures trading, forward market, contract

farming, contract marketing.

Speculation : Purchase or sale of a commodity at the present price with the object of sale
or purchase at some future date at a favourable price.

Hedging : It is a trading technique of transferring the price risk. “Hedging is the practice
of buying or selling futures to offset an equal and opposite position in the cash market
and thus avoid the risk of uncertain changes in prices” (Hoffman).

Futures Trading : It is a device for protecting against the price fluctuations which
normally arise in the course of the marketing of commodities. Stockicsts , processors or
manufactures utilize the futures contracts to transfer the price risks faced by them.

Future trading includes both hedging and speculation.

S.No. Speculation Hedging
1. Purchases and sales in the cash as : To protect oneself against excessive price
well as in futures markets are made fluctuation.
with the objective of making profit
2. The activities of buying and selling : Are always opposed to each other.
are not necessarily opposed to each
other.
3. It is not necessary that the two types : If is obligatory to buy and sell the goods in
of transactions should be of equal equal quantities in the two markets.
quantity.
4. Speculator purchases and sells : The commodities are not stored by traders.
goods when prices are as per his Only the difference in the price is given or
expectations. taken on the due date.

Commodities for Futures Trading

 Commodities permissible under futures trading must satisfy the following
conditions.
1. Plentiful supply of the commodity.

2. Must be storable.

3. Commodity should be homogeneous.

4. Commodity should have a large demand.

5. Supply of the commodity should not be controlled by a few large firms.

6. The price of a commodity should be liable to fluctuate over a wide range.

Forward Markets
A market in which the purchase and sale of a commodity takes place at time „t‟
but the exchange of the commodity takes place on some specified date in future i.e. t+1.
Some times even on the specified date in the future, (t+1) there may not be any
exchange of the commodity. Instead, the differences in the purchase and sale price are
paid or taken.
Services Rendered by a Forward Market.
1. Reduces price fluctuations so that the margin of profit may be small.

2. Ensures an even flow of goods, avoiding gluts in the peak season, and shortages
in the slack seasons.

3. It brings about an integration of the price structure of commodities at different

points of time.

4. Facilitates large purchases and sales at a short notice.

5. Brings coordination of the current and future expectations by rotating in the light
of changing supply – demand situation.

Dangers of Forward Market

1. Forward market opens out the way for a large number of persons with insufficient
means, inadequate experience and information to enter into commitments which
may be beyond their means. In such conditions market gets demoralized.
 2. It enable unscrupulous speculators, with little interest in the actual supply of and
demand for, a particular commodity, to corner the supplies and organize bear
raids and bull raids on the market in the hope of making easy money for
themselves. This results in violent fluctuations in prices.

Contract Farming/Marketing:
Contract farming is evolving an institutional arrangement of alternative
marketing in India. One of the brilliant ideas that are being thrown around is that of
contract farming. Indian government, agriculture and commerce ministries, corporate
interests, IMF, World Bank, Indian agricultural scientists,are keen on farming by
contract. It is such a simple and benevolent idea thrown in by consultants of global
repute. State like Punjab, Karnataka, Maharastra, Madhya Pradesh and Tamil Nadu have
been front runners in this regard. Experience shows that there is considerable saving of
inputs and rising profitability due to introduction of technology and effective extension
service. It is also successful in crop diversification in many states such as tomato in
Punjab and Haryana, cucumber in Andhra Pradesh, cotton in Tamil Nadu etc.
It is a bipartite agreement between farmer and industry to supply the agreed
quantity at a specified date. Services provided by sponsoring firms range from supply of
inputs, extension service, quality monitoring to purchase of output. However the absence
of common legally binding contractual arrangement gives the way for violation the
contract on both sides. Some successful cases are presented as follows.
Successful Contract Farming Projects in Andhra Pradesh
Crop Location Company
Cocoa EG, WG Cadburys India
Oil palm - SICAL, Godrej,
Palm tech
Vegetables Kuppam BHC
Gherkins Chittoor, Global Green
Mehaboobnagar Capricorn Foods
Marigold Anantapur A.V. Thomas
Indian Goosberry - DABUR

Potential areas of Contract farming in Andhra Pradesh.

Crop Location Area(ha)
1.Chillies Guntur 52000
2.Sapota Prakasam 2300
3.KP Onion Kadapa 3000
4.Tomato Kurnool,Chittoor 34000
5.Citrus Nalgonda, Anantapur 24000
6.Acid lime Nellore 22000
7.Tapioka East Godavari, Vizag 17000
8.Cashew Srikakulam, Vizag,
Vizianagaram
East and West Godavari 130000
9.Grapes Ranga Reddy 1300
10.Papaya Anatpur, Kadapa 15000
11Coconut East and West Godavari 70000
12Vegetables Ranga Reddy, Chittoor 40000
13.Turmeric Nizamabad, Karimnagar 24000
14.Mango Krishna, Chittoor 230000
15.Pomegranate Anantpur 6000

Price Forecasting
Market information can be used by those involved in the marketing process to
make better marketing decisions. The primary objective of a market information service
is to increase the degree of knowledge of market participants (farmers, traders and
consumers) about the market. Forecasting is the prediction of values of a variable.
Forecasts also may be based on expert judgments, which in turn are based on historical
data and experience.
I-Market information needs of farmers
What crop or combination of crops to plant?
In making this decision, farmers must take into consideration their physical
resources, i.e. land quantity and topography, water availability and quality, soil fertility,
labour, and capital. Progressive farmers, whose objective is profit maximization, are
interested in knowing exactly which crop and specific variety would give them the
highest returns in the market during a particular period time.
When to plant?
Timing of planting is usually determined by seasonal factors. However even
within these constraints there may be possibilities, through the use of improved varieties
and irrigation, to vary planting schedules and produce in the off-season. For successful
farmers, the decision on when to plant can therefore be seen as the decision on, when to
harvest and sell to maximize returns.
Where to sell?
A key consideration in making the decision, is the farmers‟ expectations of prices,
which may be obtained in the different markets. In making the immediate decision on
where to dispose of produce which has already been harvested or needs to be harvested in
the near future, farmers need to be aware of the current prices for the produce in different
markets. Knowledge of current market prices would also assist them in the bargaining
process with traders.

The price forecasts are estimated using the historical modal prices of various farm
commodities in important markets. Some of the commonly used price forecasting models
are:
1. Simple Exponential Smoothing

2. Double Exponential Smoothing

3. Autoregressive Integrated Moving Average (ARIMA)

4. Artificial Neural Networks (ANN)

Lecture :15

International trade-definition-difference between international and inter-regional

trade- free trade vs protection

International Trade

International trade is the exchange of goods and services between countries. This

type of trade gives rise to a world economy. Trading globally gives consumers and

countries the opportunity to be exposed to goods and services not available in their own

countries. Almost every kind of product can be found on the international market: food,

clothes, spare parts, oil, jewellery, wine, stocks, currencies and water. Services are also

traded: tourism, banking, consulting and transportation. A product that is sold to the

global market is an export, and a product that is bought from the global market is an

import. Imports and exports are accounted for in a country's current account in the

balance of payments.

Global trade allows wealthy countries to use their resources - whether labor,

technology or capital - more efficiently. Because countries are endowed with different

assets and natural resources (land, labor, capital and technology), some countries may

produce the same good more efficiently and therefore sell it more cheaply than other

countries. If a country cannot efficiently produce an item, it can obtain the item by

trading with another country. This is known as specialization in international trade. We

discuss an example in the following.

The basis of international trade
The comparative cost theory developed by David Ricardo illustrated it in 1817 by
using two country, two commodity model.
Country Labour units/unit of Labour units/unit of Exchange ratio
cloth wine between wine and
cloth

England 100 120 1 wine : 1.2 cloth

120
-----
100
Portugal 90 80 1 wine : 0.88 cloth
80
-----
90

Portugal has an absolute superiority in production of both cloth and wine.

Law of comparative advantage indicates that a country should specialise in the
production of that commodity in which it is more efficient and leave the other commodity
to other country. The two nations will then have more of both goods by engaging in
trade.
Portugal has a greater comparative advantage over England in wine relating to
cloth
80 90
----- < ----- , i.e. 0.67 < 0.9
120 100

and import of cloth from England which has a comparative advantage in cloth
production. England will gain by specializing in producing cloth and selling it in Portugal
in exchange of wine.

The key to international trade lies in the theory of comparative advantage ie each
nation specializes in the production of those commodities in which it has the highest
productivity.
Country Specialization
US Making computers
Brazil Growing coffee
 The theory of comparative advantage states that international trade is mutually
beneficial even when one of the countries can produce every commodity more cheaply
than the other country.
The terms „absolute‟ and comparative are key terms to understand this principle.
Eg: A best lawyer is best typist in the town. A secretary is less efficient than lawyer

The benefit of international trade results in a more efficient employment of the

productive forces of the world. (John Stuart Mill). Foreign trade expands a nation‟s
consumption possibilities. The following table explains this fact.
Sells Buys Good Foreign trade

By specializing, each nation ends up

Japan US Cameras
consuming more than it could produce
US Australia Computers
alone.
Australia Japan Coal

Two issues are involved in foreign trade:

1. Trade among different nations : Problem of Protectionism : (whether foreigners
are discriminated or treated equally)

2. Different nations use different currencies (or monies).

Difference between Foreign trade and domestic trade.

S.No. Domestic trade Foreign trade
1 Factors of Immobile Mobile
production
2 Currencies No difficulty The possibility of variations in
exchange rates between different
currencies in creases risk
3 Restrictions on trade Relatively less Imposed by
a. Custom duties
 b. Fixed quotas

c. Tariff barriers

d. Exchange restrictions

4 Ignorance Less ignorance Difference in culture, religion

language etc.
5 Separate markets India uses right Ethiopia uses left hand drive cars
hand
drive cars
6 Transport and Less Impede international trade.
insurance costs

Free Trade vs. Protectionism

There are opposing views. International trade has two contrasting views regarding
the level of control placed on trade: free trade and protectionism. Free trade is the simpler
of the two theories: a laissez-faire approach, with no restrictions on trade. The main idea
is that supply and demand factors, operating on a global scale, will ensure efficient
production. Therefore, nothing needs to be done to protect or promote trade and growth
because market forces will do so automatically.

In contrast, protectionism holds that regulation of international trade is important to

ensure that markets function properly. Advocates of this theory believe that market
inefficiencies may hamper the benefits of international trade and they aim to guide the
market accordingly. Protectionism exists in many different forms, but the most common
are tariffs, subsidies and quotas. These strategies attempt to correct any inefficiency in
the international market.

To conclude, the opportunity for specialization and therefore more efficient use of
resources, international trade has potential to maximize a country's capacity to produce
and acquire goods. Opponents of global free trade have argued, however, that
international trade still allows for inefficiencies that leave enveloping nations
compromised. What is certain is that the global economy is in a state of continual change
and, as it develops, so too must all of its participants.
Lecture : 16
The General Agreement on Trade and Tariffs(GATT)- World Trade Organization
(WTO) Agreement on Agriculture (AOA)-Market access –Aggregate Measures of
support (AMS)- export subsidies- Sanitary and Phyto-sanitary measures(SPS)-
Trade Related Intellectual Property Rights(TRIPS)

Genesis of GATT/ WTO

 Brettonwood conference of 1944 recognized the need for an institution to oversee
the liberalization of free trade.

 For facilitating world trade, General Agreement on Tariffs and Trade, (GATT)
was established in 1947 at Geneva in Switzerland.

 India was founder member of GATT.

 There have been several rounds of negotiations between 1947-94..

Main features of GATT (General Agreement on Tariffs & Trade)

1. Reduction in agricultural tariffs by 30% for all agricultural commodities from
1994.

2. Agricultural input subsidies are reduced by 30%, export subsidies by 36% and
value of subsidized exports by 21%.

3. Trade liberalisation policies would bring about 2-10% rise for agricultural
commodity prices in international markets resulting in a gain of $200 billion.

4. As import tariffs are reduced, the domestic demand for imports increases putting
pressure on trade balances. The developing countries have to resort to real
exchange rate devaluation to increase their exports.

5. GATT reforms are more beneficial to developed countries because of high prices
for export goods such as capital goods, machinery etc.

6. According to GATT, India can offer subsidy to increase its export

competitiveness with out altering policy related to PDS, food security etc.
7. Under TRIPS, seeds and plant varieties must be protected either by patents or by
an effective system of its own or a combination of both.

8. All regulations, rules, restrictions (QRs), export duties, minimum export prices
have to be removed to boost exports.

9. TRIMS : No restrictions on quantum of foreign investment.

2nd round 1948 France Concentrated on Tariff, rules and trade

policies till 1964.
3rd round 1956 England „‟
4th round 1956 Geneva „‟
5th round 1960 Dillon „‟
6th round 1967 Kenny Antidumping
7th round 1973-79 Tokyo Framework of GATT arrangements.
8th round 1986-93 Uruguay Boundaries were expanded to TRIPS,
TRIMS, GATTS, Agricultural trade etc.
9th round 1994 Morocco WTO establishment on 01-01-1995.

 Till 1964, negotiations were concentrated on tariff, rules, trade policies under
GATT.

 In 1982, US suggested new items such as TRIPS, agriculture and service sectors
for inclusion in the discussions. Several nations opposed the move initially.
Ultimately every one was forced to accept.

 1989-94, Dunkel draft was discussed. Lot of opposition including India, but
signed in 1994 at Markesh in Morocco.

 On the recommendation of Dunkel draft, WTO was established on 1st January,

1995 with head quarters at Geneva. At present there are 153 member countries
joined WTO as on 01-01-2010.

Three divisions of WTO:

1. Ministerial level conference: Meet once in two years to take principal policy
decisions.

2. General council : Consists of all members, handles day to day work of WTO.
 3. Bodies : (a) Dispute settlement Body, (DSB). (b) Trade policy Review Body
(TPRB).

Main Functions of WTO :

1. In addition to goods, it covers trade in services, TRIPs and TRIMs.

2. Dispute settlement system is faster and more automatic aims at solving trade
problems.

3. WTO has global states similar to IMF and World Bank.

Agreement on Agriculture (AoA)

 AoA was signed as part of the Uruguay Round Agreement in April, 1994.

 It came into force with effect from 1st January, 1995.

 AoA covers three broad areas of agriculture and trade policy, namely.

i. Market Access

ii. Domestic Support, and

iii. Export subsidy

1. Developed countries have to reduce their tariffs by an average of 36% over a

period of 6 years from 1995-2000, while developing countries to reduce by 24%
in a span of 10 years from 1995 to 2004. Least developed countries are
exempted.

2. India is under no obligation to reduce domestic support or subsidies currently

extended to agriculture.

3. No export subsidy has been extended in India.

 Market Access, Domestic subsidy and Export subsidy commitments under
AOA :

Sl.No. Pillars of AOA Developed countries Developing

(1995-2000) countries (1995-
2004)

1. Market access : Tariff cuts for 36% 24%

agricultural products (Average)

(Base period : 1986-88) minimum 15% 10%

cut per product line
2. Domestic support (Base : 1986- 20% 13%
88) AMS
3. Export subsidies : (Base : 1986- 36% 24%
90)
21% 13%
Subsidy volume :

Subsidised quantities (Volume)

Aggregate measure of support (AMS)

 Subsidies are considered to be market distortions and have a reduction
commitment based on product specific and non-product specific calculations of
AMS, based on levels of 1986-88 expressed as a percentage and the value of the
production of the relevant agricultural product or entire agricultural production.

 There was no requirement in the agreement for reduction commitment it the AMS
was 5% for developed countries and 10% for developing and least developed
countries.

 In other cases member countries were required to reduce their total AMS by 20%
over 6 years by developed countries and 13.3% over 10 years by developing
countries.

 Exemption from AMS calculations were granted to green box and blue box
subsidies.

 Green box subsidies : Have minimal trade distorting effects such as research,
extension, buffer stocks for food security purposes and other similar activities.
  Blue box subsidies consist of measures which have non-distorting and conditional
on the limitation on production.

 Amber box subsidies : The reduction commitment applies only to the Amber box
subsidies once exemption was given to green and blue box subsidies.

Agreement on the Application of Sanitary and Phytosanitary Measure (SPS)

SPS deals with standards for food safety and animal and plant health. WTO
encourages member countries to use international standards or guidelines where they
exist and names some examples are given below:
1. Codex Alimentative commission is named for food safety which is an inter
governmental body of FAO & WHO.

2. International office of Epizootics for animal health.

3. FAO secretariat of the International plant protection convention for plant health.

4. Higher standards are based on scientific justification, which is based on “risk

assessment”.

Trade Related Intellectual Property Rights (TRIPs)

Different form of intellectual property rights (IPR) identified by TRIPs
Agreement governed by WTO are
1. Patents

2. Copyrights

3. Trade marks

4. Designs

5. Trade secrets

6. Geographical indications.

1. Patent :
A patent is an exclusive right granted to the inventor to use and market the
invention for a limited period of time in consideration of the disclosure of the invention.
 The product must be (a) novel, (b) have industrial application and (c) must be
useful for entitlement of a patent. Patents are given only for inventions. Inventions are
solutions to specific problems in the field of technology. An invention may relate to a
product or a process.
2. Copy Rights :
Copy right law deals with the rights of intellectual creators. It is concerned with
protecting creativity and ingenuity. It promotes and disseminates national cultural
heritage. It is meant for original literary, dramatic, musical and artistic works,
cinematographic films and softwares. Copy right is registered at Ministry of HRD which
is valid for 60 years after author‟s death.

3. Trade mark :
It is a sign that individualize the goods of a given enterprise and distinguishes
them from the goods of its competitors. It is limited to word marks, abbreviations,
names, figures and hologram.
4. Designs :
A design includes features of structure, configuration, pattern, ornament, or
composition of lines and colors applied to an article in 2 or 3 dimensional form by any
technical process. The process or product can be manual, civil, electrical, chemical and
mechanical or combination of all.
5. Trade secret :
It is the agreement between the employer and employee to keep the research
information secret or confidential. The employer can recover damages from the improper
disclosure or use of his trade secret by the employee.
6. Geographical Indication :
Place names used to identify products such as “Champagne”, Roquefort cheese,
Basmati rice etc. They provide legal means so that interested parties can stop the use of
such geographical indications for products that do not originate from the used place name
or do not have the usual characteristics associated with that place name.
 REFERENCES

 Acharya S.S and Agarwal NL, 2006, Agricultural Marketing in India. Oxford & IBH
Publishing Co.Pvt.Ltd. New Delhi

 Kahlon, A.S and Tyagi.D S, 1983 Agricultural Price Policy in India. Allied Publishers
Pvt. Ltd., New Delhi.

 Kulkarni, K R.1964, Agricultural Marketing in India. The Co-operators Books Depot,

Mumbai.

 Mamoria, C.B. and Joshi. R L.1995, Principles and Practices of Marketing in India,
Kitab Mahal, Allahabad

 Mamoria, C.B., 1973., Agricultural Problems in India, Kitab Mahal, Allahabad

 Subba Reddy, S., P.Raghu Ram., P. Sastry, T.V.N. and Bhavani Devi I. 2010.
Agricultural Economics., Oxford & IBH Publishing Company Private Ltd., New Delhi,
2010
 1

ACHARYA N.G.RANGA AGRICULTURAL UNIVERSITY

DEPARTMENT OF AGRICULTURAL ECONOMICS

LECTURE NOTES
Course No. AECO 241
Farm Management and Production Economics (1+1)

Compiled by
Dr.T.V.Neelakanta Sastry
Professor
Department of Agricultural Economics
S.V. Agricultural College, Tirupati
 2

AECO 241 – FARM MAN AGEMENT AND PRODUCTION ECONOMICS 2(1+1)

THEORY
Sl No. Topic
1 Farm management - Meaning – Definitions of Farm Management – Scope of Farm
Management – Relationship with other science
2 Economic principles applied to the organization of farm business – principles of
variable proportions – Determination of optimum input and optimum output
3 Minimum loss principle ( cost Principle) – Principle of Factor substitution – principle
of product substitution
3 Law of Equi-marginal returns – Opportunity cost principle – Principle of Comparative
advantage – Time comparison principle
4 Type of farming – Specialization, Diversification, Mixed farming, Dry farming and
Ranching – Systems of farming -co-operative farming, Capitalistic farming, collective
farming, State farming and Peasant farming
6 Farm planning – Meaning – Need for farm planning – Types of Farm plans – simple
farm plan and whole farm plan – characteristics of a good farm plan – basic steps in
farm planning
7 Farm budgeting – meaning – types of farm budgets – Enterprise budgeting – Partial
budgeting and whole farm budgeting. Linear programming – Meaning- Assumptions –
Advantages and limitations
8 Distinction between risk and uncertainty – sources of risk and uncertainty –
production and technical risks – Price or marketing risk – Financial risk – methods of
reducing risk
9 Agricultural Production Economics – Definitions – Nature – Scope and subject matter
of Agricultural Production Economics – Objectives of Production Economics – Basic
Production Problems
10 Law of Returns – Law of constant returns – law of increasing returns – law of
decreasing returns.
11 Factor – product relationship – Law of Diminishing returns – Three stages of
production function – Characteristics – Elasticity of Production
12 Factor – Factor relationship – Isoquants and their characteristics – MRTS – Types of
factor substitution
13 Iso –cost lines – Characteristics – Methods of Determining Least-cost combination of
 3

resources – Expansion path – Isoclines – Ridge lines

14 Product – product relationship – product possibility curves – Marginal rate of product
substitution – Types of enterprise relationships – Joint products -Complementary -
Supplementary – Competitive and Antagonistic products
15 Iso – revenue line and characteristics – Methods of determining optimum combination
of products – Expansion path – Ridge lines
16 Resource productivity – Returns to scale

PRACTICALS
S No Topic
1-4 Visit to farm households – collection of data on cost of cultivation of crops and
livestock enterprises
5 Determination of optimum input and optimum output
6 Determination of optimum combination of products
7 Computation of seven types of costs
8 Computation of cost concepts related to farm management
9 Farm inventory
10 Methods of computing depreciation
11– 12 Farm financial analysis – preparation of Net worth statement and its analysis
13– 14 Preparation of farm plans and budgets – Enterprise and partial budget
15 Visit to college farm
16 Final Practical Exam

REFEERENCES
1. Heady, Earl O, 1964, Economics of Agricultural Production and Resource
Use:, Prentice Hall of India, Private Limited, New Delhi
2. C.E.BISHOP, W.D TOUSSAINT,., NEWYORK,1958, Introduction to
Agricultural Economic Analysis: John Wiley and Sons, Inc., London
3. S.S. Johl, J.R. Kapur ,2006, Fundamentals of Farm Business Management:,
Kalyani Publishers, New Delhi
4. Subba Reddy, S., Raghu ram, P. , Neelakanta Sastry T.V., Bhavani Devi
I.,2010, Agricultural Economics, Oxford & IBH Publishing Co. Private
Limited, New Delhi
 4

5. Heady Earl O and Herald R. Jenson,1954, Farm Management Economics:,

Prentice Hall, New Delhi,
6. I.J. Singh,1976, Elements of Farm Management Economics: Affiliated East-
West press, Private Limited, New Delhi
7. Sankhayan, P.L.,1983, Introduction to Farm Management: Tata – Mc Graw –
Hill Publishing Company Limited, New Delhi,
 5

FARM MANAGEMENT
Meaning
Farm Management comprises of two words i.e. Farm and Management.
Farm means a piece of land where crops and livestock enterprises are taken up
under common management and has specific boundaries.
Farm is a socio economic unit which not only provides income to a farmer but
also a source of happiness to him and his family. It is also a decision making unit
where the farmer has many alternatives for his resources in the production of crops
and livestock enterprises and their disposal. Hence, the farms are the micro units of
vital importance which represents centre of dynamic decision making in regard to
guiding the farm resources in the production process.
The welfare of a nation depends upon happenings in the organisation in each
farm unit. It is clear that agricultural production of a country is the sum of the
contributions of the individual farm units and the development of agriculture means
the development of millions of individual farms.
Management is the art of getting work done out of others working in a group.
Management is the process of designing and maintaining an environment in
which individuals working together in groups accomplish selected aims.
Management is the key ingredient. The manager makes or breaks a business.
Management takes on a new dimension and importance in agriculture which is
mechanised, uses many technological innovations, and operates with large amounts of
borrowed capital.
The prosperity of any country depends upon the prosperity of farmers, which
in turn depends upon the rational allocation of resources among various uses and
adoption improved technology. Human race depends more on farm products for their
existence than anything else since food, clothing – the prime necessaries are products
of farming industry. Even for industrial prosperity, farming industry forms the basic
infrastructure. Thus the study farm management has got prime importance in any
economy particularly on agrarian economy.
DEFINITIONS OF FARM MANAGEMENT.
1. The art of managing a Farm successfully, as measured by the test of
profitableness is called farm management. (L.C. Gray)
2. Farm management is defined as the science of organisation and management
of farm enterprises for the purpose of securing the maximum continuous
profits. (G.F. Warren)
3. Farm management may be defined as the science that deals with the
organisation and operation of the farm in the context of efficiency and
continuous profits. (Efferson)
4. Farm management is defined as the study of business phase of farming.
5. Farm management is a branch of agricultural economics which deals with
wealth earning and wealth spending activities of a farmer, in relation to the
organisation and operation of the individual farm unit for securing the
maximum possible net income. (Bradford and Johnson)
 6

NATURE OF FARM MANAGEMENT.

Farm management deals with the business principles of farming from the point
of view of an individual farm. Its field of study is limited to the individual farm as a
unit and it is interested in maximum possible returns to the individual farmer. It
applies the local knowledge as well as scientific finding to the individual farm
business.
Farm management in short be called as a science of choice or decision
making.

SCOPE OF FARM MANAGEMENT.

Farm Management is generally considered to be MICROECONOMIC in its

scope. It deals with the allocation of resources at the level of individual farm. The
primary concern of the farm management is the farm as a unit.
Farm Management deals with decisions that affect the profitability of farm
business. Farm Management seeks to help the farmer in deciding the problems like
what to produce, buy or sell, how to produce, buy or sell and how much to produce
etc. It covers all aspects of farming which have bearing on the economic efficiency of
farm.

RELATIONSHIP OF FARM MANAGEMENT WITH OTHER SCIENCES.

The Farm Management integrates and synthesises diverse piece of information

from physical and biological sciences of agriculture.
The physical and biological sciences like Agronomy, animal husbandry, soil
science, horticulture, plant breeding, agricultural engineering provide input-output
relationships in their respective areas in physical terms i.e. they define production
possibilities within which various choices can be made. Such information is helpful to
the farm management in dealing with the problems of production efficiency.
Farm Management as a subject matter is the application of business principles
n farming from the point view of an individual farmer. It is a specialised branch of
wider field of economics. The tools and techniques for farm management are supplied
by general economic theory. The law of variable proportion, principle of factor
substitution, principle of product substitution are all instances of tools of economic
theory used in farm management analysis.
Statistics is another science that has been used extensively by the agricultural
economist. This science is helpful in providing methods and procedures by which data
regarding specific farm problems can be collected, analysed and evaluated.
Psychology provides information of human motivations and attitudes, attitude
towards risks depends on the psychological aspects of decision maker.
 7

Sometimes philosophy and religion forbid the farmers to grow certain

enterprises, though they are highly profitable. For example, islam prohibits muslim
farmer to take up piggery while Hinduism prohibits beef production.
The various pieces of legislation and actions of government affect the
production decisions of the farmer such as ceiling on land, support prices, food zones
etc.
The physical sciences specify what can be produced; economics specify how
resources should be used, while sociology, psychology, political sciences etc. specify
the limitations which are placed on choice, through laws, customs etc.

ECONOMIC PRINCIPLES APPLIED TO FARM MANAGEMENT.

The outpouring of new technological information is making the farm problems

increasingly challenging and providing attractive opportunities for maximising
profits. Hence, the application of economic principles to farming is essential for the
successful management of the farm business.
Some of the economic principles that help in rational farm management
decisions are:
1. Law of variable proportions or Law of diminishing returns: It solves the
problems of how much to produce ? It guides in the determination of optimum
input to use and optimum output to produce.. It explains the one of the basic
production relationships viz., factor-product relationship
2. Cost Principle: It explains how losses can be minimized during the periods of
price adversity.
3. Principle of factor substitution: It solves the problem of ‘how to produce?. It
guides in the determination of least cost combinations of resources. It explains
facot-factor relationship.
4. Principle of product substitution: It solves the problem of ‘what to produce?’.
It guides in the determination of optimum combination of enterprises
(products). It explains Product-product relationship.
5. Principle of equi-marginal returns: It guides in the allocation of resources
under conditions of scarcity.
6. Time comparison principle: It guides in making investment decisions.
7. Principle of comparative advantage: It explains regional specialisation in the
production of commodities.
 8

LAW OF VARIABLE PROPORTIONS OR LAW OF DIMINISHING

RETURNS
OR
PRINCIPLE OF ADDED COSTS AND ADDED RETURNS

The law of diminishing returns is a basic natural law affecting many phases of
management of a farm business. The factor product relationship or the amount of
resources that should be used (optimum input) and consequently the amount of
product that should be produced (optimum output) is directly related to the operation
of law of diminishing returns.
This law derives its name from the fact that as successive units of variable
resource are used in combination with a collection of fixed resources, the resulting
addition to the total product will become successively smaller.
Most Profitable level of production
(a) How much input to use (Optimum input to use).The determination of
optimum input to use.
An important use of information derived from a production function is in
determining how much of the variable input to use. Given a goal of maximizing
profit, the farmer must select from all possible input levels, the one which will
result in the greatest profit.
To determine the optimum input to use, we apply two marginal concepts viz:
Marginal Value Product and Marginal Factor Cost.
Marginal Value Product (MVP): It is the additional income received from using
an additional unit of input. It is calculated by using the following equation.
Marginal Value Product = ? Total Value Product/? input level
MVP = ? Y. P y/? X
? Change
Y =Output
P y = Price/unit
Marginal Input Cost (MIC) or Marginal Factor Cost (MFC): It is defined as the
additional cost associated with the use of an additional unit of input.
Marginal Factor Cost = ? Total Input Cost/? Input level
MFC or MIC = ? X Px/? X = ? X .Px / ? x = Px
 9

X input Quantity
P x Price per unit of input
MFC is constant and equal to the price per unit of input. This conclusion
holds provided the input price does not change with the quantity of input
purchased.
Decision Rules:
1. If MVP is greater than MIC, additional profit can be made by using more input.
2. If MVP is less than MIC, more profit can be made by using less input.
3. Profit maximizing or optimum input level is at the point where MVP=MFC
(? Y/? X) . Py = P x ? Y/? X = P x/ P y

Determination of optimum input level – Example

Input price: Rs.12 per unit, Output price: Rs.2 per unit
Input level TPP MPP TVP (Rs) MVP (Rs) MIC (Rs)
X
0 0 -- -- -- --
1 12 12 24 24 12
2 30 18 60 36 12
3 44 14 88 28 12
4 54 10 108 20 12
5 62 8 124 16 12
6 68 6 136 12 12
7 72 4 144 8 12
8 74 2 148 4 12
9 72 -2 144 -4 12
10 68 -4 136 -8 12
The first few lines in the above table show that MVP to be greater than MIC. In other
words, the additional income received from using additional unit of input exceeds the
additional cost of that input. Therefore additional profit is being made. These
relationships exist until the input level reaches 6 units. At this input level MVP=MFC.
Using more than 6 units of input causes MVP to be less than MFC which causes profit
to decline as more input is used. The profit maximizing input level is therefore, at the
point where MVP=MIC. Note that the profit maximizing point is not at the input level
which maximizes TVP. Profit is maximized at a lower input level.
 10

(b) How much output to produce (Optimum output): The determination of

optimum output to produce.
To answer this question, requires the introduction of two new marginal
concepts.
Marginal Revenue (MR): It is defined as the additional income from selling
additional unit of output. It is calculated from the following equation
Marginal Revenue = Change in total revenue / Change in Total Physical Product
MR = ? TR / ? Y
MR=? Yy / ? Y
= Py
Y = output
P y = price per unit of output
Total Revenue is same as Total Value Product. MR is constant and equal to the price
per unit of output.
Marginal Cost (MC): It is defined as the additional cost incurred from producing an
additional unit of output. It is computed from the following equation.
Marginal Cost=Change in Total Cost / Change in Total Physical Product
MC=? X. P x/? Y
X= Quantity of input
P x= Price per unit of input.
Decision Rules:
1. If Marginal Revenue is greater than Marginal Cost, additional profit can be made
by producing more output.
2. If Marginal Revenue is less than Marginal Cost, more profits can be made by
producing less output.
3. The profit maximizing output level is at the point where MR=MC
? Y. P y/? Y=? X. P x/? Y
P y = ? X. Px/? Y
? Y. P y = ? X. Px
 11

Determination of Optimum output to produce: (An example)

Input Price Rs.2 per unit output price Rs.2 per unit
Input level TPP MPP TR (Rs) MR (Rs) MC (Rs)
X
0 0 - - -- --
1 12 12 24 2.00 1.00
2 30 18 60 2.00 0.67
3 44 14 88 2.00 0.86
4 54 10 108 2.00 1.20
5 62 8 124 2.00 1.50
6 68 6 136 2.00 2.00
7 72 4 144 2.00 3.00
8 74 2 148 2.00 6.00
9 72 -2 144 2.00
10 68 -4 136 2.00
In the above table, it is clear that MR is greater than MC up to the output level
62 units. At the output level of 68 units, the MR=MC. This is the optimum output to
be produced. If we produce 72 units of output, additional revenue from additional
output is less than the additional cost of producing output. Therefore profit decline.
COST PRINCIPLE OR MINIMUM LOSS PRINCIPLE:
This principle guides the producers in the minimization of losses.
Costs are divided into fixed and variable costs. Variable costs are
important in determining whether to produce or not . Fixed costs are important in
making decisions on different practices and different amounts of production.
In the short run, the gross returns or total revenue m ust cover the total variable
costs (TVC). To state in a different way that selling price must cover the avera ge
variable cost (AVC) to continue production in the short run.
In the long run, gross returns or total revenue must cover the total cost (TC).
Alternatively stated, that the selling price must cover cost of production (ATC).
In the short run MR = MC point may be at a level of output which may
involve loss instead of profit. The situation of operating the farms when the price of
product (MR) is less than average total cost (ATC) but greater than average variable
 12

cost (AVC) is common in agriculture. This explains why the farmers keep farming
even when they run into losses.
PROFIT OR DECISION RULES
SHORT RUN:
1. If expected selling price is greater than minimum average total cost (ATC), profit
is expected and is maximized by producing where MR = MC.
2. If expected selling price is less than minimum average total cost (ATC) but
greater than minimum average variable cost (AVC), a loss is expected but the loss
is less than TFC and is minimized by producing where MR = MC.
3. If expected selling price is less than minimum average variable cost (AVC), a loss
is expected but can be minimized by not producing anything. The loss will be
equal to TFC.

LONG RUN
1. Production should continue in the long run when the expected selling price is
greater than minimum average total cost (ATC).
2. Expected selling price which is less than minimum ATC result in continuous
losses. In this case, the fixed assets should be sold and money invested in more
profitable alternative.
The following example illustrates the operation of cost principle.
Cos t of cultivation of groundnut (Rs./ha)
Total variable costs 2621.00
Total fixed costs 707.00
Total costs 3328.00
Yield (quintals) 9
Average variable cost 291
Average total cost 369.77
Selling price 18430
Gross returns 3870
Net returns 542
Suppose the price declines to 350
Gross returns 3150
Net income -178
 13

If the price of groundnut per quintal is Rs. 430, for 9 quintals, farmer gets Rs. 3870 as
gross income. The net income is Rs. 542 (Rs. 3870 – Rs. 3328). Suppose the price
decline to Rs. 350 per quintal the net income would be Rs. 178 (Rs 3150 – Rs. 3870).
Now the question is whether the farmer should continue the production or not at the
price of Rs. 350.
If the farmer does not operate the farm the loss would be Rs. 707 in the form of fixed
costs. If farm is operated, gross income of Rs. 3150 exceeds the variable costs (Rs.
2621) by Rs. 529. By this amount the loss of Rs. 707 on account of fixed cots gets
reduced i.e., (Rs. 707-529 = Rs. 178). The loss would be reduced to Rs. 178 by
operating the farm.

PRINCIPLE OF FACTOR SUBSTITUTION

This economic principle explains one of the basic production relationships
viz., factor factor relationship. It guides in the determination of least cost combination
of resources. It helps in making a manage ment decision of how to produce.
Substitution of one input for another input occurs frequently in agricultural
production. For example, one grain can be substituted for another or forage for grain
in livestock ration, chemical fertilizers can be substitute d for organic manure,
machinery for labour, herbicides for mechanical cultivation etc. the farmer must select
that combination of inputs or practices which will produce a given amount of output
for the least cost. In other words, the problem is to find the least cost combination of
resources, as this will maximize profit from producing a given amount of output.
The principle of factor substitution says that go on adding a resource so long
as the cost of resource being added is less than the saving in cost from the resource
being replaced. Thus if input X1 is being increased, and input X2 is being replaced,
increase the use of X1 so long as.
Decrease in cost > Increase in cost
Quantity saved of the replaced input ? Quantity increased of the added input
>
price per unit of replaced input ? Price per unit of added input
Quantity saved of
the replaced input Price per unit of added input
i.e., > Price per unit of replaced input
Quantity increasedof
the added input
i.e. MRS > PR
 14

Profit or Decision rules:

1. If Marginal rate of substitution (MRS) is greater than price ratio (PR) costs can
be reduced by using more of added resource.
? X2 P X1
> increase the use of X1
? X1 P X2
or
? X1 > PX2 increase the use of X 2
? X2 PX1

2. If Marginal rate of substitution (MRS ) is less than price ratio (PR), costs can be
reduced by using more replaced resource.
? X2 P X1
< increase the use of X2
? X1 P X2
or
? X 1 < Px 2 increase the use oif X 1
? X 2 Px1

3. Least cots combination of resources is at the point where MRS=PR

? X2 P X1
=
? X1 P X2
or
? X1 = PX2
? X2 P X1

Example : Selecting a Least-cost feed ratio :

(Price of grain: Rs.4.40 per kg , price of hay : Rs.3/- per kg)
Grains in Hay in kgs
∆X1 ∆X2 MRS PR
kgs (X1 ) (X2)
825 1350 - - - -
900 1130 75 220 2.93 1.47
975 935 75 195 2.60 1.47
1050 770 75 165 2.20 1.47
1125 630 75 140 1.87 1.47
1200 520 75 110 1.47 1.47
1275 440 75 80 1.07 1.47
 15

The least cost combination of grain and hay is a combination of 1200 kgs of grain and
520 kgs of hay, as the substitution ratio equals price ratio.

LAW OF EQUI-MARGINAL RETURNS

Most of the farmers have limited resources. They have limited land, limited
capital, limited irrigation facilities. Even the labour which is considered to be surplus
becomes scarce during peak sowing, weeding and harvesting periods. Under such
resource limitations, farmers must decide how a limited amount of input should be
allocated or divided among many possible uses or alternatives. For example farmer
has to decide on the best allocation of fertilizer between different crops and feed
between different types of livestock. In addition, limited capital must be allocated to
the purchase of fertilizers, seeds, feed etc.
The equi-marginal principle provides guidelines for the rational allocation of
scare resources.The principle says that returns from the limited resources will be
maximum if each unit of the resource should be used where it brings greatest marginal
returns.
Statement of the law
A limited input should be allocated among alternative uses in such a way that
the marginal value products of the last unit are equal in all its uses.
Example
A farmer has Rs. 3000/- and wants to grow sugarcane, wheat and cotton. What
amount of money be spent on each enterprise to get maximum profits.
Marginal value products from
Amount (Rs.)
Sugarcane (Rs.) Wheat (Rs.) Cotton (Rs.)
500 800 (1) 750 (2) 650 (6)
1000 700 (3) 650 (5) 560
1500 650 (4) 580 550
2000 640 540 510
2500 630 520 505
3000 605 510 500

The first Rs. 500 would be allocated to sugarcane as it has the highest MVP. The
second dose of Rs. 500 would be allocated to wheat as its MVP is higher than that of
 16

cotton and sugarcane. In the same way, third would be used on sugarcane, the fourth,
fifth and the sixth on sugarcane, wheat and cotton respectively. Each successive Rs of
500 is allocated to the crop which has highest marginal value product remaining after
previous allocation.
The final allocation is Rs. 1500 on sugarcane, Rs 1000 on wheat and Rs. 500 on
cotton.

OPPORTUNITY COST
It is an economic concept closely related to the equi-marginal principle. Opportunity
cost recognizes the fact that every input has an alternative use. Once an input is
committed to a particular use, it is no longer available for any other alternative use
and the income from the alternative must be foregone.
Definition : Opportunity cost is defined as the returns that are sacrificed from the next
best alternative.
Opportunity cost is also known as real cost or alternate cost.

PRINCIPLE OF PRODUCT SUBSTITUTION

This principle explains the product-product relationship and helps in deciding the
optimum combination of products. Also, this economic principle guides in making a
decision of what to produce.
It is economical to substitute one product for another product, if the decrease in
returns from the product being replaced is less than the increase in returns from the
product being added.
The principle of product substitution says that we should go on increasing the output
of a product so long as decrease in the returns from the product being replaced is less
than the increase in the returns from the product being added.
Decrease in returns < Increase in returns
Quantity of output reduced of replaced Quantity of output increased of
product ? price per unit of replaced < added product ? Price per unit of
product added product
 17

Quantity of output reduced Price per unit of

of replaced product added product
i.e. <
Quantity of output increased Price per unit of
of added product replaced product

i.e. MRS < PR

Profit rules or Decision rules:
1. If MRS < PR, profits can be increased by producing more of added product.
? Y2 P Y1
MRSY1, Y2 = < increase Y1
? Y1 P Y2

? Y1 P Y2
MRS Y2, Y1 = < increase Y2
? Y2 P Y1
2. MRS > PR, profits can be increased by producing more of replaced product.
? Y2 P Y1
MRSY 1, Y2 = > increase Y2
? Y1 P Y2
? Y1 P Y2
MRSY 2, Y1 = > increase Y1
? Y2 P Y1
3. Optimum combination of products is when MRS= PR
? Y2 P Y1
=
? Y1 P Y2
or
? Y1 P Y2
=
? Y2 P Y1
Example : Selecting an optimum combination of enterprises
(P Y1 = Rs. 280 per quintal; P Y2 = Rs. 400 per quintal)
Increase
Y1 Y2 Decrease
∆Y1 ∆ Y2 MRS PR in
(Quintals) (Quintals) Y1, Y2 in returns
returns
0 60 - - - - - -
20 56 20 4 0.20 0.70 1600 5600
40 50 20 6 0.30 0.70 2400 5600
60 41 20 9 0.45 0.70 3600 5600
80 30 20 11 0.55 0.70 4400 5600
100 16 20 14 0.70 0.70 5600 5600
120 0 20 16 0.80 0.70 6400 5600
 18

It can be seen from the above table that upto fifth combination MRS is less than PR.
But at the sixth combination MRS is equal to PR. Therefore, the sixth combination
which produces 100 qunitals of corn Y1 and 16 qunitals of wheat Y 2 is the optimum
or profit maximizing combination.
PRINCIPLE OF COMPARATIVE ADVANTAGE
Certain crops can be grown in only limited areas because of specific soil and
climatic requirements. However, even those crops and livestock enterprises which can
be raised over a broad geographical area often have production concentrated in one
region. Farmers in Punjab specialize in wheat production while farmers in Andhra
Pradesh specialize in paddy production. These crops can be grown in each state.
Regional speciation in the production of agricultural commodities and other products
can be explained by the principle of comparative advantage.
While crops and livestock products can be raised over a broad geographical
area, the yields, produc tion costs, profits may be different in each area. It is relative
yields, costs, and profits which are important for the application of this principle.
Statement of the principle
Individuals or regions will tend to specialize in the production of those
commodities for which their resources give them a relative or comparative advantage.
The following example illustrates the principle of comparative advantages.
Region A Region B
Crop account per acre
Wheat Groundnut Wheat Groundnut
Total Revenue (Rs.) 500 225 225 220
Total Cost (Rs.) 425 200 210 200
Net Returns (Rs.) 75 25 15 20
Returns per rupee 1.18 1.13 1.07 1.10

Region A has greater absolute advantage in growing both wheat and

groundnut than Region B because the net incomes per acre are Rs. 75 and Rs. 25
respectively which are higher than the net incomes from wheat and groundnut in
Region B. Farmers of Region A can make more profits by growing both the crops.
But they want to make the greatest profits and this can be done by having the largest
possible acreage under wheat alone as it is the question of relative advantage.
Similarly farmers of Region B have relative advantage in growing groundnut.
 19

TIME COMPARISON PRINCIPLE

Many farm decisions involve time. For example, a farmer has to decide
between a cereal crop which would be harvested after about four months or an
orchard which would start giving returns after three years. Further, a farmer has to
decide whether to purchase new farm machinery with 10 years of life or a second
hand one which may have only five years of life. Several other decisions involving
time and initial capital investment could be judiciously taken by compounding or
discounting.
Future value of a present sum:
The future value of money refers to the value of an investment at a specified
date in the future.
This concept assumes that investment will earn interest which is reinvested at
the end of each time period to also earn interest. The procedure for determining the
future value of present sum is called compounding .
The formula to find the future value of present sum in given below
FV = P (1 + i)n
where,
FV = Future value;
P = the present sum,
i = the interest rate,
n = the number of years.
Example:
Assume you have invested Rs. 100 in a savings account which earns 8% interest
compounded annually and would like to know the future value of this investment after
3 years.
Value at Value at the
Rate of Interest
Year beginning of end of the
interest earne d (Rs.)
year (Rs.) year (Rs.)
1 100 8% 8.00 108.00
2 108 8% 8.64 116.64
3 116.64 8% 9.33 125.97
 20

In the example, a present sum of Rs. 100 has a future value of Rs. 125.97 when
invested at 8 per cent interest for 3 years. Interest is compounded when accumulated
interest also earns future interest.
Present value of future sum:
Present value of future sum refers to the current value of sum of money to be
received in the future. The procedure to find the present value of future sum is called
discounting .
The discounting is done because sum to be received in the future is worth somewhat
less now because of the time difference assuming positive interest rate.
The equation for finding the present value of future sum is
P
PV =
(1+ i)n
where,
PV = Present value
P = Future sum
i = rate of interest
n = number of years.
Example:
Find the present value of Rs. 1000/- to be received in 5 years using an interest rate of
8%.
1000
PV = = 681
(1 + 0.08 )5
A payment of Rs. 1000 to be received in 5 years has a present value of Rs. 681 at 8%
interest.

TYPES OF FARMING
On the basis of similarity in crop production and livestock rearing we have
TYPES OF FARMING.
The type of farming refers to the nature and degree of product or combination
of products being produced and the methods and practices used for them

I. SPECIALIZED FARMING:
When a farm is organized for the production of a single commodity and this
commodity is the only source of income, the farm is said to be specialized.
 21

The major enterprise contributes more than 50% of the total farm income.
Examples are sugarcane farm, cotton farm, poultry farm, dairy farm, wheat farm etc.
Advantages:
1. Better use of land
2. Better marketing
3. Better management
4. Improved skill and efficiency
5. Economical to maintain costly machinery
6. Less requirement of labour
Disadvantages:
1. Greater risk
2. Soil fertility cannot be maintained
3. By products cannot be fully utilized
4. Income is received once or twice in a year
5. Knowledge about enterprises becomes limited.
II. DIVERSIFIED FARMING:
When a farm is organized to produce several products (commodities), each of
which is itself a direct source of income, the farm business is said to be diversified. In
diversified farming, no single enterprise contributes 50% of the total farms income.
Advantages:
1. Better utilization of productive resources.
2. Reduction of risks .
3. Regular and quicker returns.
4. Proper utilization of by products.
Disadvantages:
1. Supervision will become difficult.
2. Marketing problems.
3. Not economical to maintain costly machinery.
III. MIXED FARMING:
It is the type of farming under which crop production is combined with
livestock raising. At least 10 per cent of gross income must be contributed by the
livestock. T his contribution in any case should not exceed 49%.
Advantages:
1. Maintenance of soil fertility
2. Proper use of by products
 22

3. Facilitates intensive cultivation

4. Higher income
5. Milch cattle provide drought animals.
6. Employment of labour.
IV. RANCHING:
The practice of grazing animals on public lands is called ranching. Ranch land is not
used for raising of crops. Ranching is followed in Australia, America and Tibet
V. A. Dry farming: Cultivation of crops in regions with annual rainfall of less than
750 mm. Crop failure is most common due to prolonged dry spells during crop period.
B. Dry land farming : Cultivation of crops in regions with annual rainfall of more
than 750mm. Moisture conservation practices are necessary for crop production.
C. Rain fed farming : Cultivation of crops in regions with an annual rain fall of
more than 1150 mm.
FACTORS AFFECTING TYPES OF FARMING:
Physical factors : Climate, soils, topography.
Economic factors:
1. Marketing cost
2. Relative profitability of enterprises
3. Availability of capital
4. Availability of labour
5. Land values
6. Cycles over and under production
7. Compe tetion between enterprises
8. Personal likes and dislikes of farmer

SYSTEMS OF FARMING.
The system of farming refers to the organizational set up under which farm is
being run. It involves questions like who is the owner of land, whether resources are
used jointly or individually and who makes managerial decisions.
Systems of farming, which are based on different organisational set up, may
be classified into five broad categories:
a) Capitalistic farming
b) State farming
c) Collective farming
 23

d) Peasant farming
e) Co-operative farming
1. Capitalist or Estate farming: In what is known as capitalistic or estate or
corporate farming, land is held in large areas by private capitalists, corporations or
syndicates. Capital is supplied by one or a few persons or by many, in which case it
runs like a joint stock company. In such farms, the unit of organization is large and
the work is carried on with hired labour; latest technical know how is used and
extensive use of machines are made and hence they are efficient. Examples of this
type of farming are frequently found in USA, Australia, Canada and few in India too.
Such types of farms have been organized in the states of Bombay, Madras and
Mysore for the plantation of coffee, tea and rubber and sugarcane.
The advantages of such farming are good supervision, strong organizational
set up, sufficient resources etc. Their weaknesses are that it creates socio-economic
imbalances and the actual cultivator is not the owner of the farm.
2.State farming: State farming as the name indicates is managed by the government.
Here land is owned by the state. The operation and management is done by
government officials. The state performs the function of risk bearing and decision
making, which cultivation is carried on with help of hired labour. All the labourers are
hired on daily or monthly basis and they have no right in deciding the farm policy.
Such farms are not very paying because of lack of incentive. There is no dearth of
resources at such farms but s ometimes it so happens that they are not available in time
and utilized fully.
3.Collective farming: The name, collective farming implies the collective
management of land where in large number of families or villagers residing in the
same village pool the ir resources eg: land, livestock, and machinery. A general body
having the highest power is formed which manages the farms. The resources do not
belong to any family or farmer but to the society or collective.
Collective farming has come into much promine nce and has been adopted by
some countries notably by the Russia and China. The worst thing with this system is
that the individual has no voice. Farming is done generally on large scale and thereby
is mostly mechanized. This system is not prevalent in our country.
4.Peasant farming: This system of farming refers to the type of organization in
which an individual cultivator is the owner, manager and organizer of the farm. He
makes decision and plans for his farm depending upon his resources which are
 24

genera lly meager in comparison to other systems of farming. The biggest advantage
of this system is that the farmers himself is the owner and therefore free to take all
types of decisions. A general weakness of this system is that the resources with the
individual are less. Another difficulty is because of the law of inheritance. An
individual holding goes on reducing as all the members in the family have equal rights
in that land.
5.Cooporative farming: Co-operative farming is a voluntary organization in which
small farmers and landless labourers increase their income by pooling land resources.
According to planning commission, Co-operative farming necessarily implies pooling
of land and joint management. The working group on co-operative farming defines a
co-operative farming society as “a voluntary association of cultivators for better
utilization of resources including manpower and pooled land and in which majority of
the members participate in farm operation with a view to increasing agricultural
production, employment and income.”
A co-operative farming society makes one of the following four forms
I. Co-operative better farming
II. C-operative Joint farming
III. Co-operative tenant farming
IV. Co-operative collective farming
Co-operative better farming: These societies are based on individual ownership and
individual operation. Farmers who have small holdings and limited resources join to
form a society for some specific purpose eg: use of machinery, sale of product. They
are organized with a view to introduce improved methods of agriculture. Each farmer
pays for the services which he receives from the society. The earnings of the member
from piece of land, after deducting the expenses, his profit.
Co-operative Joint farming: Under this type, the right of individual ownership is
recognized and respected but the small owners pool their land for the purpose of joint
cultivation. The ownership is individual but the operations are collective. The
management is democratic and is elected by the members of the society. Each
member working on the farm receives daily wages for his daily work and profit is
distributed according to his share in land.
Co-operative tenant farming: Such societies are usually organized by landless
farmers. In this system usually land belongs to the society. The land is divided into
plots which are leased out for cultivation to individual members. The society arranges
 25

for agricultural requirements eg: credit, seeds, manures, marketing of the produce etc.
Each member is responsible to the society for the payments of rent on his plot. He is
at liberty to dispose of his produce in such a manner as he likes.
Co-operative collective farming: Both ownership and operations under this system
are collective. Members do not have any right on land and they can not take far ming
decisions independently but are guided by a supreme general body. It undertakes joint
cultivation for which all members pool their resources. Profit is distributed according
to the labour and capitals invested by the members.
Types of Operation
System of farming Type of ownership
ship
I Co-operative farming
a Coop. better farming Individual Individual
b Coop. joint farming Individual Collective
c Coop. tenant farming Collective Individual
d Coop. collective farming Collective Collective
II Collective farming Society/state Society/State
III Capitalistic farming Individual Individual
IV State farming State Paid Management
V Peasant farming Individual Individual

FARM PLANNING
A successful farm business is not a result of chance factor. Good weather and
good prices help but a profitable and growing business is the product of good
planning. With recent technological developments in agriculture, farming has become
more complex business and requires careful planning for successful organisation.
A farm plan is a programme of total farm activity of a farmer drawn up in
advance. A farm plan should show the enterprises to be taken up on the farm; the
practices to be followed in their production ,use of labour , investments to be made and
similar other details
Farm planning enables the farmer to achieve his objectives (Profit
maximization or cost minimization) in a more organized manner. It also helps in the
analysis of existing resources and their allocation for achieving higher resource use
efficiency, farm income and farm family welfare. Farm planning is an approach which
 26

introduces desirable changes in farm organization and operation and makes a farm
viable unit.
TYPE OF FARM PLANS
1. Simple farm planning: It is adopted either for a part of the land or for one
enterprise or to substitute one resource to another. This is very simple and easy to
implement. The process of change should always begin with these simple plans.
2. Complete or whole farm planning: This is the planning for the whole farm. This
planning is adopted when major changes are contemplated in the existing organization
of farm business.
Characteristics of Good farm plan
1. It is should be written.
2. It should be flexible..
3. It should provide for efficient use of resources.
4. Farm plan should have balanced combination of enterprises. Such combination
in turn ensures,
a. Production of food, cash and fodder crops.
b. Maintain soil fertility.
c. Increase in income.
d. Improve distribution of and use of labour, power and water requirement
throughout the year.
5. Avoid excessive risks.
6. Utilize farmer’s knowledge and experience and take account of his likes and
dislikes.
7. Provide for efficient marketing.
8. Provision for borrowing, using and repayment of credit.
9. Provide for the use of latest technology.
FARM BUDGETING
Budgeting can be used to select the most profitable plan from among a number
of alternatives and to test the profitability of any proposed change in plan. It involves
testing a new plan before implementing it, to be sure that it will improve profit.
Farm budgeting is a method of estimating expected income, expenses and
profit for a farm business.
 27

Types of farm budgets

1. Enterprise budget
An enterprise is defined as a single crop or livestock commodity
being produced on the farm. An enterprise budget is an estimate of all income and
expenses associated with a specific enterprise and estimate of its profitability.
Enterprise budget can be developed for each actual and potential
enterprise in a farm plan such as paddy enterprise, wheat enterprise or a cow
enterprise. Each is developed on the basis of small common unit such as one acre or
one hectare for crops or one head for livestock. This permits easier comparison of the
profit for alternative and competing enterprises.
Enterprise budget can be organized and presented in three sections income,
variable costs and fixed costs.
The first step in developing an enterprise is to estimate the total production
and expected output price. The estimated yield should be an average yield expected
under normal weather conditions given the soil type and input levels to be used. The
output price should be the manager’s best estimate of the average price expected
during the next year or next several years.
Variable costs are estimated by knowing the quantities of inputs to be used
(such as seed, fertilizer, labour, manures) and their prices.
The fixed costs in a crop enterprise budget are depreciation on
machinery, equipment, implements, livestock, farm building etc., rental value of land,
land revenue, interest on fixed capital.
Example: Enterprise budget for paddy production (one hectare)
I) INCOME
48 quintals @ Rs. 600 per quintal 28,800
II) VARIABLE COSTS
1. Human labour 9,000
a) Owned 3,000
b) Hired 6,000
2. Bullock labour 300
a) Owned 100
b) Hired 200
3. Tractor power 4,000
a) Owned 1,000
b) Hired 3,000
4. Seeds 1,200
5. F.Y.M. 1,800
6. Green leaf manures 700
7. Fertilizers 3,000
8. Plant protection chemicals 500
9. Irrigation charges 500
10. Interest on working capital 1,700
Total variable costs 22,700
 28

III) FIXED COSTS

1. Land revenue 12
2. Depreciation 900
3. Rent on owned land 3,500
4. Interest on fixed capital 450
Total fixed costs 4,862
Total costs 27,562
Gross margin (T.R. - T.V.C.) 6,100
Profit (T.R.-T.C.) 1,238

2. Partial budget
It is used to calculate the expected change in profit for a proposed change in
the the farm business. Partial budget is best adopted to anlysing relatively small
change in the whole farm plan.
Changes in the farm plan or organization adopted to analysis by use of partial
budget are of three types.
1. Enterprise substitution: This includes a complete or partial substitution of one
enterprise for another. For example, substitution of sunflower for groundnut.
2. Input substitution : Example : Machinery for labour, changing livestock rations,
owning a machine instead of hiring, increasing or decreasing fertilizers or
chemicals.
3. Size or scale of operation: This includes changing in total size of the farm
business or in the size of the single enterprise, buying or renting of additional
land , expanding or decreasing an enterprise.
 29

Partial budget format

Proposed change
……………………………………………………………………………

Additional cost (Rs.) Additional income (Rs.)

Reduced income (Rs.) Reduced costs (Rs.)

A. Total of additional costs B. Total of additional

and reduced income ________________ income and reduced Costs_________

Net cha nge in profit (B -A)

1. Additional costs
A proposed change may cause additional costs because of a new or expanded
enterprise requiring the purchase of additional inputs.
2. Reduced income
Income may be reduced if the proposed cha nge would eliminate an enterprise, reduce
the size of an enterprise or cause a reduction in yield.
3. Additional income
A proposed change may cause an increase in total farm income if a new enterprise is
being added, if an enterprise is being expanded or if the change will cause yield levels
to increase.
4. Reduced costs
Costs may be reduced if the change results in elimination of an enterprise, or
reduction in size of an enterprise or some change in technology which decreases the
need for variable resources.
Partial budgeting is intermediate in scope between enterprise budgeting and
whole farm planning. A partial budget contains only those income and expense items
which will cha nge if the proposed modification in the farm plan is implemented. Only
the changes in income are included and not total values. The final result is an estimate
of the increase or decrease in profit.
3. Complete Budget or Whole farm budget
It is statement of expected income, expenses, and profit of the firm as a whole.
 30

4. Cash flow budget

It is summary of cash inflows and outflows for a business over a given time
period. Its primary purpose is to estimate the future borrowing needs and loan
repayment capacity of the farm business.
BASIC STEPS IN FARM PLANNING AND BUDGETING

I. RESOURCE INVENTORY:

The development of whole plan is directly dependent upon an accurate

inventory of available resources. The resources provide the means for production
and profit. The type and quality of resources available determine the inclusion of
enterprise in whole farm plan.
1) Land: Land resource should receive top priority when completing the resource
inventory. It is one of the fixed resources. The following are some of the
important items to be included in land inventory
a) Total number of acres available
b) Soil types ( slope, texture, depth)
c) Soil fertility levels.
d) Water supply or potential for developing an irrigation system.
e) Drainage problems and possible corrective measures.
f) Existing soil conservation practices
g) Existing and potential pest and weed problems which might
affect enterprise selection and crop yields.
h) Climatic factors including annual rainfall, growing seasons etc.
2) Buildings: Listing of all farm buildings along with their size, capacity and
potential uses. Livestock enterprises and crop storage may be severely limited in
both number and size of the build ings available.

3) Labour: Labour should be analyzed for both quantity and quality. Quantity can
be measured in man days of labour available from the farm operator (farmer),
family members and hired labour. Labour quality is more difficult to measure, but
any special s kills, training and experience should be noted.
4) Machinery: it is also a fixed resource. The number, size and capacity of the
available machinery should be included in the inventory.
5) Capital: The farmer’s own capital and estimate of amount which can be
borrowed represent the capital available for developing whole farm plan.
6) Management: The assessment of the management resources should include not
only overall management ability but also special skills, training, strengths,
weaknesses of mana ger. Good management is reflected in higher yields and more
efficient use of resources.
 31

II. Identifying enterprises: Based on resource inventory, certain crop and

livestock enterprises will be feasible alternatives. Care should be taken to include
all possible enterprises to avoid missing enterprise with profit potential. Custom
and tradition should not be allowed to restrict the list of potential enterprises.
III. Estimation of co-e fficients : Each enterprise should be defined on small unit
such one acre or hectare for crops and one head for livestock. The resource
requirements per unit of each enterprise or the technical coefficients must be
estimated. The technical coefficients become very important in determining the
maximum size of enterprise and the final enterprise combination.
IV. Estimating gross margins :
A gross margin is estimated for a single unit of each enterprise. Gross margin
is the difference between total income and total variable costs. Calculation of
gross margin requires the farmer’s best estimate of yields for each enterprise and
expected prices for the output. The calculation of total variable cost requires a list
of each variable input needed, the amount required and the price of each input.
V. Developing the whole farm plan:
All information necessa ry to organize a whole farm plan is now ready for
use. The systematic procedure to whole farm planning is identifying the most
limiting resource and selecting those enterprises with greatest gross margin per
unit of resource.
Gross Margin ____
Returns per unit of resource = Units of resources required

Land will generally be a limiting resource and it provides a good

starting point. At some point in the planning procedure, a resource other than
land may become more limiting and emphasis shifts to identifying enterprises
with greatest return or gross margin per unit of this resource.
LINEAR PROGRAMMING
Linear programming was developed by George B Dantzing (1947) during
second world war. It has been widely used to find the optimum resource allocation
and enterprise combination.
The word linear is used to describe the relationship among two or more
variables which are directly proportional. For example , doubling (or tripling) the
production of a product will exactly double (or triple) the profit and the required
resources, then it is linear relationship.
Programming implies planning of activities in a manner that achieves some optimal
result with restricted resources.

Definition of L.P.
 32

Linear programming is defined as the optimization (Minimization or maximization) of

a linear function subject to specific linear inequalities or equalities.

Max z cj xj
j=1

St

aij < bi i=1to m

j=1

xj = 0

cj = Net income from jth activity

xj = Level of jth activity
aij = Amount of ith resource required for jth activity
bi = Amount of ith resource available.

Assumptions of Linear Programming

1. Linearity: It describes the relationship among two or more variables which are
directly proportional.
2. Additivity: Total input required is the sum of the resources used by each activity.
Total product is sum of the production from each activity.
3. Divisibility: Resources can be used in fractional amounts. Similarly, the output can
be produced in fractions.
4. Finiteness of activities and resource restrictions: There is limit to the number of
activities and resource constraints.
5. Non negativity: Resources and activities cannot take negative values. That means
the level of activities or resources cannot be less than zero.
6. Single value expectations: Resource supplies, input-output coefficients and prices
are known with certainty.
Advantages of L.P
1. Allocation problems are solved.
2. Provides possible and practical solutions..
3. Improves the quality of decisions.
 33

4. Highlights the constraints in the production.

5. Helps in optimum use of resources.
6. Provides information on marginal value products (shadow prices).
Limitations
1. Linearity
2. Considers only one objective for optimization.
3. Does not consider the effect of time and uncertainty
4. No guarantee of integer solutions
5. Single valued expectations.
Complete budgeting Partial budgeting
1. It is adopted when drastic changes 1. Adopted when minor changes are
in the existing organization are introduced on the farm.
contemplated
2. All the available alternatives are 2. Considers few or only two
considered alternatives
3. It is a method of estimating 3. It is used to calculate expected
expected income, expenses and change in profit for a proposed
profit for the farm as a whole minor modification

Farm budgeting Linear programming

1. Method of estimating expected 1. Optimization of linear function
income, expenses and profit for the subject to linear inequalities or
farm business equalities.
2. Non mathematical tool 2. Mathematical programming mode ls
3. It is a trial and error method 3. It offers a mechanical process of
calculations in the selection of
products
4. Computation become tedious and 4. Computations are easy. .
cumbersome.

RISK AND UNCERTAINTY

Farmers must make decisions on crops to be planted, seeding rates, fertilizer
levels and other input levels early in the cropping season. The crop yield obtained as a
result of these decisions will not be known with certainty for several months or even
several years in the case of perennial crops. Changes in weather, prices and other
factors between the time the decision is made and the final outcome is known can
make previously good decision very bad.
Because of time lag in agricultural production and our inability to predict the
future accurately, there are varying amounts of risk and uncertainty in all farm
 34

management decisions. If everything was known with certainty, decision would be

relatively easy. However, in the real world more successful manager are the ones with
the ability to make the best possible decisions, and courage to make them when
surrounded by risk and uncertainty.
Definition of risk and uncertainty
Risk is a situation where all possible outcomes are known for a given management
decision and the probability associated with each possible outcome is also known.
Risk refers to variability or outcomes which are measurable in an empirical or
quantitative manner. Risk is insurable.
Uncertainty exists when one or both of two situations exist for a management
decision. Either all possible outcomes are unknown, the probability of the outcomes is
unknown or nether the outcomes nor the probabilities are known. Uncertainty refers
to future events where the pa rameters of probability distribution (mean yield or price,
the variance, range or dispersion and the skew and kurtosis) cannot be determined
empirically. Uncertainty is not insurable.
Sources of risk and uncertainty
The most common sources of risk are.
1. Production risk: Crop and livestock yields are not with certainty before harvest or
final sale weather, diseases, insects, weeds are examples of factors which can not be
accurately predicted and cause yield variability.
Even if the same quantity and quality of inputs are used every year, these and
other factors will cause yield variations which cannot be predicted at the time most
input decision must be made. The yield variations are examples of production risk.
Input prices have tended to be less variable than output prices but still
represent another source of production risk. The cost of production per unit of output
depends on both costs and yield. Therefore , cost of production is highly variable as
both input prices and yield vary.
2. Technological risk: Another source of production risk is new technology. Will the
new technology perform as expected? Will it actually reduce costs and increase
yields? These questions must be answered before adopting new technology.
3. Price or marketing risk: Variability of output prices is another source of risk.
Commodity prices vary from year to year and may have substantial seasonal variation
within a year. Commodity prices change for number of reasons which are beyond the
control of individual farmer.
 35

4. Financial risk: Financial risk is incurred when money is borrowed to finance the
operation of farm business. There is some chance that future income will not be
sufficient to repay the debt. Changes may take place in the interest rates, scale of
finance, and ability of the business to generate income.
METHODS OF REDUCING RISK AND UNCERTAINTY
The various methods which can be used to reduce risk are discussed
hereunder.
1. Diversification: Production of two or more commodities on the farm may reduce
income variability if all prices and yields are not low or high at the same time.
2. Stable enterprises: Irrigation will provide more stable crop yields than dry land
farming. Production risk can be reduced by careful selection of the enterprises with
low yield variability. This is particularly important in areas of low rainfall and
unstable climate.
3. Crop and livestock insurance: For phenomena, which can be insured, possible
magnitude of loss is lessened through converting the chance of large loss into certain
cost.
4. Fle xibility: Diversification is mainly a method of preventing large losses.
Flexibility is a method of preventing the sacrifice of large gains. F lexibility allows for
changing plans as time passes, additional information is obtained and ability to predict
the future improves.
5. Spreading sales: Instead of selling the entire crop output at one time, farmers
prefer to sell part of the output at several times during the year. Spreading sales avoids
selling all the crop output at the lowest price of the year but also prevents selling at
the highest price.
6. Hedging: It is a technical procedure that involves trading in a commodity futures
contracts through a commodity broker.
7. Contract sales: Producers of some specialty crops like gherkins, vegetables often
sign a contract with a buyer or processor before planting season. A contract of this
type removes the price risk at planting time.
8. Minimum support price: The government purchases the farm commodity from
the farmers if the market price falls below the support price.
9. Net worth: It is the net worth of the business that provides the solvency, liquidity
and much of the available credit.
 36

AGRICULTURAL PRODUCTION ECONOMICS

 37

BASIC TERMS AND CONCEPTS USED IN AGRICULTURAL

PRODUCTION ECONOMICS AND FARM MANAGEMENT
1. FARM : It means a piece of land where crops and livestock enterprises are taken up
under a common management and has specific boundaries.
2. AGRICULTURAL HOLDING: The area of the land for cultivation as a single
unit held by an individual or joint family or more than one farmer on joint basis. The
land may be owned, taken on lease or may be partly owned and partly rented.
3. OPERATIONAL HOLDING: It refers to the total land area held under single
management for the purpose of cultivation. It excludes any land leased to another
person.
4. UNITS OF ACCOUNTING: Application of inputs or measurement of output
relate to technical unit, plant or an economic unit.
a) TECHNICAL UNIT: Single, convenient unit in production for which technical
coefficients (input-output coefficients) are calculated. Examples are an acre, a hectare,
a cow etc.
b) PLANT: Generally refers to a group of technical units such as dairy enterprise or
say 15 acre farm.
c) FARM FIRM : Aggregation of resources for which costs and returns ar e worked
out as a whole. Farm-firm is also known as economic unit. Example: a farm holding.
5. RESOURCES AND RESOURCE SERVICES:
Resources Resource services
1. Any commodity or goods used by 1. A services is any act or
the firms in production performance that one party can
offer to another
2. Physical products (material) and 2.Neither material nor tangible.
tangible
3. Resources get consumed or 3.Only services are available which
physically enter the production are tra nsformed into products.
process so as to be transformed
into products.
4. Resources being physical 4.Services cannot be
products can be stored. stored(Perishable).
5. Ex: Seeds, manures, fertilizers, 5.Ex: Services of land, labour,
 38

plant protection chemicals, machinery, equipment, implements,

herbicides, irrigation water, feeds, livestock, farm buildings etc.,
veterinary medicines, fuel etc.,
Resources and resource services are called factors of production. They are
needed to produce any commodity.

6. FIXED RESOURCES:
a) The resources whose use remains the same regardless of the level of production
are called fixed resources.
b) Volume of output does not directly depend up on these resources.
c) Costs corresponding to these resources are known as fixed costs.
d) Fixed resources exist only in the short run and in the long run they
are zero
Example: land, machinery, farm buildings , equipment, implement, livestock
etc.,

7. VARIABLE RESOURCES:
a) The resources whose use vary with the level of production are known
as variable resources.
b) Volume of output directly depends on these resources.
c) Costs corresponding to these resources are known as variable costs.
d) Variable resources exist both in the short run and in the long run.
Seeds, Fertilizers, Plant protection chemicals, FYM, feeds, medicines etc.,
are examples of variable resources.
8.FLOW AND STOCK RESOURCES:
Flow Resources: There are some resources which should be used as and when they
are available. They cannot be stored or stocked for a future use. Services are
forthcoming like a flow. Examples are labour, Sunshine, land, farm buildings,
machinery, equipment etc.
Stock Resources: The resources which are not used in one period of production can
be stored for a later period. Examples are seeds, fertilizers, feeds, manures, plant
protection chemicals etc.
 39

Some factors of production are both flow and stock services. Whether a
service should be defined as flow or stock depends on the length of the time period
under consideration.
Examples are land, machinery, buildings etc.
A building lasts for 50 years provides a flow of services in each of the
individual years, still it provides a stock of services for 50 years period. Similarly a
tractor gives flow of services for each year, but a stock service over 10 years.

9. PRODUCTION: It is a process whereby some goods and services called inputs are
transformed into other goods called output is known as production.
(Or)
Production is a process of transformation of certain resources (inputs) into products.

10. PRODUCT: It is the result of the use of resources. Product is any good or service
that comes out of the production process.
11. TRANSFORMATION PERIOD (OR) PRODUCTION PERIOD:
The time required for a resource to be completely transformed into a
product is referred to as transformation period.
The production period varies with the type of resource. Some resources
are transformed into products in short time period (seeds, feed, fuel, fertilizers,
manures, plant protection chemicals etc.,). Others over a long period of time
(machines, buildings etc) and still others are never completely transformed (land).
The variations in production period give rise to complexities in decision making.
12. CHOICE INDICATOR:
It is a yardstick, or an index or a criterion indicating which of two or
more alternatives is optimum or will maximize a given end.
The choice indicator as a yardstick by which selection between
alternatives is made, indicates the relative value which is attached to one as compared
to another alternative.
Choice indicators can be applied to problems in physical production as
well as to those of profit maximization and consumer welfare. Choice indicators in
economics are almost always given as ratios: examples are substitution ratios and
price ratios.
 40

13. SHORT RUN AND LONG RUN: These are time concepts but they are not
defined as fixed periods of calendar time.
The short run is that period of time during which one or more of the
production inputs is fixed in amount and cannot be changed.
The level of production can be varied to a little extent by intensive use of
fixed resources or by using more amounts of variable resources. During the short
period, demand and supply change a little but not much.
For example, at the beginning of the planting season, it may be too late to
increase or decrease the amount of crop land owned or rented. The current crop
production cycle would be a short run period as land is fixed in amount.
The long run is defined as that period of time during which the quantity
of all necessary productive inputs can be changed.
The level of production can be varied to a greater extent by varying all the
factors of production. Demand and supply conditions have plenty of time to adjust
themselves.
In the long run, a business can expand by acquiring additional inputs or
go out of existence by selling all inputs.
Depending on which input(s) are fixed, the short run may be anywhere
from several days to several years. One year or one crop or livestock production cycle
are common short run periods in agriculture.
The distinction between fixed and variable resources holds true only in
the short run. In the long run, all resources are variable .

14. COST OF CULTIVATION : It refers to the cost of various inputs and input
services used for raising a particular crop. It includes all the operations from land
preparation to threshing, cleaning and taking the product from the field to home. Cost
of cultivation always refers to unit area (acre or hectare).
15. COST OF PRODUCTION: It refers to the cost of various inputs and input
services used to produce a unit quantity of output of a commodity.
16. ECONOMY: It is a system which provides people with means to work and earn a
living. Economy consists of all sources of employment and production such as
firms, factories, workshops, mines etc.
17. ECONOMIC SYSTEM: It is an institutional framework within which society
carries the economic activities.
 41

18. EFFICIENCY: it means absence of waste or using the economy’s resources as

effectively as possible to satisfy people’s needs and desir es.
19. TECHNIOCAL EFFICIENCY: It refers to the amount of output with given
amounts of factors of production. In other words, technical efficiency is the ratio of
output to input (Average physical product).
Technical efficiency = Y/X, Where Y= Total output and X= Quantity of input
20. ECONOMIC EFFICIENCY: It is a ratio of value of output to value of input.
Economic efficiency = Y.Py / X.Px
21. OPTIMUM : It is the ideal condition in which the costs are minimum and profits
are maximum.
22. MONOPERIOD RESOURCES: The resources which can be used in a single
production period are called mono period resources. Seeds, feeds, fuel, fertilizers,
manures, plant protection chemicals are some of the examples of mono period
resources.
23. POLYPERIOD RESOURCES: The resources which provide their services for
several years in production are known as poly period resources. Examples are land,
livestock, machinery, equipment, buildings etc.
24. ENTERPRISE: It is defined as a single crop or livestock commodity being
produced on a farm.
25. FARM ENTERPRENEUR: He is the person who thinks of, organizes and
operates the business and is responsible for the losses and gains from the business. He
is a pioneer in organizing and developing the farm firm.
26. FARM MANAGER: He is a person who manages or supervises the business
according to instructions of the entrepreneur. He is hired to manage the business. He
is not generally responsible for any gain or loss to the business.
27. PRODUCTION FUNCTION (PF):
It is the systematic way of showing the relationship between different
amounts of inputs that can be used to produce a product and the corresponding output
of that product.
Definition : Production function is a technical and mathematical relationship
describing the manner and the extent to which a particular product depends upon the
quantities of inputs or input services, used at a given level of technology and in a
given period of time.
In short, the relationship between input and output is termed as production function.
 42

Types of Production Functions:

1. Continuous Production Function: This is obtained for those inputs which can be
split up in to smaller units. All those inputs which are measurable give raise to
continuous production function.
Example: Fertilizers, Seeds, Plant protection chemicals, Manures, Feeds etc
2. Discontinuous or discrete Production Function: Such a function is obtained for
resources or work units which are used or done in whole numbers. In other words,
production function is discrete, where inputs cannot be broken in to smaller units.
Alternately stated, discrete production is obtained for those inputs which are counted.
Example: Ploughing, Weeding, Irrigation etc.,

3. Short Run Production Function (SRPF): Production Function in which some

inputs or resources are fixed.
Y= f ( X1 / X2, X 2,…………..,X n)
Eg: Law of Diminishing returns or Law of variable proportions

4. Long Run Production Function (LRPF): Production function which permits

variation in all factors of production.
Y = f( (X1, X2 , X3, ……………., Xn)
Eg: Returns to scale.
The production function can be expressed in three ways:
1. Tabular form : Production function can be expressed in the form of a table,
where one column represents input, while another indicates the corresponding
total output of the product. The two columns constitute production function.

Input (x) Output (y)

0 2
10 5
20 11
30 18
40 25
 43

2. Graphical Form : The production function can also be illustrated in the form of a
graph; where horizontal axis (X axis) represents input and the vertical axis (Y axis)
represents the output.

3. Algebraic Form: Algebraically production function can be expressed as

Y= f(X)
Where , Y represents dependent variable, output (yield of crop, livestock enterprise)
and X represents independent variable, input (seeds, fertilizers, manure etc),
f = denotes function of
When more number of inputs is involved in the production of a product,
the equation is represented as
Y=f(X1 , X2 , X3, X4 ……… Xn)
In case of single variable production function, only one variable is
allowed to vary, keeping others constant, can be expressed as
Y=f(X1 | X2 , X3 ………. Xn)
The vertical bar is used for separating the variable input from the fixed
input. The equation denotes that the output Y depends upon the variable input X1, with
all other inputs held constant.
If more than one variable input is varied and few others are held
constant, the relationship can be expressed as
Y=f(X1 , X2 | X3, X4 …….. Xn)
Production function can also be expressed as
Y=a+bX _____________ Linear production function
 44

Where Y is dependent variable,

a is constant,
b is coefficient,
X is independent variable
The constant a represents the amount of product obtained from the fixed factor if none
of the variable input is applied, while b is the amount of output produced for each unit
of X (input) applied.
Y = aX b
Is an exponential equation and is known as Cobb-Douglas production function.
Y = a+bX±cX2 is quadratic equation

Production function depends on the following factors:

1. Quantities of inputs used
2. Technical knowledge of the producer.
3. Possible processes in production
4. Size of the firm
5. Nature of firm’s organization
6. Relative prices of factors of production.

AGRICULTURAL PRODUCTION ECONOMICS

Meaning, Nature and Scope

Agricultural production economics is a field of specialization within the

subject of agric ultural economics. It is concerned with the choice of production
patterns and resource use in order to maximize the objective function of farmers, their
families, the society or the nation within a framework of limited resources.
Production economics is concerned with two broad categories of
decisions in the production process.
1. How to organize resources in order to maximize the production of a single
commodity? i.e, Choice making among various alternative ways of using resources.
2. What combination of different commodities to produce?
 45

Goals of Production Economics

1. To provide guidance to individual farmers in using their resources most efficiently.
2. To facilitate the most efficient use of resources from the stand point of economy
Definition: Agricultural Production Economics is an applied field of
science wherein the principles of choice are applied to the use of capital, labour,
land and management resources in the farming industry.
Subject matter of Agricultural Production Economics
With a view to optimizing the use of farm resources on an individual
farm level and to rationalize the use of resources from a national angle, production
economics involves analysis of relationships and principles of rational decisions.
Production Economics is concerned with productivity i.e use and
incomes from productive inputs (land, labour, capital and management). As a study of
resource productivity, it deals with
a) Resource use efficiency
b) Resource combination
c) Resource allocation
d) Resource management
e) Resource administration
The subject matter of Production Economics includes such topics as
methods or techniques of production, combination of enterprises, size of the farm,
return to scale, leasing, production possibilities, farming efficiency, soil conservation,
use of credit and capital, risks and uncertainty which effect decision making.
Any agricultural problem that falls under the scope of resource allocation
and marginal productivity analysis is the subject matter of the production economics.
The production economist is therefore, concerned with any phenomena which have a
bearing on economic efficiency in the use of agricultural resources.
Objectives
The main objectives of Agricultural production economics are:
1. To determine and define the conditions which provide for optimum use of
resources.
2. To determine the extent to which the existing use of resources deviates from the
optimum use.
3. To analyze the factors or forces which are responsible for the existing production
pattern and resource use and
 46

4. To explain means and methods for changing existing use of resources to the
optimum level.

Basic production problems

The producer or manager is faced with five basic production problems
on which they have to make decisions.
1. WHAT TO PRODUCE?
This problem involves selecting the combination of crops and livestock
enterprises to be produced. Should the business produce only crops, only livestock or
some combination? Which crop or rotations? Which livestock? The farmer must
select from among many alternatives that combination which will maximize profits.
2. HOW TO PRODUCE?
Many agricultural products can be produced in a number of ways. Crops can
be produced with more capital and less labour (capital intensive technology) or more
labour and less capital (labour intensive technology). A manager must select the
appropriate combination of inputs which will minimize the cost of producing a given
quantity of some commodity.
3. HOW MUCH TO PRODUCE?
The level of production and profit will be determined by the input levels
selected. A manager is faced with the problems of how much fertilizer and irrigation
water to use, seed rates, feeding levels, labour and machinery use etc.
4. WHEN TO BUY AND SELL?
The seasonality of supply conditions in factor and product market results in
variations in the prices. The manager must consider these things in determining when
to sell or buy.
5. WHERE TO BUY AND SELL?
Farmers generally purchase a number of inputs for a production. Attempt is
always to purchase at the least cost. The producer must decide whether to sell in the
village market or in the regulated market or other alternative market.
 47

Laws of Returns
Production is the result of cooperative working of various factors of
production viz ., land , labour, capital and management. The laws of returns operate
on account of variability in the proportion in which the various factors can be
combined for the purpose of production.
In the production of a commodity where one input is varied, keeping
all inputs fixed, the nature of relationship between single variable input and output
can be either of the one or a combination of the following:
1. Law of increasing returns
2. Law of constant returns
3. Law of decreasing returns
Law of increasing returns (Increasing marginal productivity)
Each successive unit of variable input when applied to the fixed factor
adds more and more to the total product than the previous unit .
The marginal physical product is increasing and hence known as law of
increasing returns.
Increasing returns means lower costs per unit of output. Thus the law of
increasin g returns signifies that cost per unit of additional product falls as more and
more output is produced. Hence law of increasing returns also called law of
decreasing costs.
Input(X) Output(Y) ?X ?Y ? Y/?X=MPP
1 2 1 2 2/1=2
2 6 1 4 4/1=4
3 12 1 6 6/1=6
4 20 1 8 8/1=8
5 30 1 10 10/1=10
As shown in the above table, the first unit of variable input adds 2 units,
while the second add 4 units to the total output, the third add 6 units and so on
 48

When production function is graphed with output on vertical axis and input on
horizontal axis, the resulting curve is convex to the origin.

Algebraically increasing returns is expressed as

? 1Y/? 1X < ? 2Y/? 2X < ………… < ? nY/? nX
Law of constant returns (constant marginal productivity)
Each additional unit of variable input when applied to the fixed factors
produces an equal amount of additional product. The amount of product (TPP)
increases by the same magnitude for each additional unit of input.
The marginal physical product remains the same for each additional unit of
input and hence it is called law of constant marginal productivity.
Regardless of the scale of production, the cost of additional unit of
product remains the same and hence it is also called law of constant costs.
Linear production function or constant returns is not a common relationship in
agriculture.

Input(X) Output(Y) ?X ?Y ? Y/?X=MPP

1 10 1 10 10/1=10
2 20 1 10 10/1=10
3 30 1 10 10/1=10
4 40 1 10 10/1=10
5 50 1 10 10/1=10
As shown in the table, each unit of input adds 10 units. The shape of the total product
curve is linear. Linear production indicates constant returns.
 49

Algebraically constant returns is expressed as

? 1Y/? 1X = ? 2Y/? 2X = ………… = ? nY/? nX

Law of Decreasing returns (Decreasing marginal productivity)

Each additional unit of variable input when applied to the fixed factors
adds less and less to the total product than the previous unit.
The marginal physical product is declining , hence the name law of decreasing
returns.
Input X Input Y ?X ?Y ? Y/?X=MPP
1 25 1 25 25/1=25
2 45 1 20 20/1=20
3 60 1 15 15/1=15
4 70 1 10 10/1=10
5 75 1 5 5/1=5

As shown in the table, the first unit of input adds 25 units, the second adds 20 units
and the third adds 15 units and so on.
The production function which exhibits diminishing returns is concave to the origin.
Law of diminishing returns is very common in agriculture.
 50

The cost of each additional unit of output increases as we produce more and more
output and hence it is called Law of increasing costs.
Algebraically , it can be expressed as
? 1Y/? 1X > ? 2Y/? 2X > ………… > ? nY/? nX

BASIC PRODUCTION RELATIONSHIPS

Production of farm commodities involves numerous relationships
between resources and products. Some of these relationships are simple, others are
complex. Knowledge of these relationships is essential as they provide the tools by
means of which the problems of production or resource use can be analyzed.

Major production relationships are:

1. Factor -Product relationship
2. Factor -Factor relationship
3. Product-Product relationship

Factor-Product Relationship

1. It deals with the production efficiency of resources.

2. The rate at which the factors are transformed in to products is the study of this
relationship.
3. Optimization of production is the goal of this relationship.
4. This relationship is known as input-output relationship by farm management
specialists and fertilizer responsive curve by agronomists.
5. Factor -Product relationship guides the producer in making the decision ‘how much
to produce?’.
 51

6. This relationship helps the producer in the determination of optimum input to use
and optimum output to produce.
7. Price ratio is the choice indicator.
8. This relationship is explained by the law of diminishing returns.
9. Algebraically, this relationship can be expressed as
Y = f (X1 / X 2 ,X3………………Xn)
Law of Diminishing Returns

The factor - product relationship or the amount of a resource that should

be used and consequently the amount of output that should be produced is directly
related to the operation of law of diminishing returns.
This law explains how the amount of product obtained changes as the amount of
one of the resources is varied while the amount of other resources is fixed.
It is also known as law of variable proportions or principle of added
costs and added returns.

Definitions:
v An increase in capital and labour applied in the cultivation of land causes in
general less than proportionate increase in the amount of produce raised,
unless it happens to coincide with the improvements in the arts of agriculture
(Marshall)
v If the quantity of one of productive service is increased by equal increments,
with the quantity of other resource services held constant, the increments to
total product may increase at first but will decrease after certain point
(Heady)
Limitations:
The law of diminishing returns fails to operate under certain situations.
They are called limitations of the law.
1. Improved methods of cultivation
2. New soils and
3. Insufficient capital.
 52

Why the law of diminishing returns operates in agriculture:

The law of diminishing returns is applicable not only to agriculture but
also manufacturing industries. This law is as universal as the law of life itself. If the
industry is expanded too muc h and becomes unwidely, supervision will become
difficult and the costs will go up. The law of diminishing returns, therefore set in. The
only difference is that in agriculture it sets in earlier and in industry much later. There
are several reasons for the operation of law of diminishing returns in agriculture. The
reasons are:
1. Excessive dependence on weather.
2. Limited scope for mechanization.
3. Limited scope for division of labour.
4. Agriculture uses larger proportion of land resource.
5. Soil gets exhausted due to continuous cultivation.
6. Cultivation is extended to inferior lands.

Concepts of production:

1. Total product (TP): Amount of product which results from different quantities of
variable input. Total product indicates the technical efficiency of fixed resources.
2. Average Product (AP): It is the ratio of total product to the quantity of input used in
producing that quantity of product.
AP= Y/X where Y is total product and X is total input.
Average product indicates the technical efficiency of variable in put.
3. Marginal product (MP): Additional quantity of output resulting from an additional
unit of
input.
MP= Change in total product / Change in input level (?Y/? X)
4. Total Physical Product (TPP): Total product expressed in terms of physical units
like kgs, quintals, tonnes is termed as total physical product.
Similarly if AP and MP are expressed in terms of physical units, they are
called Average Physical Product (APP) and Marginal Physical Product (MPP).
5. Total Value Product (TVP): Expression of TPP in terms of monetary value, it is
called Total Value Product.
TVP = TPP ? P y or Y? Py
 53

6. Average Value Product (AVP): The expression of Average Physical Product in

money value.
AVP = APP ? P y
7. Marginal Value Product (MVP): When MPP is expressed in terms of money value,
it is called Marginal Value Product.
MVP = MPP ? P y or (?Y/?X) ? P y ? Y. P y / ? X
Relationship between Total Product (TP) and Marginal Product (MP):
v When Total Product is increasing, the Marginal Product is positive.
v When Total Product remains constant, the Marginal Product is zero.
v When Total Product decreases, Marginal Product is negative.
v As long as Marginal Product increases, the Total Product increases at
increases at increasing rate.
v When the Marginal Product remains constant, the Total Product increases at
constant rate.
v When the Marginal Product declines, the Total Product increases at decreasing
rate.
v When Marginal Product is zero, the Total Product is maximum.
v When marginal product is less than zero (negative), total physical product
declines at increasing rate.
Relationship between Marginal and Average Product
v When Marginal Product is more than Average Product, Average Product
increases.
v When Marginal Product is equal with the Average Product, Average Product
is Maximum.
v When Marginal Product is less than Average Product, Average Product
decreases.
 54

Relationship between TP, AP and MP

Input Total Product Average Marginal Remarks
(X) (Y) Product Product
AP = Y/ X (? Y / ? X)
0 0 - -
1 2 2 2 Increasing
2 5 2.5 3 returns
3 9 3.0 4
4 14 3.5 5 Constant
5 19 3.8 5 returns
6 23 3.83 4
7 26 3.71 3
8 28 3.5 2 Decreasing
9 29 3.22 1 returns
10 29 2.9 0
11 28 2.54 -1
12 26 2.16 -2 Negative
returns

Elasticity of Production (Ep):

It is a measure of responsiveness of output to changes in input. The
elasticity of production refers to the proportionate change in output as compared to
proportionate cha nge in input.
Ep = Percentage change in output/Percentage change in input.
Ep = ((change in output / initial output)*100) / ((change in input / initial input)*100)
i.e., ((? Y/Y)*100)/((? X/X)*100)
= (? Y/Y) / (? X/X) = (? Y/Y)*(X/? X) = (? Y/? X) * (X/Y)
By rearranging we have,
(? Y/?X) * (X/Y) = (?Y/? X)/(Y/X) = MPP/APP
The elasticity of production is the ratio of Marginal Physical Product to Average
Physical Product.
Ep = 1 ,Constant Returns. E p is one at MPP = APP (At the end of I stage)
Ep > 1 , Increasing Returns (I Stage of Production)
Ep < 1 , Diminishing returns (II Stage of Production)
 55

Ep = 0 , When MPP is zero or TPP is Maximum (At the end of II stage)

Ep < 0, Negative Returns (III Stage of Production)
Three Regions of Production Function
The production function showing total, average and marginal product can be
divided into three regions, stages or zones in such a manner that one can locate the
zone of production functio n in which the production decisions are rational.
The three sages are shown in the figure.

First Stage or I Region or Zone 1:

v The first stage of production starts from the origin i.e., zero input level.
v In this zone, Marginal Physical Product is more than Average Physical
Product and hence Average Physical Product increases through out this zone.
v Marginal Physical Product (MPP) is increasing up to the point of inflection
and then declines.
v Since the marginal Physical Product increases up to the point of inflection, the
Total Physical Product (TPP) increases at increasing rate.
v After the point of inflection, the Total Physical Product increases at decreasing
rate.
v Elasticity of production is greater than unity up to maximum Average Physical
Product (APP).
v Elasticity of production is one at the end of the zone (MPP = APP).
v In this zone fixed resources are in abundant quantity relative to variable
resources.
v The technical efficiency of variable resource is increasing throughout this zone
as indicated by A verage Physical Product.
v The technical efficiency of fixed resource is also increasing as reflected by the
increasing Total Physical Product.
v Marginal Value Product is more than Marginal Factor Cost (MVP >MFC)
v Marginal revenue is more than marginal cost (MR > MC )
v This is irrational or sub-optimal zone of production.
v This zone ends at the point where MPP=APP or where APP is Maximum.
 56

Second Stage or II Region or Zone II:

1. The second zone starts from where the technical efficiency of variable
resource is maximum i.e., APP is Maximum (MPP=APP)
2. In this zone Marginal Physical Product is less than Average Physical Product.
Therefore, the APP decreases throughout this zone.
3. Marginal Physical Product is decreasing throughout this zone.
4. As the MPP declines, the Total Physical Product increases but at decreasing
rate.
5. Elasticity of production is less than one between maximum APP and
maximum TPP.
6. Elasticity of production is zero at the end of this zone.
7. In this zone variable resource is more relative to fixed factors.
8. The technical efficiency of variable resource is declining as indicated by
declining APP.
9. The technical efficiency of fixed resource is increasing as reflected by
increasing TPP.
10. Marginal Value Product is equal to Marginal Factor Cost (MVP=MFC).
11. Marginal Revenue is equal to Marginal Cost (MR= MC)
12. This is rational zone of production in which the producer should operate to
attain his objective of profit maximization.
13. This zone ends at the point where Total Physical Product is maximum or
Marginal Physical Product is zero.
Third Stage or III Region or Zone III:
v This zone starts from where the technical efficiency of fixed resource is
maximum (TPP is Max).
v Average Physical Product is declining but remains positive.
v Marginal Physical Product becomes negative.
v The Total Physical Product declines at faster rate since MPP is negative.
v Elasticity of production is less than zero (Ep < 0)
v In this zone variable resource is in excess capacity.
v The technical efficiency of variable resource is decreasing as reflected by
declining APP.
v The technical efficiency of fixed resource is also decreasing as indicated by
declining TPP.
 57

v Marginal Value Product is less than Marginal Factor Cost (MVP < MFC)
v Marginal Revenue is less than Marginal Cost ( MR < MC)
v This zone is irrational or supra-optimal zone.
v Producer should never operate in this zone even if the resources are available
at free of cost.
Three Regions of Production-Economic decisions
Stage I: It is called irrational zone of production. Any level of resource use falling
in this region is uneconomical. The technical efficiency of variable resource is
increasing throughout the zone (APP is increasing). Therefore, it is not reasonable
to stop using an input when its efficiency is increasing.
In this zone, more products can be obtained from the same resource by
reorganizing the combination of fixed and variable inputs. For this reason, it is
called irrational zone of production.
Stage II: It is rational zone of production. Within the boundaries of this region is
the area of economic relevance. Optimum point must be somewhere in this
rational zone. It can, however, be located only when input and output prices are
known.
Stage III: It is also an area of irrational production. TPP is decreasing at
increasing rate and MPP is negative. Since the additional quantities of resource
reduces the total output, it is not profitable zone even if the additional quantities of
resources are available at free of cost. In case if a farmer operates in this zone, he
will incur double loss. i.e.,
1. Reduced Production
2. Unnecessary additional Cost of inputs.

Factor-Factor Relationship
1. This relationship deals with the resource combination and resource
substitution.
2. Cost minimization is the goal of factor -factor relationship.
3. Under factor-factor relationship, output is kept constant, input is varied in
quantity.
4. This relationship guides the producer in deciding ‘How to produce’.
5. This relationship is explained by the principle of factor substitution or
principle of substitution between inputs.
 58

6. Factor-Factor relationship is concerned with the determination of least cost

combination of resources.
7. The choice indicators are substitution ratio and price ratio.
8. Algebraically, it is expressed as
Y = f(X1 X2 / X3 X4 ….. Xn )
In the production, inputs are substitutable. Capital can be substituted for
labour and vice versa, grain can be substituted for fodder and vice versa. The
producer has to choose that input or inputs, practice or practices which produce a
given output with minimum cost. The producer aims at cost minimization i.e.,
choice of inputs and their combinations.
Isoquants:
The relationship between two factors and output can not be presented
with two dimensional graph. This involves three variables and can be presented in
three dimensional diagram giving a production surface.
An isoquant is a convenient method for compressing three dimensional
picture of production into two dimensions.
Definition :
An isoquant represents all possible combinations of two resources
(X1 and X2) physically capable of producing the same quantity of output.
Isoquants are also known as isoproduct curves or equal product curves or
product indifference curves.

Isoquant Map or Iso product Contour

If number of isoquants are drawn on one graph, it is known as isoquant map. Isoquant
map indicates the shape of production surface which in turn indicates the output
response to the inputs.
 59

Characteristics of Isoquants
1. Slope downwards from left to right or negatively sloped.
2. Convex to the origin.
3. Nonintersecting
4. Isoquants lying above and to the right of another represents higher level of output.
5. The slope of isoquant denotes the marginal rate of technical substitution (MRTS).

Marginal Rate of Technical Substitution (MRTS)

It refers to the amount by which one resource is reduced as another resource is
increased by one unit.
Or
The rate of exchange between some units of X1 and X2 which are equally preferred.
MRTS X1X2 = ? X2/? X1
MRTS X2X1 = ? X1/ ? X2

Marginal Rate of Technical Substitution= Number of units of replaced resource

Number of units of added resource
The slope of Isoquant indicates MRTS.
Substitutes: A range of input combinations which will produce a given level of
output. When one factor is reduced in quantity, a second factor must always be
increased MRTS is always less than zero.
Perfect Substitutes: When two resources are completely interchangeable, they are
called perfect substitutes.
The isoquants for perfect substitutes is negatively sloped straight lines.
The MRTS is constant.
Ex: Family labour and hired labour, Farm produced and purchased seed etc,
 60

Complements: Two resources which are used together are called complements.
In the case of complements reduction in one factor can not be replaced by an increase
in another factor.
MRTS is zero .
Perfect Complements: Two resources which are used together in fixed proportion
are called perfect complements. It means that only one exact combination of inputs
will produce a particular level of output.
The isoquant in this case is of a right angle.
Ex: Tractor and driver, Pair of bullocks and labourer
Types of factor substitution
The shape of isoquant and production surface will depend up on the manner in which
the variable inputs are combined to produce a particular level of output. There can be
three such categories of input combinations. They are:
1. Fixed Proportion combination of inputs
To produce a given level of output, inputs are combined together in fixed proportion.
Isoquants are ‘L’ shaped.
It is difficult to find examples of inputs which combine only in fixed proportions in
agriculture. An approximation to this situation is provided by tractor and driver
combination. To operate another tractor, normally we need another driver.
 61

2. Constant rate of Substitution:

For each one unit gain in one factor, a constant quantity of another factor must be
sacrificed.
When factors substitute at constant rate, isoquants are linear, negatively sloped.
X1 X2 ? X1 ? X2 MRTS X1X2 =
? X2/? X1
0 50 -- -- --
5 40 5 10 10/5=2
10 30 5 10 10/5=2
15 20 5 10 10/5=2
20 10 5 10 10/5=2
25 0 5 10 10/5=2
The above table shows that the six combinations of resources X2 and X2 can be used
in producing a given level of output. As X1 input is increased from 0 to 5 units ,10
units of X2 are replaced. Similarly addition of another 5 units of X1 replaces another
10 units. The MRS of X1 for X2 is 2. That means if we want to obtain one unit of X1,
we have to forego 2 units of X2.
Ex:, family labour and hired labour,
When inputs substitute at constant rate, it is economical to use only one
resource, and which one to use depends up on relative prices.

Algebraically, constant rate of factor substitution is expressed as

? 1X2/? 1X 1 = ? 2X2/? 2X1 = ……. = ? nX2/? nX1
3. Decreasing Rate of substitution:
Every subsequent increase in the use of one factor replaces less and less of other
factor. In other words, each one unit increase in one factor requires smaller and
smaller sacrifice in another factor.
 62

Ex: Capital and labour, concentrates and green fodder, organic and inorganic
fertilizers etc.
X1 X2 ? X1 ? X2 MRTS X1X2 =
? X2/? X1
1 18 -- -- --
2 13 1 5 5/1=5
3 9 1 4 4/1=4
4 6 1 3 3/1=3
5 4 1 2 2/1=2
The MRS of X1 for X2 becomes smaller and smaller as X1 replaces X2.
Isoquants are convex to the origin when inputs substitute at decreasing rate.

Algebraically, decreasing rate of substitution is expressed as

? 1X2/? 1X 1 > ? 2X2/? 2X1 > ……. > ? nX2/? nX1
Decreasing rate of factor subs titution is more common in agricultural production.
Isocost Line (price line, budget line, iso outlay line, factor cost line)
Isocost line defines all possible combinations of two resources (X1 and X2) which can
be purchased with a given outlay of funds.

Characteristics of Isocost line:

1. As the total outlay increases, the isocost line moves farther away from the origin.
 63

2. Isocost line is a straight line because input prices do not change with the quantity
purchased.
3. The slope of isocost line indicates the ratio of factor prices.
Least Cost Combination of inputs
There are innumerable possible combinations of factors which can be used to produce
a particular level of output. The problem is to find out a combination of inputs which
should cost the least, a cost minimization problem. There are three methods to find
out the least cost combination of inputs. They are:
1. Simple Arithmetical calculations:
One possible way to determine the least cost combination is to compute the cost of all
possible combinations of inputs and then select one combination with minimum cost.
This method is suitable where only a few combinations produce a particular level of
output.
X1 X2 X1@Rs.3 X2@Rs.2 Total cost
10 3 30 6 36
7 4 21 8 29
5 6 15 12 27
3 8 9 16 25
2 12 6 24 30
The above table shows five combinations of inputs which can produce a given level of
output. The price per unit of X1 is Rs.3/ - and of X 2 is Rs.2/-. The total cost of each
combination of inputs is computed.Out of five combination, 3 units of X1 and 8 units
of X2 is the least cost combination of inputs i.e., Rs.25/-
2. Algebraic method:
a) Compute Marginal Rate of technical substitution
MRS = Number of units of replaced resource / Number of units of added resource
MRS X1X2 = ? X2/ ? X1
MRSX2X1 = ? X1 / ? X2
b) Compute Price Ratio (PR)
PR=Price per unit of added resource/Price per unit of replaced resource
PR=PX1/PX2 if MRSX1 X2
Or
PR= PX2/ PX1 if MRSX2X1
 64

c) Workout least cost combination by equating MRS and PR

i.e., ?X2/ ? X1= P X1 /P X2 MRS X1X2
? X1/ ? X2= PX2/ PX1 MRSX 2X1
The same can be expressed as
? X2. PX2= PX1. ? X1
Or
? X1. PX1 =? X2. PX2
The least cost combination is obtained when Marginal Rate of substitution is equal to
Price Ratio.
3. Graphical Method:
Since the slope of isoquant indicates MRTS and the slope of isocost line
indicates factor price ratio, minimum cost for given output will be indicated by the
tangency of these isoclines. For this purpose, isocost line and isoquant are drawn on
the same graph for different levels of production. The least cost combination will be
at the point where isocost line is tangent to the isoquant i.e., slope of isoquant=slope
of isocost line i.e., MRS=PR

Iso-cline
There can be number of possible output levels as shown in the figure and the
least cost combination can be found out for these various output levels. A line or
curve connecting the least cost combination of inputs for all output levels is called
isocline.
 65

The isocline passes through all the isoquants at points where they have
the same slope. Isoclines can be drawn at different sets of price ratio. All isoclines of
course converge at the point of maximum output. Though all the points on isocline
represent least cost combination, only one point represents the maximum profit
output.
Expansion Path : Of many isoclines, the isocline which is considered to be the most
appropriate over a production period is known as expansion path or scale line. At any
particular time, only one expansion path is possible.
Ridge lines or Border or Boundary lines
Ridge lines represent the points of maximum output from each input, given a
fixed amount of another input. Also they represent limits of substitution. Ridge lines
reflect the limits of economic relevance, the boundaries beyond which isoquant map
ceases to have economic meaning. The portions of isoquants which lie between the
lines are suited for economic production (Where MPP of both inputs are positive but
decreasing and isoquants are negatively sloped). Portions of is oquants outside the
ridge lines are not suitable for production in economic terms (outside the ridge lines,
MPP of both factors are negative and methods of production are inefficient).
 66

Product-Product Relationship
v Product-Product relationship deals wit h resource allocation among competing
enterprises.
v The goal of Product-Product relationship is profit maximization.
v Under Product-Product relationship, inputs are kept constant while products
(outputs) are varied.
v This relationship guides the producer in deciding ‘What to produce’
v This relationship is explained by the principle of product substitution and law
of equi marginal returns.
v This relationship is concerned with the determination of optimum combination
of products (enterprises).
v The choice indicators are substitution ratio and price ratio.
v Algebraically it is expressed as
Y1=f (Y2 Y3, ……. Yn )
Production Possibility Curve (PPC)
Production Possibility Curve is a convenient device for depicting two production
functions on a single graph.
Def: Production Possibility Curve represents all possible combinations of two
products that could be produced with given amounts of inputs.
Production Possibility Curve is known as Opportunity Curve because it
represents all production possibilities or opportunities available with limited
resources.
It is called Isoresouce Curve or Iso factor curve because each output
combination on this curve has the same resource requirement.
It is also called Transformation curve as it indicates the rate of
transformation of one product into another.
How to draw Production Possibility Curve
Production Possibility Curve can be drawn either directly from
production function or from total cost curve.
The method of drawing Production Possibility Curve from Production
Function is explained below:
A farmer has five acres of land and wants to produce two products Viz
cotton (Y1 ) and Maize (Y2). Assume all other inputs are fixed. Now the farmer has
to dec ide how much of land input to use on each product.
 67

The amount of land that can be used to produce Cotton (Y1) depends
upon the amount of land used to produce Maize (Y 2)
Therefore Y 1= f (Y2)
The allocation of land resource between the two products and the output
from different doses of land input are presented below
Allocation of land in acres Output in quintals
Y1 Y2 Y1 Y2
0 5 0 60
1 4 8 48
2 3 15 36
3 2 21 24
4 1 26 12
5 0 30 0
As evident from the above data, if all 5 acres of land are used in the production of
Y2 we obtain 60 quintals of Y2 and do not get any Y1. On the other hand, if all the
five acres of land are used in the production of Y1 we can obtain 30 quintals of Y1
and do not get any Y2. But these are the two extreme production possibilities. In
between these two, there will be many other production possibilities. Plotting
these two points on a graph, we get the Production Possibility Curve.

Production Possibility Curve

Types of Product-Product Relationships or Enterprise Relationship
Farm commodities bear several physical relationships to one
another. These basic product relationships can be
1) Joint Products: These are produced through single production process. As a rule
the two are combined products. Production of one (main product) without the other
 68

(by-product) is not possible. The level of production of one decides the level of
production of another. All farm commodities are mostly joint products.
Ex: Wheat and Straw, paddy and straw, groundnut and hulms , cotton seed and lint,
cattle and manure, butter and buttermilk, beef and hides, mutton and wool etc.

Graphically the quantities of Y1 and Y2 that can be produced at different

levels of resources will be shown as points AB in the figure.
2) Complementary enterprises: Complementarity between two enterprises exists
when with a change in the level of production of one, the other also changes in the
same direction. That is when increase in output of one product, with resources held
constant, also results in an increase in the output of the other product. The two
enterprises do not compete for resources but contribute to the mutual production by
providing an element of production required by each other. The marginal rate of
product substitution is positive ( > 0). Ex: Cereals and pulses, crops and livestock
enterprises.

As shown in the figure, range of complementarities is from point A to point B

when production of Y1 expands beyond zero level. On the other end of the curve, the
products again are complementar y as production of Y2 expands beyond zero. This
 69

means Y1 must be produced up to B and Y2 up to point C , up to these points increase

in one product increases the production of other.
All complementary relationships should be taken advantage by producing both
products up to the point where the products become competitive.
3) Supplementary enterprises: Supplementarity exists between enterprises when
increase or decrease in the output of one product does not affect the production level
of the other product. They do not compete for resources but make use of resources
when they are not being utilized by one enterprise. The marginal rate of product
substitution is zero.
For example, small poultry or dairy or piggery enterprise is supplementary on the
farm.
All supplementary relationships should be taken advantage by producing both
products up to the point where the products become competitive.
Production of Y1 can be increased without affecting the production of Y2 in the range
AB. From C to D, production of Y2 ca n be increased without affecting the production
of Y1.
4) Competitive enterprises: This relationship exists when increase or decrease in the
production of one product affect the production of other product inversely. That is
when increase in output of one product , with resources held constant, results in the
decrease of output of other product.Competitive enterprises compete for the same
resources. Two enterprises are competitive in the use of given resources if output of
one can be increased only through sacrifice in the production of another. The marginal
rate of product substitution is negative (<0)

5) Antagonistic products: Two products may be detrimental to each other because of

disease or similar factors. When this is true ,only one of the products should be
produced. Eg: Aqua culture and paddy cultivation.
Marginal rate of product substitution
 70

The term marginal rate of product substitution has the same meaning
under the product-product relationship as under the factor-factor relationship.
Marginal rate of the product substitution refers to the absolute change in
one product associated with a change of one unit in competing product.
The quantity of one product to be sacrificed so as to gain another product
by one unit is called MRPS.

MRPS = Number of units of replaced product / Number of units of added product

MRPSY 1Y2 = ? Y2/? Y1
MRPSY 2Y1 = ? Y1/? Y2
Types of Product Substitution
When two products are competitive, they substitute either at constant
rate, or increasing rate or at decreasing rate.
1) Constant rate of Substitution:
For each one unit increase or gain in one product, a constant quantity
of another product must be decreased or sacrificed .
When products substitute at constant rate, the Production Possibility
Curve is linear negatively sloped.
Constant rate of substitution occurs when
a) One of the production function has an elasticity greater than one (increasing
returns), the other has an elasticity of less than one (decreasing returns)
Or
b) Both the production functions have stages of increasing and decreasing returns.

The Production Possibility Curve is linear when products substitute at constant

rate. When two products substitute at constant rate, only one of the two products
will be economical to produce depending on their relative prices. This is to say that
 71

specialization is the general pattern of production under constant rate of product

substitution.
Y1 Y2 ? Y1 ? Y2 MRS
0 40 -- -- --
10 30 10 10 10/10=1
20 20 10 10 10/10=1
30 10 10 10 10/10=1
40 0 10 10 10/10=1
This relationship can be expressed as
? 1Y2/? 1Y1 = ? 2Y2/? 2Y1 = ……. = ? nY 2/? nY1
2) Increasing rate of product substitution:
Each unit increase in the output of one product is accompanied by larger
and larger sacrifice (decrease) in the level of production of other product.
Increasing rates of substitution holds true when the production for each
independent commodity is one of decreasing resource productivity (decreasing
returns) and non-homogeneity in quality of limited resource.
The production Possibility Curve is concave to the origin when product
substitutes at the increasing rate. Increasing rate of the product substitution is
common in agricultural production. The general pattern of production is
diversification i.e., profits are maximized by producing both the products.
? 1Y2/? 1Y1 <? 2Y 2/? 2Y1 < ……. < ? nY2/? nY 1
 72

Y1 Y2 ? Y1 ? Y2 MRSY 1Y2
0 60 -- -- --
8 48 8 12 1.50
15 36 7 12 1.71
21 24 6 12 2.00
26 12 5 12 2.40
30 0 4 12 3.00

3) Decreasing rate of Product Substitution:

Each unit increase in the output of one product is accompanied lesser and
lesser decrease in the production of another product.
This type of product substitution holds good under conditions of increasing
returns.
Production Possibility Curve is convex to the origin when products substitute
at decreasing rate. It is economical to produce only one of the products depending on
the relative prices, when products substitute at constant rate i.e., specialization is the
general pattern of production.
Y1 Y2 ? Y1 ? Y2 MRSY 1Y2
1 18 -- -- --
2 13 1 5 5
3 9 1 4 4
4 6 1 3 3
5 4 1 2 2

This relationship is algebraically expressed as

? 1Y2/? 1Y1 >Y 2/? 2Y1 > ……. >? nY2/? nY1
 73

Summary of basic Enterprise Relationships

MRPS
Relationship

1 ? Y2/Y1 or ? Y1/Y2 > 0 (Positive)

Complementary
2 ? Y2/Y1 or ? Y1/Y2 =0 Supplementary
3 ? Y2/Y1 or ? Y1/Y2 <0 (Negative) Competitive
IsoRevenue Line
It represents all possible combination of two products which would yield an equal
(same) revenue or income.
Characteristics:
1) Isorevenue line is a straight line because product prices do not change with quantity
sold.
2) As the total revenue increases, the isorevenue line moves away from the origin
since the total revenue determines the distance of it from the origin.
3) The slope indicates ratio of product (output) prices. As long as product prices
remaining constant, the isorevenue line show ing different total revenues are parallel.
But change in either price will change the slope.
 74

Determination of optimum combination of products:

1) Algebraic Method:
There are three steps to determine the optimum product combination
through algebraic method.
a) Compute Marginal Rate of Product Substitution
MRPS =Number of units of replaced products/Number of units of added
product
MRPSY1Y2 = ? Y2/? Y1
MRPSY2Y1 = ? Y1/? Y2
b) Workout price ratio (PR)
Price Ratio (PR) = Price per unit of added product/Price per unit of replaced
product
PR= P y1/P y2 if it is MRS Y1Y2
P y2/ Py1 if it is MRS Y2Y1
c) Optimum combination of enterprises is at where MRS=PR

Number of units replaced product = Price per unit of added product

Number of units of added product Price per unit of replaced product

? Y2/?Y1= Py1/P y2
Or
? Y1/?Y2 = P y2/ P y1
For profit maximization, a rational producer should operate in the range where
two products are competitive and within the range, the choice of products should
depend upon the MRS and PR.
2) Graphic Method:
 75

Draw production possibility curve and isorevenue line on one graph. Slope of
production possibility curve indicates MRPS and the slope of isorevenue line
indicates price ratio of products. The point of optimum combination of products is at
where the isorevenue line is tangent to the production possibility curve. At this point,
slope of the isorevenue line and the slope of the production possibility curve will be
the same. In other words, the MRPS=PR.
3) Tabular Method:
Compute total revenue for each possible output combination and then select that
combination of outputs which yields maximum total revenue. This method is useful
only when we have few combinations.
Y1 Y2 P y1@Rs.50 P y2@Rs.80 Total revenue
8 2 400 160 560
5 3 350 240 490
6 4 300 320 620
4 5 200 400 600
3 7 150 560 710

3 units of Y1 and 7 units of Y2 yield maximum revenue

Expansion path in Product-Product relationship

Several isorevenue lines are shown each indicating a different level of revenue. Prices
are assumed constant and hence the slope of isorevenue lines remains the same. All
the isorevenue lines are tangent to the production possibility curve at different points
m,and n. The line connecting the points of optimum combination of the products is
 76

called expansion path. The points of tangency specify the most profitable enterprise
combination for different possibility cur ves with the prices indicated by isorevenue
line.
Ridge lines or border lines
Line OA intersects the each production possibility curve where the production
possibility curve is horizontal. Line OB intersects each production possibility curve
where it is vertical. The portions of production possibility curve falling within the
ridge lines have negative slope indicating competition (MRS< 0). Portions of
production possibility curve outside ridge line have positive slope indicating
Complementarity (MRS> 0). On the ridge lines MRS is zero. Therefore ridge lines are
used to separate ranges of product competition from ranges of product
complementarity.

Summary of basic production relationships

Factor – Product Factor – Factor Product – Product
Deals with resource use Deals with resource Deals with resource
efficiency combination and resource allocation among
substitution enterprises
Optimization of the Cost minimization is the Profit optimization is the
production is the goal goal goal.
How much to produce How to produce What to produce
Considers single variable Inputs or resources varied Output of products are
production function keeping the output varied keeping the
constant resource constant
Guides in the Concerned with the Helps in the determination
 77

determination of optimum determination of Least cost of optimum combination

input to use and optimum combination of resources of products
output to produce
Price ratios are choice Substitution ratio and Substitution ratio and price
indicator choice ratio are the choice ratios are choice indicators
indicators.
Explained by the law of Explained by the principle Explained by the principle
diminishing returns of factor substitution of product substitution and
law of equimarginal
returns.
Y=f(X1 | X2 , X3 ………. Y = f(X1 X 2 / X3 X4 ….. Y1=f(Y 2 Y3 , ……. Yn)
Xn) Xn)

Returns To Scale
By returns to scale, it is meant the behaviour of production when all
factors (inputs) are increased or decreased simultaneously in the same proportion.
Scale relationship refers to simultaneous change in all the resources in
the same proportion. In other words, in returns to scale, we analyze the effect of
doubling, trebling and so on of all inputs on the output.
In returns to scale, all the necessary factors of production are increased
or decreased to the same extent so that what ever the scale of production, the
proportion among the inputs remain the same.
When all inputs are increased, in unchanged proportions, the scale of
production is expanded, the effect on output shows three stages:
Firstly, returns to scale increase because the increase in total output is more
than proportional to increase in all inputs.
Secondly, returns to scale become constant as the increase in total product is
an exact proportion to the increase in inputs.
Lastly, returns to scale diminish because the increase in output is less than
proportionate to increase in inputs.
 78

Returns to scale -Example

SNO Scale of inputs Total Physical Marginal Remarks
Product in Physical
Quintals Product in
Quintals
1 1 Worker+3 2 2
acres
2 2 Workers+6 5 3
acres Increasing
3 3 Workers+9 9 4 Returns
acres
4 4 Workers+12 14 5
acres
5 5 Workers+15 19 5
acres
6 6 Workers+18 24 5 Constant
acres Returns
7 7 Workers+21 28 4
acres
8 8 Workers+24 31 3 Decreasing
acres Returns
9 9 Workers+27 33 2
acres
 79

In the above example, we see that when we employ one worker on three acres of land,
the total product is 2 quintals. Now to increase the output, we double the scale, but the
total product increases to more than double (5 quintals instead of 4 quintals). When
the scale is trebled, the total product increases from 5 quintals to 9 quintals- the
increase this time being 4 quintals as against 3 quintals. In other words, returns to
scale have been increasing. If the scale of production is further increased, the
Marginal Physical Product remains constant up to certain point and beyond it starts
diminishing.
Returns to scale are more theoretical interest than being relevant to actual
practice. In practice, it is the law of variable proportions which has universal
applications.
Returns to scale can also be explained by using the knowledge of scale line
and that of isoquant map. In the case of constant returns to scale , the distance
between successive isoquants is constant i.e., AB = BC = CD (Fig-A). The distance
goes on widening between the successive isoquants and diminishing returns operate
i.e., AB<BC< CD (Fig-B). Finally, in the case of increasing returns to scale, the
distance between the successive isoquants becomes smaller and smaller as we move
away from the origin on the isoquant map i.e., AB> BC> CD .(Fig -C)
Returns to scale is frequently measured by fitting the least square Cobb-
Douglas production function and then adding the exponents which are production
elasticities of the inputs.
Y= a x1b1 x2b2 x3 b3 ………. Xnbn
Where Y= Total output
X1, X2 , X 3 …… Xn: variable inputs
b1, b2 , b3……….bn: elasticity coefficients
Returns to scale from this production function are given by the summation of
individual elasticities of coefficients.
Returns to scale: ? bi where i=1 to n
n
? bi < 1 Decreasing returns to scale
i=1
n
? bi = 1 Constant returns to scale
i=1
 80

n
? bi > 1 increasing returns to scale
i=1

Differe nces between Law of variable Proportion and Returns to scale

Law of Variable Proportion Returns to Scale

Describes the response in output when a Examines the response in output when all
single input is varied inputs are varied in equal proportions
At least one factor is kept constant or All factors are varied
fixed
Factors are combined in different Proportion among factors remains the
proportions same
Short run production function Long run production function
Y=f(X1 | X2 , X3 ………. Xn) Y=f (X1,X2,X3,…..Xn)
Output exhibits three stages: increasing, Output exhibits three stages: increasing,
constant, diminishing constant and diminishing returns to scale.
Increasing returns are due to better use of Increasing returns are due to the
fixed factors appeara nce of internal economics
Maximum output is due to the best Maximum output is due to the optimum
proportion between fixed and variable size of production.
factors
Diminishing returns are due to Diminishing returns to scale are due to
inefficiency arising out of over utilization internal dis economies of scale.
of fixed factor s beyond the optimum
point.
 81

Formulae
1. Production function: y = f (x1, x2, x 3,…..xN)
where y is output of a crop, x1, x 2, x3,…..x N are inputs, f denotes function of
2. Linear production function y = a + bx
where y is dependent variable (output), a is constant, b is coefficient, x is independent
variable (input)
3. Cobb-douglas (non linear production function) y = axb
where y = dependent variable, a constant, b coefficient, x independent variable

4. Quadratic function y = a + bx – cx2

where y = output or yield dependent variable, a constant, c & b coefficient,
x input (independent variable)
? Y1 ? Y2 ? Yn
5. Law of increasing returns: < < LL <
? X1 ? X2 ? Xn
? Y1 ? Y2 ? Yn
6. Law of constant returns: = = LL =
? X1 ? X2 ? Xn

? Y1 ? Y2 ? Yn
7. Law decreasing returns: > > LL >
? X1 ? X2 ? Xn
8. Marginal physical product (MPP)
Change in total physical product
MPP =
Change in input level
?TPP ?Y
MPP = =
?X ?X
Total output
9. Average products (AP) = = y
Quantity of input x

10. Marginal value product (MVP)

Change in total value product
MVP =
Change in input level

? T ⋅ Py
MPP =
?X
11. Marginal fac tor cost (MFC) or marginal input cost (MIC)
 82

Change in total input cost ?X ⋅ PX

MVP = = = PX
Change in input level ?X
12. Marginal Revenue (MR)
Change in total revenue ?Y
MR = = Py = Py
Change in output level ?Y
13. Marginal Cost (MC)
Change in total cost ?X ⋅ PX
MC = =
Change in output level ?y

14. Marginal Rate of technical substitution (MRTS) or

Marginal Rate of substitution (MRS)
Number of units of replacedresource
MRS =
Number of units of Added resource
?X 2
MRS x1x2 =
?X1

?X1
MRS x2 x1 =
?X 2
15. Marginal Rate of product substitution (MRPS) or
Marginal Rate of substitution (MRS)
Number of units of replacedproduct
MRPS =
Number of units of Added product
?Y2
MRS y1 y2 =
?Y1
?Y1
MRS y2 y1 =
?Y2
16. Price ratio of factor (PR)
Price per unit of added resource
PR =
Price per unit of replaced product
P X2 P X1
PR = or
P X1 P X2
17. Product price ratio (PR)
Price per unit of added product
PR =
Price per unit of replacedproduct
 83

P Y2 P Y1
PR = or
P Y1 P Y2
18. Constant rate of factor substation
?1 X2 ? X ? X
= 2 2 = LL = n 2
? 1 X1 ? 2 X1 ? n X1

19. Decreasing rate of factor substitution

?1 X2 ? X ? X
> 2 2 > LL > n 2
? 1 X1 ? 2 X1 ? n X1
20. Increasing rate of product substitution
?1 Y2 ? Y ? Y
< 2 2 < LL < n 2
? 1 Y1 ? 2 Y1 ? n Y1
21. Constant rate of product substitution
?1 Y2 ? Y ? Y
= 2 2 = LL = n 2
? 1 Y1 ? 2 Y1 ? n Y1
22. Decreasing rate of product substitution
?1 Y2 ? Y ? Y
> 2 2 > LL > n 2
? 1 Y1 ? 2 Y1 ? n Y1

23. Short run production function y = f (x 1 / x2, x 3 … … x n)

24. Long run production function y = f (x 1, x2, x3 …… xn)
25. Least cost combination of resources.
Number of units of replacedresource Price per unit of added resource
=
Number of units of added resource Price per unit of replacedresources

? X2 P X1 ? X1 P X2
LCC = = or =
? X1 P X2 ? X2 P X1

26. Optimum combination of products

Number of units of replacedproduct Price per unit of added product
=
Number of units of added product Price per unit of replaced product

? Y1 P Y2
= or ? Y2 / ? Y 1 = PY1 / PY2
? Y2 P Y1
27. Optimum input or profit maximizing level of input
 84

Marginal value product (MVP) = Marginal factor cost (MFC)

?Y ?X ?Y P
Py = Px or = x
?X ?X ?X Py
28. Optimum output or profit maximizing level of output
Marginal Revenue (MR) = Marginal cost
?Y ?X
Py = Px
?Y ?Y
?X .Px
Py =
?Y
∆Y.P y = ∆X.P x
29. Future value of present sum (compounding)
FV = P (1 + i)n
FV: Future value; P: present sum (original investment); i : rate of interest;
n : number of years.

30. Present value of Future sum (Discounting)

P
PV =
(1 + i)n
where PV: Present value; P: sum to be received in future); i : rate of interest;
n : number of years.
31. Variable cost (TVC) = P x1⋅X1
Px1 = price per unti of X1, X1 = Quantity of X1 input
n
32. Total fixed cost (TFC) = ∑P
j =1
xy X j (j = 2, 3, … w)

33. Total cost (TC) = Total variable cost + Total fixed cost
TC = TVC + TFC
Total variable cost
34. Average variable cost (AVC) =
output
TVC
AVC =
Y
Total fixed cost
35. Average fixed cost (AFC) =
output
TFC
AVC =
Y
 85

Total cost
36. Average total cost (ATC) =
output
or
Average total cost (ATC) = Average variable cost + Average fixed cost
TC
? TC = AVC + ATC or
Y
37. Cost A2 = Cost A1 + Rent on leased in land
38. Cost B = Cost A1 / A2 + Rent on owned land + Interest on owned fixed capital
39. Cost C = Cost B + Value of family labour
40. Farm business income = Gross incom e – Cost A1 / A2
41. Family labour income = Gross income – Cost B
42. Net income = Gross income – Cost C
43. Farm investment income = (Gross income – Cost C) + (Cost B – Cost A)

44. Net cash income = Total cash income – Total cash operating expenses
45. Net Farm income = Net cash income + Change in inventory and depreciation
46. Farm earning = Net farm income + Value of farm products consumed in home
47. Family labour earnings =Farm earnings – Interest on capital
48. Returns to management = Family labour earnings - Value of family labour
Operating expenses
49. Operating cost ration (OCR) =
Gross income
Total fixed costs
50. Fixed cost ratio (FCR) =
Gross income
Total costs
51. Gross cost ratio (GCR) =
Gross income
Gross income
52. Rate of capital turnover =
Total capital invested
Total assets
53. Net capital ratio (NCR) =
Total liabilities
Current assets + Working assets
54. Working ratio (WR) =
Current liabilites+ Working liabilities
Current assets
55. Current ratio (CR) =
Current liabilites
Total liabilites
56. Debt/equity ratio =
Owner's equity or net woth
 86

57. Production efficiency =

Yield of a crop on the farm
x 100
Average yield of the same crop in the locality
Gross cropped area
58. Cropping intensity = x 100
Net sown area
59. Productive man work units per mar equivalent
Total productive man work units
Number of man equivalents
Original cost - Junk value
60. Straight line method =
Useful life
61. Diminishing balance method = (Book value at the biginning) x R
where R is rate of depreciation
RL
62. Sum of the years digits method = (Original cost – Junk value) X
SoYD
RL : Remaining years of useful life
SoYD : Sum of the years digits
63. Income capitalization V = R / r
where V = capitalized value, R = Net income per unit of land per annum, r = rate of
interest
64. Break-even output =
TotalFixedcosts
Seeling price per unit − Variable costs per unit (AVC)
ABBREVIATIONS
1. PF : Production Function
2. EP : Elasticity of production
3. SRPF : Short run production function
4. LRPF : Long run production function
5. TP : Total Product
6. MP : Marginal product
7. AP : Average Product
8. TPP : Total physical product
9. APP : Average physical product
10. MPP : Marginal physical product
11. TVP : Total value product
12. AVP : Average value product
13. MVP : Marginal value product
14. MFC : Marginal factor cost
 87

15. MIC : Marginal input cost

16. MC : Marginal cost
17. MRS : Marginal rate of substitution
18. MRTS : Marginal rate of technical substitution
19. MRPS : Marginal rate of product substitution
20. PR : Price ratio
21. TFC : Total fixed cost
22. TVC : Total variable cost
23. TC : Total cost
24. AFC : Average fixed cost
25. AVC : Average variable cost
26. ATC : Average total cost
27. PPC : Production possibility curve
28. LCC : Least cost combination of resources
29. LDR : Law of diminishing returns
30. LEMR : Law of equi-marginal returns.
31. CYI : Crop yield index
32. CI : Cropping intensity
33. GI : Gross income
34. NI : Net income
35. PMWC : Productive man work unit
36. BEO : Break-even output
37. BEP : Break-even point
38. NCR : Net capital ratio
39. WR : Working ratio
40. CR : Current ratio
41. MR : Marginal revenue
42. OCR : Operating cost ratio
43. FCR : Fixed cost ratio
44. GCR : Gross cost ratio
45. FBI : Farm business income
46. FLI : Family labour income
47. LP : Linear programming
 LECTURE NOTES
Course No. AECO 142

Agricultural Finance and Co-operation

Compiled by

Dr. P.RAGHURAM
Professor and University Head
Department of Agricultural Economics
S.V. Agricultural College
TIRUPATI

&

Dr.S. Hymajyoti
Assistant professor
Agricultural College
RAJAHMUNDARY
 LECTURE-1
Definition of agricultural Finance – nature-scope- meaning - significance -micro &
macro finance

Meaning:
Agricultural finance generally means studying, examining and analyzing the
financial aspects pertaining to farm business, which is the core sector of India.
The financial aspects include money matters relating to production of agricultural
products and their disposal.
Definition of Agricultural finance:
Murray (1953) defined agricultural. finance as “an economic study of borrowing funds
by farmers, the organization and operation of farm lending agencies and of society’s
interest in credit for agriculture .”
Tandon and Dhondyal (1962) defined agricultural. finance “as a branch of agricultural
economics, which deals with and financial resources related to individual farm units.”
Nature and Scope:
Agricultural finance can be dealt at both micro level and macro level. Macro-
finance deals with different sources of raising funds for agriculture as a whole in the
economy. It is also concerned with the lending procedure, rules, regulations, monitoring
and controlling of different agricultural credit institutions. Hence macro-finance is related
to financing of agriculture at aggregate level.
Micro-finance refers to financial management of the individual farm business
units. And it is concerned with the study as to how the individual farmer considers various
sources of credit, quantum of credit to be borrowed from each source and how he allocates
the same among the alternative uses with in the farm. It is also concerned with the future
use of funds.
Therefore, macro-finance deals with the aspects relating to total credit needs of
the agricultural sector, the terms and conditions under which the credit is available and the
method of use of total credit for the development of agriculture, while micro-finance refers
to the financial management of individual farm business.
Significance of Agricultural Finance:

1) Agril finance assumes vital and significant importance in the agro – socio –
economic development of the country both at macro and micro level.
2) It is playing a catalytic role in strengthening the farm business and augmenting
the productivity of scarce resources. When newly developed potential seeds are
combined with purchased inputs like fertilizers & plant protection chemicals in
appropriate / requisite proportions will result in higher productivity.
3) Use of new technological inputs purchased through farm finance helps to increase
the agricultural productivity.
4) Accretion to in farm assets and farm supporting infrastructure provided by large
scale financial investment activities results in increased farm income levels
leading to increased standard of living of rural masses.
5) Farm finance can also reduce the regional economic imbalances and is equally
good at reducing the inter–farm asset and wealth variations.
6) Farm finance is like a lever with both forward and backward linkages to the
economic development at micro and macro level.
7) As Indian agriculture is still traditional and subsistence in nature, agricultural
finance is needed to create the supporting infrastructure for adoption of new
technology.
8) Massive investment is needed to carry out major and minor irrigation projects,
rural electrification, installation of fertilizer and pesticide plants, execution of
agricultural promotional programmes and poverty alleviation programmes in the
country.
 LECTURE -2
Credit needs in Agriculture – meaning and definition of credit-classification of
credit based on time, purpose, security, lender and borrower.
_____________________________________________________________________
The word “credit” comes from the Latin word “Credo” which means “I
believe”. Hence credit is based up on belief, confidence, trust and faith. Credit is other
wise called as loan.
Definition: Credit / loan is certain amount of money provided for certain purpose on
certain conditions with some interest, which can be repaid sooner (or) later.

According to Professor Galbraith credit is the “temporary transfer of asset

from one who has to other who has not”
Credit needs in Agriculture:
Agricultural credit is one of the most crucial inputs in all agricultural
development programmes. For a long time, the major source of agricultural credit was
private moneylenders. But this source of credit was inadequate, highly expensive and
exploitative. To curtail this, a multi-agency approach consisting of cooperatives,
commercial banks ands regional rural banks credit has been adopted to provide cheaper,
timely and adequate credit to farmers.
The financial requirements of the Indian farmers are for,
1. Buying agricultural inputs like seeds, fertilizers, plant protection chemicals, feed
and fodder for cattle etc.
2. Supporting their families in those years when the crops have not been good.
3. Buying additional land, to make improvements on the existing land, to clear old
debt and purchase costly agricultural machinery.
4. Increasing the farm efficiency as against limiting resources i.e. hiring of
irrigation water lifting devices, labor and machinery.
Credit is broadly classified based on various criteria:
1. Based on time: This classification is based on the repayment period of the loan. It is
sub-divided in to 3 types
 Short–term loans: These loans are to be repaid within a period of 6 to 18
months. All crop loans are said to be short–term loans, but the length of the
repayment period varies according to the duration of crop. The farmers require
this type of credit to meet the expenses of the ongoing agricultural operations on
the farm like sowing, fertilizer application, plant protection measures, payment of
wages to casual labourers etc. The borrower is supposed to repay the loan from
the sale proceeds of the crops raised.
 Medium – term loans: Here the repayment period varies from 18 months to 5
years. These loans are required by the farmers for bringing about some
improvements on his farm by way of purchasing implements, electric motors,
milch cattle, sheep and goat, etc. The relatively longer period of repayment of
these loans is due to their partially-liquidating nature.
 Long – term loans: These loans fall due for repayment over a long time ranging
from 5 years to more than 20 years or even more. These loans together with
medium terms loans are called investment loans or term loans. These loans are
meant for permanent improvements like levelling and reclamation of land,
construction of farm buildings, purchase of tractors, raising of orchards ,etc. Since
these activities require large capital, a longer period is required to repay these
loans due to their non - liquidating nature.
2. Based on Purpose: Based on purpose, credit is sub-divided in to 4 types.
 Production loans: These loans refer to the credit given to the farmers for crop
production and are intended to increase the production of crops. They are also
called as seasonal agricultural operations (SAO) loans or short – term loans or
crop loans. These loans are repayable with in a period ranging from 6 to 18
months in lumpsum.
  Investment loans: These are loans given for purchase of equipment the
productivity of which is distributed over more than one year. Loans given for
tractors, pumpsets, tube wells, etc.
 Marketing loans: These loans are meant to help the farmers in overcoming the
distress sales and to market the produce in a better way. Regulated markets and
commercial banks, based on the warehouse receipt are lending in the form of
marketing loans by advancing 75 per cent of the value of the produce. These
loans help the farmers to clear off their debts and dispose the produce at
remunerative prices.
 Consumption loans: Any loan advanced for some purpose other than production
is broadly categorized as consumption loan. These loans seem to be unproductive
but indirectly assist in more productive use of the crop loans i.e. with out
diverting then to other purposes. Consumption loans are not very widely
advanced and restricted to the areas which are hit by natural calamities. These
loams are extended based on group guarantee basis with a maximum of three
members. The loan is to be repaid with in 5 crop seasons or 2.5 years whichever
is less. The branch manager is vested with the discretionary power of sanctioning
these loans up to Rs. 5000 in each individual case. The rate of interest is around
11 per cent.
The scheme may be extended to
1) IRDP beneficiaries
2) Small and marginal farmers
3) Landless Agril. Laborers
4) Rural artisans
5) Other people with very small means of livelihood hood such as carpenters,
barbers, washermen, etc.
4. Based on security: The loan transactions between lender and borrower are governed
by confidence and this assumption is confined to private lending to some extent, but the
institutional financial agencies do have their own procedural formalities on credit
transactions. Therefore it is essential to classify the loans under this category into two
sub-categories viz., secured and unsecured loans.
  Secured loans: Loans advanced against some security by the borrower are
termed as secured loans. Various forms of securities are offered in obtaining the
loans and they are of following types.

I. Personal security: Under this, borrower himself stands as the guarantor. Loan is
advanced on the farmer’s promissory note. Third party guarantee may or may not be
insisted upon (i.e. based on the understanding between the lender and the borrower)
II. Collateral Security: Here the property is pledged to secure a loan. The movable
properties of the individuals like LIC bonds, fixed deposit bonds, warehouse receipts,
machinery, livestock etc, are offered as security.
III. Chattel loans: Here credit is obtained from pawn-brokers by pledging movable
properties such as jewellery, utensils made of various metals, etc.
IV. Mortgage: As against to collateral security, immovable properties are presented for
security purpose For example, land, farm buildings, etc. The person who is creating the
charge of mortgage is called mortgagor (borrower) and the person in whose favour it is
created is known as the mortgagee (banker). Mortgages are of two types
a) Simple mortgage: When the mortgaged property is ancestrally inherited property
of borrower then simple mortgage holds good. Here, the farmer borrower has to
register his property in the name of the banking institution as a security for the loan
he obtains. The registration charges are to be borne by the borrower.
b) Equitable mortgage: When the mortgaged property is self-acquired property of
the borrower, then equitable mortgage is applicable. In this no such registration is
required, because the ownership rights are clearly specified in the title deeds in
the name of farmer-borrower.
V. Hypothecated loans: Borrower has ownership right on his movable and the banker
has legal right to take a possession of property to sale on default (or) a right to sue the
owner to bring the property to sale and for realization of the amount due. The person who
creates the charge of hypothecation is called as hypothecator (borrower) and the person in
whose favor it is created is known as hypothecate (bank) and the property, which is
denoted as hypothecated property. This happens in the case of tractor loans, machinery
loans etc. Under such loans the borrower will not have any right to sell the equipment
until the loan is cleared off. The borrower is allowed to use the purchased machinery or
equipment so as to enable him pay the loan installment regularly.

Hypothecated loans again are of two types viz., key loans and open loans.
a) Key loans : The agricultural produce of the farmer - borrower will be kept under
the control of lending institutions and the loan is advanced to the farmer . This
helps the farmer from not resorting to distress sales.
b) Open loans: Here only the physical possession of the purchased machinery rests with
the borrower, but the legal ownership remains with the lending institution till the loan
is repaid.
 Unsecured loans: Just based on the confidence between the borrower and
lender, the loan transactions take place. No security is kept against the loan
amount
4. Lender’s classification: Credit is also classified on the basis of
lender such as
 Institutional credit: Here are loans are advanced by the institutional agencies
like co-operatives, commercial banks. Ex: Co-operative loans and commercial
bank loans.
 Non-institutional credit : Here the individual persons will lend the loans Ex:
Loans given by professional and agricultural money lenders, traders,
commission agents, relatives, friends, etc.
5. Borrower’s classification: The credit is also classified on the basis of type of
borrower. This classification has equity considerations.
 Based on the business activity like farmers, dairy farmers, poultry farmers,
pisiculture farmers, rural artisans etc.
 Based on size of the farm: agricultural labourers, marginal farmers, small
farmers , medium farmers , large farmers ,
 Based on location hill farmers (or) tribal farmers.
6. Based on liquidity: The credit can be classified into two types based on liquidity and
they are
  Self-liquidating loans: They generate income immediately and are to be paid
with in one year or after the completion of one crop season. Ex: crop loans.
 Partially -liquidating: They will take some time to generate income and can be
repaid in 2-5 years or more, based on the economic activity for which the loan
was taken. Ex: Dairy loans, tractor loans, orchard loans etc.,
7. Based on approach:
 Individual approach: Loans advanced to individuals for different purposes will
fall under this category
 Area based approach: Loans given to the persons falling under given area for
specific purpose will be categorized under this. Ex: Drought Prone Area
Programme (DPAP) loans, etc
 Differential Interest Rate (DIR) approach: Under this approach loans will be
given to the weaker sections @ 4 per cent per annum.
8. Based on contact:
 Direct Loans: Loans extended to the farmers directly are called direct loans.
Ex: Crop loans.
 Indirect loans: Loans given to the agro-based firms like fertilizer and
pesticide industries, which are indirectly beneficial to the farmers are called
indirect loans.
 LECTURE NO: 3

Credit Analysis-Economic Feasibility Tests- Returns to investment, Repayment

capacity and Risk bearing ability (3Rs)
________________________________________________________________________

The technological break-thorough achieved in Indian agriculture made the

agriculture capital intensive. In India most of the farmers are capital starved. The farmers
need credit at right time, through right agency and in adequate quantity to realize
maximum productivity. This is from farmer’s point of view.
In contrast to the farmer’s point of view, when a farmer approaches an
Institutional Financial Agency (IFA) with a loan proposal, the banker should be
convinced about the economic viability of the proposed investments.
Economic Feasibility Tests of Credit
When the economic feasibility of the credit is being observed, three basic
financial aspects are to be assessed by the banker.

If the loan is advanced,

1. Will it generate returns more than costs?
2. Will the returns have surplus, to repay the loan when it falls due?
3. Will the farmer stand up to the risk and uncertainty in farming?
These three financial aspects are known as 3 Rs of credit, which are as
follows
1. Returns from the proposed investment
2. Repayment capacity the investment generates
3. Risk- bearing ability of the farmer-borrower
The 3Rs of credit are sound indicators of credit worthiness of the farmers.
Returns from the Investment
This is an important measure in credit analysis. The banker needs to have an
idea about the extent of returns likely to be obtained from the proposed investment. The
farmer’s request for credit can be accepted only if he can be able to generate returns that
enable him to meet the costs. Returns obtained by the farmer depend upon the decisions
like,
 What to grow?
 How to grow?
 How much to grow?
 When to sell?
 Where to sell?

Therefore the main concern here is that the farmers should be able to generate
incremental returns that should cover the additional costs incurred with borrowed funds.

Repayment Capacity:

Repayment capacity is nothing but the ability of the farmer to repay the loan
obtained for the productive purpose with in a stipulated time period as fixed by the
lending agency.
At times the loan may be productive enough to generate additional income but
may not be productive enough to repay the loan amount. Hence the necessary condition
here is that the loan amount should not only profitable but also have potential for
repayment of the loan amount. Under such conditions only the farmer will get the loan
amount.

The repayment capacity not only depends on returns, but also on several other
quantitative and qualitative factors as given below.
Y= f(X1, X2, X3, X4 X5, X6, X7…)
Where, Y is the dependent variable ie., the repayment capacity
The independent variables viz., X1to X4 are considered as quantitative factors
while X5 to X7 are considered as qualitative factors.
X1(+) = Gross returns from the enterprise for which the loan was taken during a
season /year (in Rs.)
X2(-) = Working expenses in Rs.
X3(-) = Family consumption expenditure in Rs.
X4(-) = Other loans due in Rs.
X5(+) = Literacy
 X6(+) = Managerial skill
X7(+) = Moral characters like honesty, integrity etc.
Note: Signs in the brackets are apriori signs.

Hence, eventhough the returns are high, the repayment capacity is less because
of other factors.
The estimation of repayment capacity varies from crop loans (i.e. self
liquidating loans) to term loans (partially liquidating loans)

i) Repayment capacity for crop loans

Gross Income- (working expenses excluding the proposed crop loan + family
living expenses + other loans due+ miscellaneous expenditure )
ii) Repayment capacity for term loans

Gross Income- (working expenses + family living expenses + other loans due+
miscellaneous expenditure + annual installment due for term loan)
Causes for the poor repayment capacity of Indian farmer

1. Small size of the farm holdings due to fragmentation of the land.

2. Low production and productivity of the crops.
3. High family consumption expenditure.
4. Low prices and rapid fluctuations in prices of agricultural commodities.
5. Using credit for unproductive purposes
6. Low farmer’s equity/ net worth.
7. Lack of adoption of improved technology.
8. Poor management of limited farm resources, etc
Measures for strengthening the repayment capacity
1. Increasing the net income by proper organization and operation of the farm
business.
2. Adopting the potential technology for increasing the production and reducing the
expenses on the farm.
3. Removing the imbalances in the resource availability.
 4. Making the schedule of loan repayment plan as per the flow of income.
5. Improving the networth of the farm households.
6. Diversification of the farm enterprises.
7. Adoption of risk management strategies like insurance of crops, animals and
machinery and hedging to control price variations ,etc.,

Risk Bearing Ability

It is the ability of the farmer to withstand the risk that arises due to financial
loss. Risk can be quantified by statistical techniques like coefficient of variation (CV),
standard deviation (SD) and programming models. The words risk and uncertainty are
synonymously used.
Some sources / types of risk
1. Production/ physical risk.
2. Technological risk.
3. Personal risk
4. Institutional risk
5. Weather uncertainty.
6. Price risk
Repayment capacity under risk

Deflated gross Income- (working expenses excluding the proposed crop loan+
family living expenses + other loans due+ miscellaneous expenditure )
Measures to strengthen risk bearing ability

1. Increasing the owner’s equity/net worth

2. Reducing the farm and family expenditure.
3. Developing the moral character i.e. honesty, integrity , dependability and
feeling the responsibility etc. All these qualities put together are also called
as credit rating.
4. Undertaking the reliable and stable enterprises ( enterprises giving the
guaranteed and steady income)
5. Improving the ability to borrow funds during good and bad times of crop
production.
6. Improving the ability to earn and save money. A part of the farm earnings
should be saved by the farmer so as to meet the uncertainty in future.
7. Taking up of crop, livestock and machinery insurance.
 LECTURE NO: 4

Five Cs of credit - Character, Capacity, Capital, Condition and Commonsense and

Seven Ps of credit - Principle of Productive purpose, Principle of personality,
Principle of productivity, Principle of phased disbursement, Principle of proper
utilization, Principle of payment and Principle of protection
________________________________________________________________________

Next to 3 Rs of credit, the other important tests applied to study the economic
feasibility of the proposed investment activity are 5 Cs of credit viz., character, capacity,
capital, condition and commonsense.
1. Character:

The basis for any credit transaction is trust. Even though the bank insists up on
security while lending a loan, an element of trust by the banker will also play a major
role. The confidence of an institutional financial agency on its borrowers is influenced by
the moral characters of the borrower like honesty, integrity, commitment, hard work,
promptness etc. Therefore both mental and moral character of the borrowers will be
examined while advancing a loan. Generally people with good mental and moral
character will have good credit character as well.
2. Capacity:
It means capacity of an individual borrower to repay the loans when they fall due.
It largely depends upon the income obtained from the farm.

C= f(Y) where C= capacity and Y = income

3. Capital:
Capital indicates the availability of money with the farmer - borrower. When his
capacity and character are proved to be inadequate the capital will be considered. It
represents the networth of the farmer. It is related to the repayment capacity and risk
bearing ability of the farmer - borrower.
4. Condition:

It refers to the conditions needed for obtaining loan from financial institutions i.e.
procedure to be followed while advancing a loan.
5. Commonsense:
This relates to the perfect understanding between the lender and the borrower in
credit transactions. This is in fact prima-facie requirement in obtaining credit by the
borrower.
7 Ps of farm credit/ principles of farm finance

The increased role of financial institutions due to technological changes on

agricultural front necessitated the evolving of principles of farm finance, which are
expected to bring not only the commercial gains to the bankers but also social benefits.
The principles so evolved by the institutional financial agencies are expected to have
universal validity. These principles are popularly called as 7 Ps of farm credit and they
are
1. Principle of productive purpose.
2. Principle of personality.
3. Principle of productivity.
4. Principle of phased disbursement.
5. Principle of proper utilization.
6. Principle of payment and
7. Principle of protection.
1. Principle of productive purpose:
This principle refers that the loan amount given to a farmer - borrower should be
capable of generating additional income. Based on the level of the owned capital
available with the farmer, the credit needs vary. The requirement of capital is visible on
all farms but more pronounced on marginal and small farms. The farmers of these small
and tiny holdings do need another type of credit i.e. consumption credit, so as to use the
crop loans productively (without diverting them for unproductive purposes). Inspite of
knowing this, the consumption credit is not given due importance by the institutional
financial agencies.
This principle conveys that crop loanss of the small and marginal farmers are to
be supported with income generating assets acquired through term loans. The additional
incomes generated from these productive assets add to the income obtained from the
farming and there by increases the productivity of crop loans taken by small and marginal
farmers.
The examples relevant here are loans for dairy animals, sheep and goat, poultry
birds, installation of pumpsets on group action, etc.
2. Principle of personality:
The 3Rs of credit are sound indicators of credit worthiness of the farmers. Over the
years of experiences in lending, the bankers have identified an important factor in credit
transactions i.e. trustworthiness of the borrower. It has relevance with the personality of
the individual.
When a farmer borrower fails to repay the loan due to the crop failure caused by
natural calamities, he will not be considered as willful – defaulter, whereas a large farmer
who is using the loan amount profitably but fails to repay the loan, is considered as
willful - defaulter. This character of the big farmer is considered as dishonesty.
Therefore the safety element of the loan is not totally depends up on the security
offered but also on the personality (credit character) of the borrower. Moreover the
growth and progress of the lending institutions have dependence on this major
influencing factor i.e. personality. Hence the personality of the borrower and the growth
of the financial institutions are positively correlated.
3. Principle of productivity:
This principle underlines that the credit which is not just meant for increasing
production from that enterprise alone but also it should be able to increase the
productivity of other factors employed in that enterprise. For example the use of high
yielding varieties (HYVs) in crops and superior breeds of animals not only increases the
productivity of the enterprises, but also should increase the productivity of other
complementary factors employed in the respective production activities. Hence this
principle emphasizes on making the resources as productive as possible by the selection
of most appropriate enterprises.
4. Principle of phased disbursement:
This principle underlines that the loan amount needs to be distributed in phases, so
as to make it productive and at the same time banker can also be sure about the proper
end use of the borrowed funds. Ex: loan for digging wells
The phased disbursement of loan amount fits for taking up of cultivation of
perennial crops and investment activities to overcome the diversion of funds for
unproductive purposes. But one disadvantage here is that it will make the cost of credit
higher. That’s why the interest rates are higher for term loans when compared to the crop
loans.
5. Principle of proper utilization:

Proper utilization implies that the borrowed funds are to be utilized for the
purpose for which the amount has been lent. It depends upon the situation prevailing in
the rural areas viz., the resources like seeds, fertilizers, pesticides etc., are free from
adulteration, whether infrastructural facilities like storage, transportation, marketing etc.,
are available. Therefore proper utilization of funds is possible, if there exists suitable
conditions for investment.
6. Principle of payment:

This principle deals with the fixing of repayment schedules of the loans advanced
by the institutional financial agencies. For investment credit advanced to irrigation
structures, tractors, etc the annual repayments are fixed over a number of years based on
the incremental returns that are supposed to be obtained after deducting the consumption
needs of the farmers.With reference to crop loans, the loan is to be repaid in lumpsum
because the farmer will realize the output only once. A grace period of 2-3 months will
be allowed after the harvest of crop to enable the farmer to realize reasonable price for his
produce. Otherwise the farmer will resort to distress sales. When the crops fail due to
unfavourable weather conditions, the repayment is not insisted upon immediately. Under
such conditions the repayment period is extended besides assisting the farmer with
another fresh loan to enable him to carry on the farm business.
7. Principle of Protection:
Because of unforeseen natural calamities striking farming more often,
institutional financial agencies can not keep away themselves from extending loans to the
farmers. Therefore they resort to safety measures while advancing loans like
 Insurance coverage
 Linking credit with marketing
 Providing finance on production of warehouse receipt
 Taking sureties: Banks advance loans either by hypothecation or mortgage
of assets
 Credit guarantee: When banks fail to recover loans advanced to the weaker
sections, Deposit Insurance Credit Guarantee Corporation of India (DICGC)
reimburses the loans to the lending agencies on behalf of the borrowers.
 LECTURE – 5
Methods and Mechanics of Processing Loan Application
____________________________________________________________________

Procedure to be followed while sanctioning farm loan:

The financing bank is vested with the full powers either to accept or reject
the loan application of a farmer. This is nothing but the appraisal of farm credit
proposals or procedures and formalities followed in the processing of loans.
The processing procedure of a loan application can be dealt under following
ten sub-heads or steps.
1. Interview with the farmer
2. Submission of loan application by the farmer
3. Scrutiny of records.
4. Visit to the farmer’s field before sanction of loan
5. Criteria for loan eligibility
6. Sanction of loan
7. Submission of requisite documents
8. Disbursement of loan
9. Post-credit follow-up measures , and
10. Recovery of loan.

1. Interview with the farmer:

A banker has a good scope to assess the credit characteristics like honesty,
integrity, frankness, progressive thinking, indebtedness, repayment capacity etc, of a
farmer-borrower while interviewing. During the interview, the banker explains the terms
and conditions under which the loan is going to be sanctioned. Interview also helps the
banker to understand the genuine credit needs of farmer. Therefore an interview is not a
formality, but it facilitates the banker to study a farmer in detail and assess his actual
credit requirements.
2. Submission of loan application by the farmer:

The banker gives a loan application to the farmer borrower after getting
satisfied with his credentials. The farmer has to fill the details like the location of the
farm, purpose of the loan, cost of the scheme, credit requirements, farm budgets, financial
statements etc.

The items like 10 -1 (indicating the ownership of land or title deeds) and
adangal ( statement showing the cropping pattern adopted by the farmer-borrower ), farm
map, no-objection certificate from the co-operatives, non-encumbrance certificate from
Sub-Registrar of land assurances, affidavit from the borrower regarding his non-mortgage
of land elsewhere are to be appended to the loan application. A passport size photograph
of farmer is also to be affixed on the loan application form.

3. Scrutiny of records:
The relevant certificates indicating the ownership of land and extent of land are to
be verified by the bank officials with village karnam or village revenue official.
4. Visit to the farmer’s field before sanction of loan:

After verifying the records at village level, the field officer of the bank pays a
visit to the farm to verify the particulars given by the farmer. The pre-sanction visit is
expected to help the banker in identifying the farmer and guarantor, to locate the
boundaries of land as per the map, assess the managerial capacity of the farmer in
farming and allied enterprises and the farmer’s attitude towards latest technology. Details
on economics of crop and livestock enterprises, economic feasibilities of proposed
projects and farmer’s loan position with the non- institutional sources are ascertained in
the pre -sanction visit. Hence, the pre-sanction visit of the bank officials is very important
to verify credit-worthiness and trust-worthiness of the farmer - borrower.

While appraising different types of loans, different aspects should be verified. For
advancing loan for well digging, the location of proposed well, availability of ground
water, rainfall, area to be covered (command area of the well) and distance from the
nearby well etc, are verified in the pre-sanction visit. In the same way, for other loans,
the relevant aspects are verified. All these aspects are included in the report submitted to
the branch manager for taking the final decision in sanctioning of the loan amount.

5. Criteria for loan eligibility:

The following aspects are to be considered while judging the eligibility of a farmer
- borrower to obtain loan.
 He should have good credit character and financial integrity.
 His financial transactions with friends, neighbours and financial institutions must
be proper (i.e. he should not be a wilful defaulter in the past)
 He must have progressive outlook and receptive to adopt modern technology.
 He should have firm commitment to implement the proposed plan.
 The security provided by the farmer towards the loan must be free from any sort
of encumbrance and litigation.

6. Sanction of loan:
The branch manager takes a decision whether to sanction the loan (or) not,
after carefully examining all the aspects presented in the pre-sanction farm
inspection report submitted by the field officer. Before sanctioning, the branch
manager considers the technical feasibility, economic viability and bankability of
proposed projects including repayment capacity, risk-bearing ability and sureties
offered by the borrower.
If the loan amount is beyond the sanctioning power of branch manager, he
will forward it to regional manager (or) head office of bank, incorporating his
recommendations. The office examines the proposed projects and take final
decision and communicate their decision to the branch manager for further action.
7. Submission of requisite documents:

After the loan has been sanctioned, the following documents are to be obtained
by the bank from the farmer- borrower.
  Demand promissory note
 Deed of hypothecation – movable property
 Deed of mortgage (for immovable property)
 Guarantee letter
 Instalment letter
 An authorisation letter regarding the repayment of loan from the
marketing agencies.
Title deeds are to be examined by the bank’s legal officer. Simple mortgage is
followed in the case of ancestral property and equitable mortgage in respect of self-
acquired property.

8. Disbursement of loan:
Immediately after the submission of requisite documents, the loan amount is
credited to the borrower’s account. The sanctioned loan amount is disbursed in a phased
manner, after ensuring that the loan is properly used by the farmer- borrower. Based on
the flow of income of the proposed project a realistic repayment plan is prepared and
given to the farmer.

9. Post-credit follow-up measures:

To ascertain the proper use of the sanctioned loan the branch manager or field
officer pays a visit to the farmer’s field. Apart from this, farmer can get the technical
advice if any needed from the field officer for the implementation of the proposed
project. These visits are helpful for developing a close rapport between the farmers and
the banker. And these visits are more informal than formal. These visits also help in
assessing any further requirement of supplementary credit to complete the scheme.

10. Recovery of loan:

Well in advance the bank reminds the farmer- borrower about the due date of
loan repayment. Some appropriate measures like organising recovery camps, special
drives, village meetings etc, are to be organised by banks to recover the loan in time. In
case of default, the reasons are to be ascertained as to whether he is a wilful defaulter or
not. If he founds to be a non-wilful defaulter, he is helped further by extending fresh
financial assistance for increased farm production. In the case of wilful defaulter, the
bank officials initiate stringent measures to recover loan through court of law. In some
possible cases banks make some tie-up arrangements i.e. the recovery of the loan is
linked with marketing. In respect of justifiable cases re-phasing of repayment plan is
allowed.
 LECTURE-6
Repayment plans: Lumpsum repayment /straight-end repayment, Amortized
decreasing repayment, Amortized even repayment, Variable or quasi variable
repayment plan, Future repayment plan and Optional repayment plan
________________________________________________________________________

The repayment of term loans (i.e. medium term loans and long term loans)
differs from that of short term loans because they are characterized by their partially
liquidating nature. These loans are recovered by a given number of installments
depending up on the nature of the asset and the amount advanced for the asset under
consideration.
There are six types of repayment plans for term loans and they are
1. Straight-end repayment plan or single repayment plan or lumpsum repayment
plan
2. Partial repayment plan or Balloon repayment plan
3. Amortized repayment plan
a) Amortized decreasing repayment plan
b) Amortized even repayment plan or Equated annual installment method
4. Variable repayment plan (or) Quasi-variable repayment plan
5. Optional repayment plan
6. Reserve repayment plan (or) Future repayment plan

1. Straight-end Repayment Plan or Single Repayment Plan (or) Lumpsum

Repayment Plan

The entire loan amount is to be cleared off after the expiry of stipulated time
period. The principal component is repaid by the borrower at a time in lumpsum when the
loan matures, while interest is paid each year.

2. Partial repayment plan or Balloon repayment plan

 Here the repayment of the loan will be done partially over the years. Under
this repayment plan, the installment amount will be decreasing as the years pass by
except in the maturity year (final year), during which the investment generates sufficient
revenue. This is also called as balloon repayment plan, as the large final payment made at
the end of the loan period (i.e. in the final year) after a series of smaller partial payments.
3. Amortized repayment plan:
Amortization means repayment of the entire loan amount in a series of
installments. This method is an extension of partial repayment plan.
Amortized repayment plans are of two types
a) Amortized decreasing repayment plan
Here the principal component remains constant over the entire repayment period
and the interest part decreases continuously. As the principal amount remains fixed and
the interest amount decreases, the annual installment amount decreases over the years.
loans advanced for machinery and equipment will fall under this category. As the assets
do not require much repairs during the initial years of loan repayment, a farmer can able
to repay larger installments.

Fig:1 Amortized decreasing repayment plan

b) Amortized even repayment plan

Here the annual installment over the entire loan period remains the same.
The principal portion of the installment increases continuously and the interest
component declines gradually. This method is adopted for loans granted for farm
development, digging of wells, deepening of old wells, construction of godowns, dairy,
poultry units, orchards etc.

Fig 2: Amortized even repayment plan

The annual installment is given by the formula

I = B* i/1-(1+i)-n Where I= annual installment in Rs.

B= principal amount borrowed in Rs.
n= loan period in years
i= annual interest rate

4. Variable repayment plan or Quasi-variable repayment plan

As the name indicates that, various levels of installments are paid by the
borrower over the loan period. At times of good harvest a larger installment is paid and at
times of poor harvest smaller installment is paid by the borrower. Hence, according to the
convenience of the borrower the amount of the installment varies here in this method.
This method is not found in lendings of institutional financial agencies.

5. Optional repayment plan:

Here in this method an option is given for the borrower to make payment towards the
principal amount in addition to the regular interest.
6. Reserve repayment plan or Future repayment plan
 This type of repayment is seen with borrowers in areas where there is variability in
farm income. In such areas the farmers are haunted by the fear of not paying regular loan
installments. To avoid such situations, the farmers make advance payments of loan from
the savings of previous year. This type of repayment is advantageous to both the banker
and borrower. The bankers need not worry regarding loan recovery even at times of crop
failure and on the other hand borrower also gains, as he keeps up his integrity and
credibility.
 LECTURE-7
Recent trends in Agricultural finance-Social control and Nationalization of Banks
___________________________________________________________________
Recent trends in Agricultural finance:
Finance in agriculture is as important as development of technologies.
Technical inputs can be purchased and used by farmer only if he has funds. But his own
money is always inadequate and he needs outside finance.

Professional money lenders were the only source of credit to agriculture till
1935. They used to charge exorbitantly high rates of interest and follow unethical
practices while giving loans and recovering them. As a result, farmers were heavily
burdened with debts and many of them are living in perpetuated debts. There was
widespread discontentment among farmers against these practices and there were
instances of riots also.

With the passing of Reserve Bank of India Act 1934, District Central Co-
operative Banks Act and Land Development Banks Act, agricultural credit received
impetus and there were improvements in agricultural credit. A powerful alternative
agency came into being. Large-scale credit became available with reasonable rates of
interest in easy terms, both in terms of granting loans and recovery of them. Both the co-
operative banks advanced credit mostly to agriculture. The Reserve Bank of India as the
central bank of the country took lead in making credit available to agriculture through
these banks by laying down suitable policies.

Although the co-operative banks started financing agriculture with their

establishments in 1930s real impetus was received only after independence when suitable
legislation were passed and policies formulated. Thereafter, bank credit to agriculture
made phenomenal progress.
 Till 14 major commercial banks were nationalized in 1969, co-operative banks
were the main institutional agencies providing finance to agriculture. After
nationalization, it was made mandatory for these banks to provide finance to agriculture
as a priority sector. These banks undertook special programmes of branch expansion and
created a network of banking services through out the country and started financing
agriculture on large scale. Thus agricultural credit acquired multi-agency dimension.
Development and adoption of new technologies and availability of finance go hand in
hand Now the agricultural credit, through multi agency approach has come to stay.

The procedures and amount of loans for various purposes have been
standardized. Among the various purposes "crop loans" (Short-term loan) has the major
share. In addition, farmers get loans for purchase of electric motor with pumpsets, tractor
and other machinery, digging wells, installation of pipe lines, drip irrigation, planting
fruit orchards, purchase of dairy animals, poultry, sheep and goat keeping and for many
other allied enterprises.

The quantum of agricultural credit can be judged from the

figures of credit disbursed by all the banks at all India level.

Year Rs. in crore

1987-88 9255
1988-89 9785
1989-90 10186
1990-91 8983
1991-92 11303
1992-93 13000
1993-94 15100
1994-95 16700
1999-2000 43000
2000-01 51500
2001-02 NA
2002-03 69560
2003-04 86981
2004-05 125299
2005-06 180486
2006-07 229400
2007-08 254657
2008-09 264455*
 2009-10 325000**
Note: * Proposed, ** Targeted

Table1: Flow of Institutional Credit to Agriculture and Allied Activities (Rs. Crore)

Institutional 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09* 2009-10**

Credit from
Cooperative 23716 26959 31424 39786 42480 48258 35747 _
Banks
RRBs 6070 7581 12404 15223 20435 25312 25852 _
Commercial 39774 52441 81481 125477 166485 181087 202856 _
Banks
Grand Total 69560 86981 125299 180486 229400 254657 264455 325000

Source:http://www.indiabudget.nic.in * Proposed, ** Targeted.

Extent and Nature of Farmers’ Indebtedness

The National Sample Survey Organization (NSSO) in the country surveyed the
extent of indebtedness among farmers in its 59th round of surveys as far back as 2003.

The survey indicated that nearly half (48.6%) of farmer households were
indebted and 61 per cent of them were small farmers holding less than one hectare. Of the
total outstanding amount, 41.6 per cent was taken for purposes other than the farm related
activities. About 30.6 per cent of the total loan was for capital expenditure purposes and
27.8 per cent was for current expenditure in farm related activities. The other important
fact was that 42.3 per cent of the outstanding amounts are from informal sources like
moneylenders and traders.
 An expert group on agricultural indebtedness under the chairmanship of Shri. R.
Radhakrishna was formed. In its report in July, 2007, it estimated that in 2003 non-
institutional channels accounted for Rs. 48,000 crore of farmers’ debt out of which Rs.
18,000 crore was availed at an interest rate of 30 per cent per annum.

It said that the cropping pattern in India is highly skewed in favour of cash crops
in recent years which invited more investment in agriculture. For cash crops, there is a
need for long term loans, but short term credit dominates the farm credit structure,
accounting for more than 75 per cent of the total.

Social control and Nationalization of Banks

At the time of independence, the private sector banks were predominantly
urban–oriented and under the control of a few industrialists which had not helped in
achieving the basic socio–economic objectives. The credit needs of agriculture, small–
scale industries and also weaker sections such as small traders and artisans continued to
be ignored.
Even though for nearly three fourths of population, agriculture is the main
occupation and contributed 50 per cent of gross domestic product, the total bank credit
advanced to this sector was only one per cent as on June, 1967. The bulk of the deposits
contributed by the public were being advanced to the industrial and trade sectors ignoring
the prime sector of agriculture. In agriculture, the credit scene was dominated by the
private money lenders who were charging exorbitant rates of interest.
All these situations compelled the imposition of social control over the banks in
1968. The main aim of social control was achieving of wider spread of bank credit to the
priority sectors thereby reducing the authority of managing directors in advancing the
loans.
Social control created the tempo of banks expansion, as evident by the addition
of 785 new branches by the end of first half of 1969. But this did not make dent in
increased canalisation of credit to agricultural sector and to the other weaker sections
.The directions issued by the Government were also ignored by many of the banks. Under
these circumstances the Government thought that the social control of banks was not
sufficient for socio – economic development and nationalisation of banks was considered
as an alternative solution.
The Government of India on 19th July 1969, promulgated an ordinance called
“The Banking companies Ordinance 1969” (Acquisition and Transfer of Undertakings).
Under this act 14 commercial banks having deposits of more than Rs. 50 crore each were
nationalised and they were
1. Central Bank of India
2. Bank of India
3. Punjab National Bank
4. Bank of Baroda
5. United commercial Bank
6. Canara Bank
7. United Bank of India
8. Dena Bank
9. Union Bank of India
10. Allahabad Bank
11. Syndicate Bank
12. Indian Bank
13. Bank of Maharashtra
14. Indian overseas Bank
The objectives of nationalisation of banks (done by the former Prime Minister, Smt.
Indira Gandhi) were
 Removal of control on banking business by a few industrialists.
 Elimination of the use of bank credit for speculative and unproductive purposes.
 Expansion of credit to priority areas which were grossly neglected like agriculture
and small scale industries.
 Giving a professional bent to the bank management
 Encouragement of new entrepreneurs
 Provision of adequate training to bank staff.
The average population served per bank branch declined markedly from 65,000
in June, 1969 to 32,000 by June, 1975.
 Encouraged by the success of first spell of nationalisation of banks, six more
banks in the private sector, having deposits more than Rs.200 crore were nationalised on
15th April 1980.

The six banks nationalised in the second spell were

1. Punjab and Sind bank
2. Andhra Bank
3. New Bank of India
4. Vijaya Bank
5. Oriental Bank of Commerce
6. Corporation Bank.
As a result of two spells of nationalisation of banks, by the end of June, 1992
bank advances towards agriculture sector were 16.2 per cent of total credit as against one
per cent by the end of June, 1967.
 LECTURE-8
Lead Bank Scheme- Origin-Objectives-functions and progress; Regional Rural
Banks (RRBs )- origin-objectives-functions-progress-RRBs in Andhra Pradesh
_____________________________________________________
Lead Bank Scheme
The study group appointed by National Credit Council (NCC) in 1969 under the
chairmanship of Prof. D.R.Gadgil recommended “Service Area Approach” for the
development of financial structure.
In the same year i.e., 1969, RBI appointed Sri. F.K.F Nariman
committee to examine recommendations of Prof. Gadgil’s study group. The Nariman
committee also endorsed the views of the Gadgil committee on “Service Area Approach”
and recommended the formulation of “Lead Bank Scheme”. The RBI accepted the
Nariman’s committee recommendations and lead bank scheme came into force from
1969.
Under the lead bank scheme, specific districts are allotted to each bank,
which would take the lead role in identifying the potential areas for banking and
expanding credit facilities.
Lead bank is the leading bank among the commercial banks in a district
i.e. having maximum number of bank branches in the district. Lead bank acts as a
consortium leader for coordinating the efforts of all credit institutions in the each allotted
district for the development of banking and expansion of credit facilities.
The activities of lead bank can be dealt under two important phases

Phase I: Survey of the lead district

The RBI has mentioned the following functions of lead bank under phase-I
 Surveying the potential areas for banking in the district.
  Identifying the business establishments which are so far dependent on non –
institutional agencies for credit and financing them so as to raise their income
 Examining the available marketing facilities for agricultural and industrial
products and linking credit with marketing.
 Invoking cooperation among different banks in opening new bank branches.
 Estimating the credit gaps in various sectors of district economy.
 Developing contacts and maintaining liaison with the Government and other
agencies.

Phase II-Preparation of credit Plans:

RBI emphasized that the lead bank should

 Formulate the bankable loaning schemes involving intensive use of labour, so as
to generate additional employment.
 Disburse loans to increase the productivity of land in Agriculture and allied
activities, so as to increase the income level.
 Give maximum credit to weaker sections of the society mainly for productive
purposes.
Therefore lead bank scheme expects the banker to become an important
participant in the developmental process in the area of its operation in rural areas, and the
service area approach put the banker in the position of implementing the development
plans.
Contd…
Table2: Lead Banks of Different Districts in Andhra Pradesh

S.No District Lead Bank

1 East Godavari Andhra Bank

2 West Godavari Andhra Bank

3 Guntur Andhra Bank

4 Srikakulam Andhra Bank

5 Chittoor Indian Bank

6 Krishna Indian Bank

7 Anantapur Syndicate Bank

8 Cuddapah Syndicate Bank

9 Kurnool Syndicate Bank

10 Nellore Syndicate Bank

11 Prakasam Syndicate Bank

12 Mahbubnagar State Bank of India

13 Medak State Bank of India

14 Visakhapatnam State Bank of India

15 Vizianagaram State Bank of India

16 Warangal State Bank of India

17 Adilabad State Bank of Hyderabad

18 Karimnagar State Bank of Hyderabad

19 Khammam State Bank of Hyderabad

20 Nalgonda State Bank of Hyderabad

21 Nizamabad State Bank of Hyderabad

22 Ranga Reddy State Bank of Hyderabad

Regional Rural Banks (RRBs)

All India Rural Credit Review Committee (AIRCRC) under chairmanship of Sri.
B. Venkatappaiah during the year 1969 was of the opinion that over large parts of the
country the marginal and small farmers were deprived of having access to the cooperative
credit both for production and investment purposes. This stressed the establishment of
institutional financial agencies under public sector. Consequently the first spell of
nationalization of banks was done with greater expectations, but the situation had not
changed as per the expectations.
Hence, the Government of India appointed a working committee under the
chairmanship of Sri. M. Narasimham to study the financial assistance rendered to the
weaker sections in the rural areas. This working committee recommended the setting up
of rural based institutional agencies called “Regional Rural Banks” after identifying
shortcomings in the functioning of commercial banks and cooperatives.
The Government of India accepted the recommendations of Sri.Narsimham
committee and regional rural banks came in to existence through regional rural banks
ordinance on 26th September, 1975. Initially only 5 RRBs were set up on pilot basis with
sponsorship of commercial banks on October 2nd, 1975. This ordinance of 1975 was
replaced by the Regional Rural Banks Act, 1976. The list of five RRBs opened in the
country is presented in table 3.
Table 3.List of RRBs
S.No Sponsoring Bank Name of RRB Head quarters
1. Syndicate Bank Pratham Bank Moradabad ( UP)
2. State Bank of India (SBI) Gorakhpur Gorakhpur (UP)
3. United Bank of India Gaur Grameena Malda (WB)
Bank
4. Punjab National Bank Haryana Kshetriya Bhiwani ( Haryana)
 Grameena Bank
5. United Commercial Bank Jaipur Nagalur Jaipur, Rajasthan
Anchalik Grameena
Bank

The objectives of RRBs are:

 To develop rural economy.

 To provide credit for agriculture and allied activities.
 To encourage small scale industries, artisans in the villages.
 To reduce the dependence of weaker sections (Marginal farmers, small farmers
and rural artisans) on private money lenders.
 To fill the gap created by the moratorium on borrowings from private money
lenders.
 To make backward and tribal areas economically better by opening new bank
branches.
 To help the financially poor people in their consumption needs.
Functioning of RRBs:
Each RRB is being sponsored by a scheduled commercial bank. The operational
area of each RRB is one or two districts. Each branch of RRB can serve a population of
roughly 20,000 people.
Authorized share capital of each RRB is Rs. one crore, contributed by central
government, state government and sponsoring commercial bank in the ratio of 50:15:35.
Issued capital for each RRB is Rs. 25 lakhs.
The rate of interest charged by RRBs on the loans is same as that of Primary
Agriculture Credit Societies (PACS), but they are allowed to offer 0.5 per cent interest
more than that of commercial banks on its deposits.
RRBs have simplified procedural formalities in giving agricultural finance on
recommendations of Sri. Baldev Singh’s working group. RRBs use local languages in
their transactions. The cost of operation i.e. user charges are low as compared to that of
commercial banks.
Contd…
Regional Rural Banks in AP:
Table: Amalgamated Regional Rural Banks in Andhra Pradesh

S.No Sponsoring Bank Name of New RRB Names of Amalgamated RRBs

1. Andhra Bank Chitanya Godavari Chitanya Grameena bank
Grameena bank Godavari Grameena bank
2. Indian Bank Saptagiri Grameena Kanakadurga Grameena bank
bank Shri Venkateswara Grameena
bank
3. State Bank of Hyderabad Deccan Grameena bank Golconda Grameena bank
Sri Rama Grameena bank
Sri Saraswathi Grameena bank
Sri Satavahana Grameena bank
4. State Bank of India Andhra Pradesh Kakatiya Grameena bank
Grameena Vikas Bank Manjira Grameena bank
( APGVB) Nagarjuna Grameena bank
Sangameswara Grameena bank
Sri Visakha Grameena bank
5. Syndicate Bank Andhra Pragathi Pinakini Grameena bank
Grameena bank Rayalseema Grameena bank
Sree Anantha Grameena bank
 LECTURE - 9
Crop Loan System: Objectives- Importance- Scale of Finance-Estimation- Term
Loans – Objectives and Interest Rates, Kisan Credit Card
________________________________________________________________________

Crop Loan System:

Even though All India Rural Credit Survey Committee (AIRCSC) under the
chairmanship of Sri. Gorwala during 1954 and V.L. Mehra Committee on Co-operative
credit in 1960 recommended the adoption of crop loan system in all states; it was not
implemented due to several reasons. After a lapse of five years i.e. in the year 1965 it was
introduced throughout the country and in Andhra Pradesh from Karif, 1966.
The twin objectives of crop loan system are:
1. Treating the crop as security instead of immovable property like land.
2. Fixing the scale of finance depending up on the actual farm expenditure i.e. based
on cost of cultivation.
Salient features of the crop loan system:
 The credit requirements of the farmers are to be estimated based on the
cost of cultivation of the crops cultivated by them.
 The eligibility to receive the loan by the farmer is not measured by the
ownership of land but by the fact that he is a real farmer who needs credit
for cultivation.
 The crop loans should be advanced on the hypothecation of the crop.
 The disbursement and recovery of the loans are to be made in accordance
with the crop production schedule.
 The loans should include both cash and kind components.
  The quantum of loan should be fixed according to the variety (i.e. local,
improved variety or HYV), the season in which it is grown and the type
of crop i.e. whether it is irrigated or rainfed crop.
 Crop loan is fixed by the District Level Technical Committee (DLTC)
consisting of experts from the fields of agriculture, animal husbandry,
banking etc.

Scale of Finance

Definition: It is an indicative cost taken as base cost depending on which the amount to
be financed to a farmer is fixed.
Normally scale of finance is given in a range, as the cost of cultivation for a
farmer practicing traditional methods of farming and that of a progressive farmer
practicing modern methods of cultivation differs. The lower value of the range
corresponds to the requirement of the former while the upper value corresponds to the
latter.
Scale of finance is fixed for annual, perennial crops and livestock also.
Livestock will have fixed costs of finance and they are termed as unit costs. The unit
varies with the type of livestock. Ex: for milch cattle the unit refers to two animals, for
sheep and goat a minimum of 10 animals and for poultry a minimum of 500 birds.
Factors influencing the scale of finance:

1. Type of the crop: It varies from crop to crop.

2. Nature of the crop: With in the same crop between the improved varieties and high
yielding varieties (HYVs) the scale of finance differs.
3. Season: Scale of finance differs with season for the same crop.
4. Type of land: Based on the type of the land i.e. irrigated or dry the scale of finance
differs with the same crop.
5. District/Area: For the same crop the scale of finance varies from district to district.

How Scale of Finance is fixed:

 Scale of finance is fixed for each district by a committee known as District Level
Technical Committee (DLTC).The members of DLTC constitute representatives of lead
bank of that district, NABARD, local co-operative banks and commercial banks, officials
of department of agriculture& animal husbandry etc. The meetings of DLTC are chaired
by district magistrate/ district collector and convened by respective lead bank district
manager.
DLTC compiles technical survey report with the information obtained from
NABARD. NABARD in turn obtains information from the state agricultural department
every year, which will have the necessary details like what are crops grown, their extent
etc. By using the above details a potential map is prepared. By using this one can list out
the priority activities to be financed in each part of the district and extent to which these
are to be financed. Finally cost of cultivation is estimated based on the market trends and
needs. This scale of finance is not fixed and keeps on changing every year.

Kisan Credit Card (KCC)

The Government of India introduced Kisan Credit Card scheme by banks

during 1998 -99. The scheme was designed by NABARD. KCC aims at adequate and
timely support from the banking system to the farmers for their short-term production
credit needs in cultivation of crops, purchase of inputs etc in a flexible and cost
effective manner.
Under this scheme, the farmers would be issued a credit card-cum pass book
incorporating the name, address, particulars of land holding, borrowing limit, validity
period etc and it will serve both as an identity card as well as facilitates the financial
transactions.
Credit limit on the card may be fixed on the basis of operational holding,
cropping pattern and scale of finance as recommended by the District Level Technical
committee (DLTC) / State Level Technical committee (SLTC)
As per the recommendations of Sri R.V. Gupta committee in the year 1998, on
the flow of credit to agricultural sector, apart from the total credit need, a 20 per cent of
 total peak level credit requirement (PLCR) will be given contingent credit need (with a
maximum ceiling of Rs.10,000)
The KCC should normally valid up to 3 years and subject to annual review. The
KCC will be considered as a non-performing asset (NPA) if it remains inoperative for a
period of two successive crop seasons.

Table5: Bank-Wise Position of Kisan Credit Card during Financial Year, 2006-07

(Rs. in Lakhs)
Name of the Target From 1-4-2006 to 31-12-2007 % of Cumulative position
Bank Group 2007- achievement since inception
08 of target
No No of Limit Disbursement No Amount
Cards sanctioned sanctioned
issued
Commercial 63100 31349 17521 16391 49.68 199567 75311
Banks
Cooperatives 189300 118384 29640 10382 62.53 956276 291201

RRBs 60900 27421 6776 11801 45.02 428703 40200

Total 313300 177154 53947 38574 56.54 1584546 406712

Source: www.pdfxp.com/kisan-credit-card-pdf.html
 LECTURE-10
Schemes for financing weaker sections- Differential Interest Rate (DIR), Integrated
Rural development Programme (IRDP), Ganga Kalyan Yozana (GKY),
Swarnajayanti Gram Swarozgar Yojana (SGSY), Self Help Groups etc.
_____________________________________________________________________

Schemes for financing weaker sections: Following are the schemes for the benefit of
weaker sections.
Differential Rate of Interest Scheme (DIR)
On the recommendations of RBI committee under the chairmanship of Dr. B.
K. Hazare, the Ministry of Finance, and the Government of India instructed all the
public sector commercial banks to introduce differential rate of interest scheme (DIR).
All the commercial banks under public sector implemented DIR scheme since 1975 and
private sector banks also volunteered to participate in the scheme from 1977 onwards.
The scheme was originally implemented at selected bank branches in 265 backward
districts of the country and later on the scheme was extended to cover all parts of the
country. Under DIR scheme, loans are being extended to the weaker sections of the
society, who do not possess tangible assets to put as security, at a concessional rate of 4
per cent per annum. The DIR loans are covered by Deposit Insurance and Credit
Guarantee Corporation of India (DICGC). Under DIR scheme the loans are extended to
marginal farmers and agricultural labourers, schedule castes and schedule tribes
engaged in agriculture, people having rural industries and cottage industries, hoteliers,
rickshaw pullers, cobblers, basket makers, carpenters, physically challenged persons,
orphans and indigent students having higher education etc. From 1981 onwards , the
banks were allowed to give their advances under DIR scheme through RRBS in their
area of operation on refinance basis and these advances will be kept under lending
account of the respective sponsoring banks only.
The size of the borrower’s holding should not exceed 1.0 acre of wet land and
2.5 acres of dry land. Family incomes of the borrowers should not exceed Rs.24000 per
annum in urban and semi urban areas and Rs.18000/- in rural areas as per the revision
in 2008-09. However, the restrictions on the loan amounts are relaxed for persons
belonging to schedule castes and schedule tribes.
 The commercial banks are required to advance 0.5 to 1.00 per cent of their
aggregate lending towards this scheme and forty per cent of total amount available
under the scheme should be made available to SC and ST borrowers.
During the April, 1983 a task force was appointed to examine the various
provisions of the DIR scheme. As per the task force recommendations, GOI decided the
DIR scheme, IRDP and Self Employment Programme for the Urban Poor (SEPUP)
would be mutually exclusive (i.e. if a person is assisted under IRDP or SEPUP, he will
not be eligible for the benefit under DIR scheme).
Therefore, DIR scheme is a measure to attain “social justice” as it safeguards
the interests of the weaker sections of the society.
Integrated Rural Development Programme (IRDP)

Most of the programmes aimed at improving the economic conditions of the rural
poor, did not create an expected impact. The reasons for this failure were
 None of the programmes covered the entire country
 Frequent overlapping of the schemes in the same area
 Lack of coordination among the implementing agencies etc.
Hence, the Government of India has decided to replace all these programmes
with one single integrated programme, in 1978 -79, with the twin objectives of
 Elimination of poverty and unemployment in rural areas.
 Rural development.
This programme was named as integrated rural development programme. IRDP is
basically an action-oriented and time bound programme. Under IRDP other existing
programmes like SFDA, MFAL, DPAP, CADA, National Rural Employment Programme
(NREP) and Training of Rural Youth for Self Employment (TRYSEM) etc, have been
merged. IRDP scheme is funded by central and state governments in the ratio 50: 50

IRDP is popularly called as anti-poverty programme. Under this programme in

addition to small and marginal farmers , agricultural labourers, landless agricultural
workers, artisans, schedule castes and schedule tribes and others living below Poverty
line ( BPL) are covered .
 As Per 1976 data a family of 5 members was said to be below the poverty line, if
it earns an annual income of less than Rs.11, 600/- in rural areas and Rs.12, 800 /- in
urban areas. As per 2005-06 data the same was Rs.22, 080/- and Rs. 33600/-
respectively.

Specific Objectives:
1. Increasing the productivity of land by providing the needed inputs in required
quantities at right time, thereby raising the productivity and production in
agriculture.
2. Creating tangible assets for the rural poor to improve their economic
conditions.
3. Augmenting the resources and income levels of weaker sections.
4. Diversifying the agriculture through poultry, dairy, fishery, sericulture etc.
5. Providing infrastructural facilities like processing, storage, organised
marketing, milk chilling and collection centres, artificial insemination centres
etc.
Identification of beneficiaries:
Those people living below poverty line are eligible to be covered under this
programme apart from small and marginal farmers, agricultural and non-agricultural
labourers, and rural artisans, schedule castes and schedule tribe families. Each bank
branch should finance IRDP scheme in villages falling under its service area.
Purpose of advance under IRDP
Three major kinds of activities capable of income generation on continuous basis
have been selected for targeted families. They are
1) Primary sector: The activities are agricultural, animal husbandry, fisheries, farm
forestry etc.
2) Secondary sector: Activities like khadi and village industries, handlooms, handi-
crafts, blacksmithy, pottery, carpentary etc., are included.
3) Tertiary sector: Activities like transport, small business and other activities like
tailoring, workshops, repair shops etc., are included.
Implementing Agency:
At national level IRDP is administrated by the Ministry of Rural
Development. The states and union territories have set up bodies known as DRDAs
(District Rural Development Agencies).
DRDA identifies beneficiaries, draws up income generating projects for
them and brings them into contact with banks. DRDA provides capital subsidy to the
identified families and supply the list of such families along with suggested economic
activities to the financing institutions for extending loan assistance. DRDA also ensures
backward linkages (supply of inputs, technical advice, etc) and forward linkages
(processing facility and marketing arrangements, etc) in respect of the proposed
economic activities.

Subsidies: The subsidy in the case of small farmers is 25 per cent while for marginal
farmers and agricultural labourers 33.33 per cent and for scheduled tribes 50 per cent.

Ganga Kalyan Yojana (GKY)

A central Government. sponsored scheme i.e. Ganga Kalyan Yojana was launched
in the year 1997. The objective of the scheme is to provide irrigation through exploitation
of ground water by tube wells and bore wells to individual as well as group of
beneficiaries belonging to the target groups i.e. small and marginal farmers, falling below
poverty line (BPL).

Swarnajayanti Gram Swarozgar Yojana [SGSY]:

SGSY is an ambitious programme launched by Government of India from

1-4-1999 for poverty alleviation through self employment. It is a holistic programme
covering all aspects of self-employment such as organization of the poor into self-help
groups, training, credit, technology, infrastructure and marketing. It replaces earlier
poverty alleviation programmes viz. Integrated Rural Development Programme, Training
of Rural Youth for Self Employment (TRYSEM), Development of Women and Children
in Rural Areas (DWCRA).
 SGSY places emphasis on group financing for poverty alleviation by
organizing the rural poor into self-help groups (SHGs). Accordingly, the bulk of
assistance under SGSY is expected to be provided to SHGs for supporting the group level
micro-enterprises established by their members.

The objective of SGSY is to bring the Swarozgaris (poor families) below

the poverty line by providing them with income generating assets through a mix of bank
credit and government subsidy by ensuring appreciable sustained level of income over a
period of time. The target group under SGSY consists of all families below poverty line.

SGSY envisages providing training of basic orientation and skill

development, critical infrastructural facilities, revolving fund and credit linked subsidy to
SHGs and individuals. The key activities under implementation in the District are dairy
development, fisheries, vegetable growing and vending, cane and bamboo work, agarbatti
, artistic pottery, pickles and papad, wood carving, etc.,

Self Help Groups (SHGs):

In the year 1992, the National Bank for Agriculture and Rural Development
(NABARD) introduced a pilot project for linking 500 Self-Help Groups (SHGs) with
banks, after thorough discussions with the RBI, commercial banks and non-governmental
organizations (NGOs).

Other Programmes of Rural Development:

Small Farmers Development Agency (SFDA) and Marginal Farmers and Agricultural
Labourers Development Agency (MFAL).
Small and marginal farmers were however denied to receive the benefits from
the nationalization of banks due to
 Cumbersome lending procedures
 Their inadequacy to furnish tangible securities for obtaining loan
  Undue delays in disbursement of loans
As a result, the marginal and small farmers depended mostly on the private
money lenders for their credit needs paying high rates of interest. To avoid this situation
prevailing in rural areas, “All India Rural Credit Review Committee, 1969 under the
chairmanship of Sir. Venkatappaiah (AIRCRC) recommended the establishment of
SFDA and MFAL in 1969. They came into operation in 1971.
 LECTURE: 11
Crop Insurance-meaning and its- advantages-progress of crop insurance scheme in
India-limitations in application-Agricultural Insurance Company of India-National
Agricultural Insurance scheme (NAIS) - salient features-Weather insurance
_______________________________________________________________________

Origin and Importance of crop Insurance scheme:

Insurance-meaning
Insurance is a legal contract that transfers risk from a policy holder to an insurance
company in exchange for a premium.
▫ Risk: The possibility of financial loss
▫ Policyholder: The person who has purchased and owned an insurance
policy.
▫ Insurance Company: A company that provides the insurance coverage for
its policyholders
▫ Premium: The cost of insurance

The desire to introduce two pilot schemes viz., crop insurance and cattle
insurance with the objective of protecting the farmers from the heavy losses of crop and
livestock by Government of India was dates back to 1948 soon after the independence.
But due to paucity of funds, none of the state governments agreed to implement the
programme.
The Government of India during the year 1970 appointed an expert committee
on crop Insurance under the chairmanship of Dharam Narain to examine and analyse
the administrative and financial implications of the scheme. Sri. Dharam Narain ruled
out the possibility of implementing the scheme in India. In contrast to the above
committee, Prof. Dhandekar strongly supported the implementation of the scheme. By
accepting Prof. Dhandekar’s views in 1973, the GOI had set up General Insurance
Corporation (GIC) to carry out all types of insurance business throughout the country
with four subsidiary insurance companies. They are
1. National Insurance Company Limited
2. The New India Assurance Company Limited
3. The oriental Insurance Company Limited
4. United India Insurance Company Limited
On pilot basis in 1973, the GIC introduced the crop Insurance scheme in selected
centres of Gujarat covering only H4 variety of cotton. Later on the same was extended to
West Bengal, Tamilnadu and Andhra Pradesh for the cotton crop and this scheme was in
operation till 1979.
In 1979, area based crop Insurance scheme was introduced on pilot basis in
selected areas. If the actual average yield of the crop in the area was less than the
guaranteed yield of the crop, then the indemnity would be payable to all the insured
farmer-borrowers. Sum insured under crop insurance was 100 per cent but with a ceiling
limit of Rs.5000 per farmer in the case of dry land and Rs.10, 000 per farmer - borrower
in the case of irrigated areas. The scheme was implemented in 12 states up to 1984.
Comprehensive Crop Insurance Scheme (CCIS): In the year 1985, the Comprehensive
Crop Insurance Scheme (CCIS) was introduced by GIC in all the states. This scheme
covers all farmers who availed the crop loan and it is limited to cereals such as paddy,
wheat, millets, oil seeds and pulses. The loans given from 1st April to 30th September
were considered for kharif insurance business. The loans granted from 1st October to
March 31st of next year qualify for rabi insurance. Therefore the insurance cover will be
considered as built-in-aspect of crop loan.
Crop insurance risk is taken by GIC and the respective state governments in 2:1
ratio. The sum insured is 100 per cent of crop loan taken by the farmers during that
season. Here the sum insured was limited to Rs. 10000 /- per farmer for all insurable
crops irrespective of the quantum of loan taken by the farmer. Only that part of crop loan
is insurable which is utilized for the purpose of covering insured crops.
The insurance premium is fixed at 2 per cent of sum insured for paddy, wheat and
millets and for oilseeds and pulses it is one per cent. The premium is sanctioned as an
additional loan to the farmers and should not be deducted from original loan amount. For
small and marginal farmers, 50 per cent of insurance premium is subsidized by the
central and state governments in equal proportion.
Indemnity payable under the scheme is calculated on the basis of “threshold
yield” and it is equal to 80 per cent of the average yield for a given crop for the
previous 5 years . Normally 80 per cent of the average annual yield of the given crop in a
given area over the last preceding five years is considered as “threshold yield” of that
area. Short fall in yield of crop is difference between threshold yield and actual yield of
the crop in particular area for the year under consideration.
 Shortfall in the yield of the crop
Indemnity = _____________________________ x Sum insured.
(Guaranteed
Compensation) Threshold yield of the crop

The yield data for this purpose is obtained from the crop-cutting experiments
conducted by the state Government in accordance with the prescribed procedure as
approved by National Sample Servey organization (NSSO), Ministry of Planning,
Government of India.
Advantages of CCIS:

Comprehensive crop insurance scheme has some specific advantages, which is in

operation in all the states from 1985 onwards. They are
 It stabilizes the farm business during the periods of crop failure.
 The farmer can act much more confidently in farm business as there is protection
against hazards of farming.
 It prevents the farmers to approach non-institutional agencies at times of crop
failure.
 It enhances the use of modern inputs to boost the productivity in agriculture
 In high-risk areas crop insurance serves as a catalyst in bringing areas under
cultivation, which otherwise would have remained uncultivated.
Demerits of CCIS are

 It provided coverage only to a limited number of crops like wheat, paddy,

oilseeds, millets and pulses excluding important cash crops like sugarcane, potato,
cotton etc.
 As the coverage was restricted to rainfed crops only, the scheme was not effective
in agriculturally intensive states such as Punjab, Haryana and Western U.P.
 The scheme covered only those farmers who had availed crop loans from
financial institutions. Sum insured per farmer was also limited to a maximum of
Rs.10, 000 /- only.
Eminent economists made some suggestions for the satisfactory functioning and
improvement of CCIS and they are:
 All crops and all the farmers should be brought under the purview of the scheme.
 The premium rates should vary with the nature and indices of crop production in
different areas.
 The unit area considered for paying indemnity should be a village or group of
villages as against block/mandal.
 Threshold yield should be worked out on the basis of crop production indices over
a ten year period as against five year period.

National Agricultural Insurance Scheme (NAIS)/Bharatiya Krishi Bhima Yojana

(BKBY):

With a view to take insurance closer to the farmers, a newly improved

insurance package over the existing CCIS was launched by the former Prime minister
Sri. Atal Bihari Vajpayee on 23-06-1999. It is National Agricultural Insurance
Scheme.
Irrespective of the size of their holdings, the NAIS would provide insurance
facilities to all farmers from 1999 -2000 season onwards. The NAIS would cover all
crops, including coarse cereals, all pulses and oil seeds. Apart from these, three more
cash crops viz., sugarcane, potato and cotton were also brought under the purview of
the scheme in the first year i.e.1999-2000 itself.
All the other crops i.e. horticulture and commercial crops were also proposed
to be included under the scheme from the year 2002. There was no maximum limit
for the sum insured. The premium rates were 3.5 per cent of sum insured for bajra and
oilseeds and 2.5 per cent for other kharif crops. It was 1.5 per cent of sum insured for
wheat and 2 per cent for other rabi crops. Similar to that CCIS, in this NAIS also 50
per cent subsidy in premium is there for small and marginal farmers. However, this
subsidy will be proposed to be phased out from five years after its inception. i.e 2005
onwards.
 The scheme would be operated on the basis of area approach. All the farmers
in a defined area would be entitled for payment of insurance claim according to the
indemnity rates prescribed for that area. Individual claims of the affected farmers
would also be entertained in the case of localized calamities like hailstorm, land slip,
cyclone, floods etc.

Agriculture Insurance Company of India (AIC) Limited:

Agriculture Insurance Company of India Limited (AIC) had been formed by the
Government of India in 2003 to subserve the needs of farmers better and to move towards
a sustainable actuarial regime. It was proposed to set up a new corporation for agriculture
Insurance. AIC has taken over the implementation of National Agricultural Insurance
Scheme (NAIS) which until 2003 was implemented by General Insurance Corporation of
India. In future, AIC would also be transacting other insurance businesses directly or
indirectly concerning agriculture and its allied activities.

Agriculture Insurance Company of India Limited is a public sector undertaking

with headquarters at New Delhi. It currently offers area based and weather based crop
insurance programs in almost 500 districts of India. It covers almost 20 million farmers,
making it one of the biggest crop insurers in the world.

Agriculture Insurance Company of India Ltd (AIC) is promoted by General

Insurance Corporation of India (GIC), NABARD and the 4 public sector general
Insurance companies. AIC has taken over the implementation of National Agricultural
Insurance Scheme (NAIS) in 2003 which until the financial year 2002 – 03 was
implemented by GIC.

AIC is under the administrative control of Ministry of Finance, Government of

India, and under the operational supervision of Ministry of Agriculture. Insurance
Regulatory and Development Authority, Hyderabad, is the regulatory body governing
AIC.
Main objective of AIC:

To provide financial security to persons engaged in agriculture and allied activities

through insurance products and other support services.

Share Capital

 Authorized share capital - Rs. 1500 crores

 Paid-up share capital - Rs. 200 crores

Promoted by:

 General Insurance Corporation of India - share holding: 35 %

 National Bank for Agriculture And Rural Development (NABARD) - share holding: 30 %
 National Insurance Company Ltd - share holding: 8.75 %
 New India Assurance Company Ltd- share holding: 8.75 %
 Oriental Insurance Company Ltd - share holding: 8.75 %
 United India Insurance Company Ltd.- share holding: 8.75%

Weather Insurance:
Agriculture is still the dominant sector in India, contributing around 20 per
cent of GDP and providing employment to two-thirds of its population. Therefore, even
the slightest change in this sector can affect the economy. However, most of it is rain-fed
and prone to unfavourable weather conditions like deficit or excess rainfall and variations
in temperature. Though phenomenon of unpredictable rainfall in India remains an
unresolved issue, weather insurance has emerged as a ray of hope to farmers to tackle the
uncertain pattern of their crops.
Weather Insurance- an insurance cover against crop losses incurred due to
unfavorable weather conditions such as deficit, excess or untimely rainfall or variations
in temperature. Weather insurance product is designed on the basis of location’s
agricultural and climatic properties and productivity levels over the last several years.
This serves as a good alternative to farmers for mitigating their production related losses.
Weather insurance is now a common term in countries likes US, Canada, UK and other
western countries. In India, ICICI Lombard is the most popular company in the field of
weather insurance.
In India Weather Insurance was developed by government of India in
association with the World Bank and launched in kharif 2007 in Karnataka. In 2008-09 it
was extended to states like Andhra Pradesh, Rajasthan, Bihar, Haryana, West Bengal
Chhttisgarh, Gujarat, Madhya Pradesh, Maharastra, Orissa, Tamilnadu, Jharkhand,
Himachal Pradesh, Kerala, Uttaranchal and Uttar Pradesh. It was launched as a pilot
scheme to insure groundnut in Andhra Pradesh during Kharif 2008. There are several
benefits of weather insurance.
They include:

 High level of client comfort

 Low management expenses
 Scientifically developed objective

Weather insurance provides protection to the farmers, banks, micro-finance

lenders and agro-based industries. This in turn results in boosting the entire rural
economy. Some vital factors of Weather Insurance are:

 Peril/ hazard Identification

 Index Setting
 Back testing for payouts
 Pricing
 Monitoring
 Claims Settlement

There are some examples of deals initiated by Weather Insurance for oranges in Jhalawar,
Rajasthan, 782 farmers were aided by the Weather Insurance which provided a cover for
613 acres for a sum insured of Rs.18.3 million to them. Another example states various
crops in Andhra Pradesh were provided cover when they faced losses due to deficit
rainfall.

Weather Insurance – Broad Challenges/limitations

1. Needs large no. of Automatic Weather Stations (AWS) to minimize Basis

Risk (Basis risk: Without sufficient correlation between the index and actual
losses, index insurance is not an effective risk management tool. This is
mitigated by self-insurance of smaller basis risk by the farmer; supplemental
products underwritten by private insurers; blending index insurance and rural
finance; and offering coverage only for extreme events.)
 2. Precise actuarial modeling: Insurers must understand the statistical properties
of the underlying index.

3. Education: Required by users to assess whether index insurance will provide

effective risk management.

4. Market size: The market is still in its infancy in developing countries like
India and has some start-up costs.

5. Weather cycles: Actuarial soundness of the premium could be undermined by

weather cycles that change the probability of the insured events

6. Microclimates: Make rainfall or area-yield index based contracts difficult for

more frequent and localized events.
7. Reliable and verifiable data
8. Tamper proof weather stations (Automatic Weather Stations - AWS)
Weather Insurance for Farmers in Andhra Pradesh

The former Chief-Minister Dr Y. S. Rajasekhara Reddy launched the

Weather Based Crop Insurance Scheme (WBCIS) in Andhra Pradesh during kharif 2009-
10. The new scheme is intended to provide compensation to farmers who lose their crop
due to insufficient rainfall. The scheme in the first phase covered the red chilli crop in
Guntur district during kharif 2009-10. The Weather Based Crop Insurance Scheme helps
to mitigate the hardships of the farmers against the likelihood of financial losses on
account of anticipated crop loss resulting from the incidence of adverse weather
conditions like rainfall, temperature, humidity, frost etc.

The crop selected is “Red ” which includes both irrigated and unirrigated
Red chilli crop under WBCIS for Kharif-2009 season. All the cultivators (including
sharecroppers and tenant cultivators) growing the notified crop i.e., red either irrigated or
unirrigated in any of the Reference Unit Areas shall be eligible for coverage. Sum
Insured is equivalent to the total cost of cultivation i.e. Rs.1,50,000/- per hectare in
respect of red chilli (Irrigated) and Rs.1,00,000/- per hectare for red chilli (Unirrigated)
crop. For this purpose weather stations were established in the 42 mandals of Guntur
district, during the lunching of the scheme. The Chief Minister said the weather-based
crop insurance should be extended to all horticulture crops in phases in all the districts of
the State. Weather stations will be established in all mandals of the state.

The National Agricultural Insurance Scheme (NAIS) which is already in

force provided relief only if the crop is damaged to the extent of 50%. However, the new
scheme i.e. WBCIS will provide compensation to all farmers irrespective of the quantity
of crop damaged.

In the last five years (2005-2009), the AP government has allocated

RS.19.61 billion for crop insurance scheme as against Rs. 7 billion spent during 1999 to
2004. About 16,500 farmers in the Guntur district of Andhra Pradesh have received the
first-ever insurance claim under the Weather-based Crop Insurance Scheme launched by
the Agriculture Insurance Company (AIC) for farmers. The scheme covered events like
deficit rainfall, excess rainfall and uneven distribution of rainfall. It calculates the crop
damages with village as a unit as against block, mandal or district in the other agriculture
insurance schemes.

The state government received a cheque for Rs 17.34 crore from Agricultural
Insurance Company( AIC), towards insurance claims for the farmers who the lost the
crop during the kharif season 2009-10 benefiting the farmers of 38 mandals in Guntur
district. As the weather-based insurance scheme provided better coverage, the Andhra
Pradesh state government had decided to extend the scheme to cotton farmers in
Adilabad, Khammam and Warangal districts, sweet lime in Nalgonda districts, palm oil
in West Godavari district and mangoes in Chittoor and Rangareddy district,” during
2010-2011.

Lecture-12
Higher Financing Agencies- Reserve Bank of India (RBI)- origin –objectives and
functions- role of RBI in agricultural development and finance; National Bank for
Agricultural and Rural Development (NABARD)- origin, functions, activities and its
role in agricultural development; International Bank for Reconstruction and
Development (IBRD); International Monetary Fund (IMF); International
Development Agency (IDA); Asian Development Bank (ADB); Insurance and
Credit Guarantee Corporation

Higher Financing Agencies: An account of higher financing agencies is furnished

hereunder

Reserve Bank of India (RBI)

Origin, functions and role of RBI in agricultural development and finance:

The Reserve Bank of India (RBI) was established in 1935 under the Reserve
Bank of India Act, 1934. Its headquarters is located at Mumbai
The RBI was set up to
 regulate the issue of bank notes
 secure monetary stability in the country
 operate currency and credit system to its advantage
The role of RBI in agricultural credit was found in the establishment of
Agricultural Credit Department (ACD).
The primary functions of ACD are
 To coordinate the functions of RBI with other banks and state cooperative
banks in respect of agricultural credit
 To maintain expert staff to study all the questions of agricultural credit and be
available for consultation by central government, state governments,
scheduled commercial banks and state cooperative banks.
 To provide legislations to check private money lending and checking other
malpractices.
All India Rural Credit Survey Committee (AIRCSC) under the
chairmanship of Sri. Gorwala in 1954 suggested several recommendations with
regard to the activities of RBI in the sphere of rural credit. Based on this, two funds
were established after amending RBI act, 1934.
1. National Agricultural credit (Long-term operations) fund-1955: It
has started with an initial capital of Rs.10 crores and annual
contribution of Rs.5 crore and later this was increased to Rs. 15 crore.
This fund was meant to provide long–term loans to various state
 governments so as to enable them to contribute to the share capital of
different types of cooperative societies including Land Mortgage
Banks (LMBs). Loans and advances out of this fund are made to state
governments for a period not exceeding 20 years.
2. National Agricultural credit (Stabilization fund)-1956: It was started with
RBIs initial contribution of Rs. 1 crore and subsequent annual
contribution of Rs. 1crore. This fund is utilized for the purpose of
granting medium-term loans to State Co-operative Banks (SCBs),
especially during the times of famines, droughts and other natural
calamities when they are unable to repay their loans to RBI.
The state and central cooperative banks and PACS in turn provide a similar
facility to the farmer - borrowers regarding short-term production loans taken for crops
affected by the natural calamities. This helps the farmers in getting additional finance at
the same time reducing their burden of repaying the loans immediately.
The functions of RBI in the sphere of rural credit can be dealt seen under three aspects:
1. Provision of finance
2. Promotional activities, and
3. Regulatory functions
Provision of Finance:

 Reserve Bank of India provides necessary finances needed by the farmers through
the commercial banks, cooperative banks and RRBs on refinance basis.
 It advances long-term loans to state governments for their contribution to the
share capital of the cooperative credit institutions like State Cooperative Banks
(SCBs) and District Cooperative Central Banks (DCCBs).
 It advances medium-term loans to State Cooperative Banks.
 It extends refinance facility to the RRBs only to an extent of 50 per cent of
outstanding advances.

Promotional activities:
 Reserve Bank of India constitutes study teams to look into the organisation and
operation of the cooperative credit institutions all over the country. It also conducts
number of surveys and studies pertaining to rural credit aspects in the country.
The RBI felt that the cooperatives are the major force in the field of agricultural
credit and hence following measures were framed for the strengthening of cooperatives.
 Reorganisation of the state and central cooperative banks on the principle of one
apex bank for each state and one central bank for each district.
 Rehabilitation of those central cooperative banks, which are financially weak due
to mounting overdues, insufficiency of internal finances, untrained staff, poor
management etc.
 Strengthening of PACS to ensure their financial and operational viability.
 Arranging suitable training programmes for the personnel of cooperative
institutions.
Regulatory functions
 Reserve bank of India is concerned with efficiency of channels through which
credit is distributed.
 Banking Regulation Act, 1966 makes the RBI to exercise effective supervision
over cooperative banks and commercial banks.
 As per the Credit Authorized Scheme (CAS) of 1976, the cooperative banks
should get prior authorization from RBI for providing finances beyond a certain
limit.
 The cash liquidity ratio (CLR) and cash reserve ratio (CRR) are fixed by RBI for
cooperatives, farmers service societies (FSS), regional rural banks (RRBs) and
agricultural development banks (ADBs) at lower levels than those fixed for
commercial banks. For these cooperative banks the bank rate was 3 per cent less
than that of commercial banks. They are permitted by RBI to pay 0.5 per cent
higher rate of interest on deposits.

Credit Control/ Credit Squeeze:

 The term credit control or credit squeeze indicates the regulation by monetary
authority i.e. RBI, on the volume and direction of credit advanced by the banking system,
particularly the commercial banks.
At times of inflation, credit control operations aim at contraction of credit,
while during deflation they aim at expansion of credit. There are two methods of credit
control
1. Quantitative or General Credit control: It aims at regulating the amount of bank
advances i.e. to make banks to lend more or less.
2. Qualitative or Selective credit control: It aims at diverting the bank advances into
certain channels or to discourage them from lending for certain purposes. These
controls, in recent times assumed special significance, especially in under
developed economies.
Credit Rationing: It is nothing but rationing of loans by non-price means at times of
excess demand for credit. Under variable capital-asset ratio, the RBI fixes a ratio of
capital to the total assets of the commercial banks.
Origin of National Bank for Agricultural and Rural Development (NABARD):

Agricultural Refinance and Development Corporation (ARDC) had not made an

expected dent in the field of direct financing and delivery of rural credit against the
massive credit demand for rural development. As a result many committees and
commissions were constituted like,
* Banking commission in 1972
*National Commission on Agriculture (NCA) in 1976
* Committee to Review Arrangements for Institutional Credit in Agricultural and Rural
Development (CRAFICARD) in 1979. This CRAFICARD, under the chairmanship of
Sri. B. Sivaraman, a former member of planning commission recommended the setting
up of a national level institution called NABARD for providing all types of production
and investment credit for agriculture and rural development. As a result of
CRAFICARD’S recommendations NABARD came into existence on July 12th, 1982.
The then existing national level institutions such as Agricultural Refinance and
Development Corporation (ARDC), Agricultural Credit Department (ACD) and Rural
Planning and Credit Cell (RPCC) of RBI were merged with NABARD with a share
capital of Rs.500 crore equally contributed by Government of India and RBI. NABARD
operates through its head office at Mumbai and 17 regional offices-one each in major
states, 10 sub-offices in smaller states / U.Ts and 213 district offices.
Board of Management:
Central Government in consultation with RBI appoints all the directors in the
“Board of Management “along with the chairman and the managing director (MD).
The M.D. is the chief executive officer (C.E.O) of NABARD and he is primarily
responsible for the various operations of the bank. Apart from M.D and Chairman, the
Board of Management consists of 13 other directors and these directors will act as
“Advisory council” of NABARD. Of the 13 directors of Advisory council
- 2 are experts in rural economics and rural development.
- 3 are representatives of co- operatives
- 3 are representatives of commercial banks
- 3 are the officials of Government of India
- 2 officials belong to State Governments
Sources of funds:
Authorized share capital of NABARD is Rs. 500 crore equally contributed by
Government of India and RBI and Issued and paid up capital of Rs. 100 crore. Other
sources are:
 Borrowings from Government of India (GOI) and any institution approved by GOI
 Borrowings from RBI
 Deposits from state governments and local authorities
 Gifts and grants received.
Objectives:
 As an apex refinancing institution, NABARD survey and estimates all types of credit
needed for the farm sector and rural development
 Taking responsibility of promoting and integrating rural development activities
through refinance.
 With the approval of Government of India, NABARD also provides direct credit to
any institution or organization or an individual.
 Maintaining close links with RBI for guidance and assistance in financial matters.
 Acting as an effective catalytic agent for rural development i.e in formulating
appropriate rural development plans and policies.
Functions of NABARD:
The functions of NABARD are broadly categorized as
a) Credit activities
b) Development activities, and
c) Regulatory activities
a) Credit activities:
 NABARD prepares for each district a potential linked credit plan annually and this
forms the basis for district credit plan.
 It participates in finalization of annual action plan at block, district and state level.
 It monitors the implementation of credit plans.
 It frames the terms and conditions to be followed by credit institutions in financing
rural farm and non- farm sectors.
 It provides refinance facilities.
Refinance is of two types
1. Short-term refinance is extended for agricultural production operations and marketing
of crops by farmers and farmers’ cooperatives and production and marketing activities of
village and cottage industries.
The eligible institutions for short term refinance are state cooperative banks (SCBs),
regional rural banks, commercial banks and other banks approved by RBI. The time
period is 12 months.
2. Medium term and long term refinance is extended for investments in agriculture and
allied activities such as minor irrigation, farm mechanization, dairy, horticulture and for
investment activities of rural artisans, small scale industries(SSI) etc. The period is up to
a maximum of 15 years. The eligible institutions are land development banks( LDBs).
The extent of refinance under various schemes is
 Pilot rainfed farming projects (100%)
 Wasteland development scheme of individuals (100%)
 Non-farm sector schemes (out side the purview of IRDP) 100%
 Agro-processing units (75%)
  Bio-gas scheme (75%)
 All other schemes including IRDP(70%)
 Farm mechanization (50%)
 Rural Electrification Corporation (50%)
 Apart from refinance, NABARD also provides direct finance to state
governments, state sponsored corporations.
NABARD will monitor its assisted projects in order to ensure their proper
implementation. It also undertakes consultancy work for projects even though they are
not refinanced by NABARD.
b) Development activities:
For the productive use of credit the following developmental activities are under
taken by NABARD.
 Institutional development: Providing financial assistance for establishment and
development of institutional financial agencies.
 Research and Development Fund: Providing funds for research and development
efforts of institutional financial agencies.
 Agricultural and Rural Enterprises Incubation Fund (AREIF): For providing
assistance while inception of new enterprises.
 Rural Promotion Corpus Fund (RPCF)
It is meant to provide financial assistance for training - cum production centers,
rural entrepreneurship development programmes, and technical monitoring and
evaluation centers.
 Credit and Financial Services Fund (CFSF)
It aims at providing the assistance for innovations in rural banking and credit
system, supports institutions for research activities, surveys, meets etc.
 Linking SHGs to credit institutions: During the year 1992, NABARD started the
pilot project of linking SHGs to credit institutions. Under this, it provides 100 per
cent refinance to banks for loans extended to SHGs.

c) Regulatory activities
 As an apex development bank, NABARD shares with RBI, some of the regulatory
and supervisory functions in respect of cooperative banks and regional rural banks
(RRBs). They are
 Under Banking regulation act 1949, NABARD undertakes the inspection of
RRBs and cooperative banks ( other than PACs)
 Any RRB or cooperative bank seeking permission of RBI, for opening branches
needs recommendation of NABARD.
 The state and district central cooperative banks also need an authorization from
NABARD for extending assistance to units outside the cooperative sector and non
-credit cooperatives for certain purposes beyond the cut-off limit.

World Bank (WB):

The International Bank for Reconstruction and Development (IBRD) also

called as World Bank was established in the year 1945 and started its operations in the
year 1946. It is the sister institution of another international financial agency,
International Monetary Fund (IMF)
The IBRD/world bank’s main aim is to reduce the poverty by promoting
sustainable economic development in member countries. It attains this goal by providing
loans and technical assistance for projects and programmes in its developing member
countries.
The financial strength of IBRD is based on the support it receives from its
shareholders and financial policies and practices adopted by it. The main activity of
World Bank is to provide loans to the member- countries.
Functions of World Bank

 Development activities:
It provides loans to its member-countries to meet their developmental
needs. It also provides technical assistance and other services to the member countries to
reduce poverty.
 Providing Loans:
 Each loan must be approved by IBRD’s executive directors. Apart from
providing loans it also waives the loans under special circumstances i.e. occurrence of
natural calamities. After providing loans, the appraisal of the projects is carried out by
IBRD’s operational staff comprising engineers, financial analysts, economists and other
specialists.
The loan disbursements are subjected to the fulfillment of conditions laid
in the loan agreement. During the implementation, IBRD’s experienced staff periodically
visits the project site to review the progress and monitor whether the execution of project
is inline with IBRD’s policies. During these visits the bank staff help in resolving any
problems that may arise during the execution of the project.
After the completion, the projects are evaluated by an independent body
and findings will be reported to the executive directors to determine the extent to which
project objectives were fulfilled.
 Consultancy:

In addition to the financial help, IBRD also provides technical assistance to

its member countries irrespective of loans taken from it or not. There is a growing
demand from borrowers for strategic advise, knowledge transfer and capacity building.
 Research and Training:

For assisting its member countries, the World Bank offers courses and
training related to economic policy development and administration for governments and
organizations that work closely with IBRD.
 Trust–Fund Administration:

IBRD itself or jointly with International Development Agency (IDA),

on behalf of donors restricts the use of funds for specific purposes only. The funds so
obtained are not included in the list of assets owned by IBRD.
 Investment Management:
IBRD provides investment management services for external
institutions by charging a fee. The funds thus obtained are not included in the assets of
IBRD.
Affiliated Organizations of IBRD:
 To complement the activities of IBRD, there are three affiliated
organizations and they are
1. International Development Association (IDA):

It was established in the year 1960. Its main goal is to reduce the poverty
through promoting economic development in less developed areas of the world.

The International Bank for Reconstruction and Development (IBRD), better known as the
World Bank, was established in 1944 to help Europe recover from the devastation of
World War II. The success of that enterprise led the bank, within a few years, to turn its
attention to developing countries. By the 1950s, it became clear that the poorest
developing countries needed softer terms than those that could be offered by the bank, so
they could afford to borrow the capital they needed to grow.

With the United States taking the initiative, a group of the bank’s member countries
decided to set up an agency that could lend to the poorest countries on the most favorable
terms possible. They called the agency the "International Development Association." Its
founders saw IDA as a way for the "haves" of the world to help the "have-nots." But they
also wanted IDA to be run with the discipline of a bank. For this reason, US President
Dwight D. Eisenhower proposed, and other countries agreed, that IDA should be part of
the World Bank.

IDA's Articles of Agreement became effective in 1960. The first IDA loans, known as
credits, were approved in 1961 to Chile, Honduras, India and Sudan.

IDA currently has 169 member countries. Members subscribe to IDA’s initial
subscriptions and subsequent replenishments by submitting the necessary documentation
and making the required payments under the replenishment arrangements.

The International Development Association (IDA) is the part of the World Bank that
helps the world’s poorest countries. Established in 1960, IDA aims to reduce poverty by
providing interest-free credit and grants for programmes that boost economic growth,
reduce inequalities and improve people’s living conditions.

IDA complements the World Bank’s other lending arm–the International Bank for
Reconstruction and Development (IBRD)–which serves middle-income countries with
capital investment and advisory services. IBRD and IDA share the same staff and
headquarters and evaluate projects with the same rigorous standards.

IDA is one of the largest sources of assistance for the world’s 79 poorest countries, 39 of
which are in Africa. It is the single largest source of donor funds for basic social services
in the poorest countries.

IDA lends money (known as credits) on concessional terms. This means that IDA credits
have no interest charge and repayments are stretched over 35 to 40 years, including a 10-
year grace period. IDA also provides grants to countries at risk of debt distress.

Since its inception, IDA credits and grants have totaled US$207 billion, averaging US$14
billion a year in recent years and directing the largest share, about 50 percent, to Africa.

2. International Financial Corporation (IFC):

It was established in the year 1955.Its main aim is to encourage the
growth of productive private enterprises in the member- countries by providing loans and
investments without a member’s guarantee.
3. Multilateral Investment Guarantee Agency (MIGA):
Its main aim is to encourage the flow of investments for productive
purposes among member countries particularly in developing countries.
IBRD, IDA, IFC and MIGA are collectively called as World Bank
Group. Each of them is financially independent, with separate assets and liabilities.
International Monetary Fund (IMF):

The International Monetary Fund (IMF) is an international organization.

At present 185 countries are the members of IMF. Its headquarters is located at
Washington, DC., USA.
Origin: After the Second World War, many countries felt the need to have an
organization to get help in monetary matters between countries. To begin with, 29
countries discussed the matter, and signed an agreement. The agreement was the Articles
of Association of the International Monetary Fund. IMF came in to being in December
1945.
Membership: Any country can apply to become a member of the IMF. When a country
applies for membership, the IMF’s Executive Board examines the application. If found
suitable, the Executive Board gives its report to IMF’s Board of Governors. After the
Board of Governors clears the application, the country may join the IMF. However,
before joining, the country should fulfill legal requirements, if any, of its own country.
Every member has a different voting right. Likewise, every country has a different right
to draw funds. This depends on many factors, including the member country’s first
subscription to the IMF.

Functions:

The IMF does a number of supervisory works relating to financial dealings

between different countries. Some of the works done by IMF are:

 Helping in international trade, that is, business between countries

 Looking after exchange rates
 Looking after balance of payments
 Helping member countries in economic development

Management

A Board of Directors manages the IMF. One tradition has governed the
selection of two most senior posts of IMF. Firstly, IMF’s managing director is always
European. IMF’s president is always from the United States of America.

The major countries of Europe and America control the IMF. This is because
they have given more money to IMF by way of first subscriptions, and so have larger
share of voting rights.
Asian Development Bank (ADB):

The Asian Development Bank is a regional development bank established in the

year 1966 to promote economic and social development in Asia and Pacific countries by
providing loans and technical assistance. The ADB’s head quarters are located at Manila,
Philippines. It aims at eradication of poverty in the Asia –Pacific region.
It is a multilateral financial institution owned by 67 members, with 48 members
from the region of Asia- pacific and 19 from other parts of globe. The highest policy-
making body of the bank is the Board of Governors consists of one representative from
each member country. The Board of Governors, in turn, elect among themselves, the 12
member Board of Directors. Eight of the twelve members come from Asia- Pacific
members, while the rest come from non-regional members.
The Board of Governors also elects the bank’s president who is the chairperson
of the Board of Directors and manages the ADB. The term of office of president lasts for
five years, and may be reelected for second term. As Japan is the largest share holder of
the bank, traditionally the president has always been from Japan.
The ADB was founded in 1966 with goal of eradicating the poverty in the
Asia-Pacific region. With over 1.9 billion people living on less than $2 a day in Asia, the
institution has a formidable challenge. It plays the following functions for countries in the
Asia –Pacific region:
 Provides loans and equity investments to its developing member countries
(DMCs).
 Provides technical assistance for the planning and execution of development
projects, programmes and for advisory services.
 Promotes and facilitates investment of public and provide capital for
development.
 Assists in coordinating developmental policies and plans of its DMCs.

Deposit Insurance and Credit Guarantee Corporation (DICGC):

The concept of insuring deposits kept with banks received attention for the first
time in the year 1948 after the banking crisis in Bengal. The question came up for
reconsideration in the year 1949, but it was decided to hold it in abeyance till the Reserve
Bank of India ensured adequate arrangements for inspection of banks. Subsequently, in
the year 1950, the Rural Banking Enquiry Committee also supported the concept. Serious
thought to the concept was, however, given by the Reserve Bank of India and the Central
Government after the crash of the Palai Central Bank Ltd., and the Laxmi Bank Ltd. in
1960. The Deposit Insurance Corporation (DIC) Bill was introduced in the Parliament on
August 21, 1961. After it was passed by the Parliament, the Bill got the assent of the
President on December 7, 1961 and the Deposit Insurance Act, 1961 came into force on
January 1, 1962.

The Deposit Insurance Scheme was initially extended to functioning

commercial banks only. This included the State Bank of India and its subsidiaries, other
commercial banks and the branches of the foreign banks operating in India.

Since 1968, with the enactment of the Deposit Insurance Corporation

(Amendment) Act, 1968, the Corporation was required to register the 'eligible co-
operative banks' as insured banks under the provisions of Section 13 A of the Act. An
eligible co-operative bank means a co-operative bank (whether it is a state co-operative
bank, a central co-operative bank or a primary co-operative bank) in a state which has
passed the enabling legislation amending its Co-operative Societies Act, requiring the
State Government to vest power in the Reserve Bank to order the Registrar of Co-
operative Societies of a state to wind up a co-operative bank or to supersede its
committee of management and to require the registrar not to take any action for winding
up, amalgamation or reconstruction of a co-operative bank without prior sanction in
writing from the Reserve Bank of India.

Further, the Government of India, in consultation with the Reserve Bank of

India, introduced a Credit Guarantee Scheme in July 1960. The Reserve Bank of India
was entrusted with the administration of the scheme, as an agent of the Central
Government, under Section 17 (11 A)(a) of the Reserve Bank of India Act, 1934 and was
designated as the Credit Guarantee Organization (CGO) for guaranteeing the advances
granted by banks and other credit institutions to small scale industries. The Reserve Bank
of India operated the scheme up to March 31, 1981.

The Reserve Bank of India also promoted a public limited company on January
14, 1971, named the Credit Guarantee Corporation of India Ltd. (CGCI). The main thrust
of the Credit Guarantee Schemes, introduced by the Credit Guarantee Corporation of
India Ltd., was aimed at encouraging the commercial banks to cater to the credit needs of
the hitherto neglected sectors, particularly the weaker sections of the society engaged in
non-industrial activities, by providing guarantee cover to the loans and advances granted
by the credit institutions to small and needy borrowers covered under the priority sector.

With a view to integrating the functions of deposit insurance and credit guarantee, the
above two organizations (DIC and CGCI) were merged and the present Deposit Insurance
and Credit Guarantee Corporation (DICGC) came into existence on July 15, 1978.
Consequently, the title of Deposit Insurance Act, 1961 was changed to 'The Deposit
Insurance and Credit Guarantee Corporation Act, 1961.

Effective from April 1, 1981, the corporation extended its guarantee support to
credit granted to small scale industries also, after the cancellation of the Government of
India's credit guarantee scheme. With effect from April 1, 1989, guarantee cover was
extended to the entire priority sector advances, as per the definition of the Reserve Bank
of India. However, effective from April 1, 1995, all housing loans have been excluded
from the purview of guarantee cover by the corporation.

Objective of DICGC: To contribute to stability and public confidence in the banking

system through provision of deposit insurance and credit guarantee to small depositors
and borrowers.
 Lecture: 13
Co-operation-Meaning-Scope, Importance and definition - principles -
objectives of co-operation.
________________________________________________________________________

Meaning of co-operation:

Co-operation is voluntary association of persons for achieving a common goal.

It generally means working together for a common goal. It indicates joint effort and
coordinated action of all the members of the association. Ex: Producer’s cooperatives,
Consumer’s cooperatives, Marketing cooperatives, Credit cooperatives, Multi-purpose
cooperative societies, etc.
Definition: According to Huber Calvert “Co-operation is a form of organization, where
in persons voluntarily associate together on the basis of equality for the promotion of
common economic interest of themselves”
According to Sir. Horace Plunkett, “Co-operation is self - help made
effective by organization.”

Co-operation helps in protecting the weak, provides equal justice to all and
promotes welfare of the society. The motto of co-operation is “Each for all and all for
each.”

Principles of Cooperation:

Rochdale pioneers were a group of 28 weavers and other artisans in

Rochdale region of England formed against the advent of industrial revolution forcing
many skilled workers into poverty. Rochdale pioneers were most famous for designing
the Rochdale principles i.e. a set of principles of co-operation now followed worldwide.
The important principles of co-operation are
1. Principle of open and voluntary association:

The admission and membership into a co-operative society is open to

everybody irrespective of caste, religion, any social and political affiliations. It does not
allow any discrimination. The membership is open as well as voluntary. It implies that
there is no compulsion exercised on any individual to join the cooperative. Once an
individual joins as a member, there is no compulsion on him to continue as such. At any
time he has every freedom to withdraw from the society.
2. Principle of Democratic organization:
Co-operatives are organized and managed based on the principle of
democracy. Each member is given equal right to vote irrespective of his share capital in
the society. “One man one vote” is the important principle of cooperation. The elected
board of management will work based on the acts, rules and laws guiding the matters of
co-operation.
3. Principle of service:
Co-operatives main aim is to cater to the needs of its members. Unlike
business organizations, the cooperatives are more service - oriented rather than profit -
oriented. This spirit of service invokes loyalty among the members.
4. Principle of self-help and mutual help:

The funds of society are contributed by the members in the form of share
capital. In co-operatives generally, the members are financially weak. The society can
barrow required capital from different financial sources at lower interest rates and offer
the same to the members for productive purposes. This may not be possible at individual
level. Hence, in co-operatives, the principle of self-help and mutual-help can work for the
welfare of the members.
5. Principle of distribution of profits and surpluses:

Co-operatives are not interested in making profits like business

organizations. But, they are also required to run on same minimum profits through
efficient working. In co-operatives a certain amount of profits i.e. 25 per cent will be kept
back as reserve fund and the remaining 75 per cent can be distributed among the
members based on their contribution to the share capital.
6. Principle of political and religious neutrality:

The important strength for growth of the cooperatives is the unity

among the members and non-interference of political parties. The members of the
cooperatives should continuously work for the growth of the society with harmony,
integration and un-biasedness towards any religion or political party. The political and
religious differences of the members should be kept away for the smooth running of the
cooperatives.
7. Principle of Education:
If the members in cooperative society are illiterate, their participation is
poor in running the cooperatives and they cannot understand what is going on in the
society. Hence, first such type of illiterate members should be made literate. For
promoting awareness and efficiency in the operations of cooperatives, education to
members and training to office bearers and executives is necessary.
8. Principle of thrift:
The cooperatives must aim at inculcating the habit of thrift i.e.
“propensity to save” among the members. Thrift and service are part and parcel of
cooperation. The members who save their money with cooperatives should get
incentives. Thrift is very much basis of self-help, but it must precede credit. It implies
that in sanctioning of credit, a priority should be given to the members who save.
9. Principle of publicity:
The cooperatives should make sincere efforts to tell their members
about the society and all the dealings of the society should be made public.
10. Principle of honorary service:

The honorary personnel will simply supervise and direct operations of

cooperatives. But to have efficiency in the society, trained secretaries with salaries are
needed. But if the societies are started with poor members, it is better to have honorary
office bearers, because such societies cannot afford to pay salaries to such office bearers.
Maxims of co-operation:
The founder of Irish co-operative movement Sir Horace Plunkett sums up co-
operation in three famous maxims.
1. Better Farming:
It means helping the farmer to realize a better production in the farm business
through adoption of requisite technology. The farmers’ objective of achieving higher
production and productivity will be realized only when the resources are available in
adequate quantities and at right time. For this necessary capital for the farmer also should
be provided by institutional agencies at right time. A well developed co-operative
network helps in meeting this particular requirement of the farmers.
2. Better Business:
Farmers should get a better deal in buying the inputs as well as disposing the
products. The efforts of the farmer will be fruitful only when an efficient marketing
system is accessible to him. Farmers as a group enjoy better bargaining power when
compared individually. Hence co-operatives should provide inputs needed by the farmers
at reasonable rates and arrange for the disposal of produce at favourable prices.
3. Better Living:
This implies that the cooperative societies should supply consumer goods to the
consumers at reasonable rates. This helps the consumers to pay less than what they pay in
open market. A good and successful cooperative help in preventing marketing middlemen
(as minimum as possible) especially private traders from taking undue advantage.
Thus co-operatives help in getting favourable prices to producers for their
products and providing the same products for consumers at reasonable prices.

Lecture 14: origin and history of Indian cooperative movement-

cooperative movement during pre-independence period-progress of
cooperative movement during post- independence period.
Lecture 15: Short comings of Indian co-operative movement and
remedies- recommendations of various committees –development of co-
operative credit and non-credit organizations- co-operative credit
structure

The origin and history of cooperative movement in India can be dealt

under two eras.
a) Pre-Independence Era:
The cooperative movement in India during pre-independence era can be
divided in to four phases viz.,
1. Initiation phase (1904-1911)
2. Modification phase (1912-1918)
3. Expansion phase (1919-1929)
4. Restructuring phase (1930-1946)
Initiation phase (1904-1911):
In olden days rural credit service was dominated by non-institutional
financial agencies (i.e. private money lenders) charging exorbitant interest rates from
farmers. In extreme cases or out of distress the poor farmers have to sell their belongings
to clear their debts. This precarious situation triggered a sort of agitation by farmers
against private money lenders in certain areas. The revolts found in Poona and
Ahemadnagar areas of Maharashtra attracted the attention of government. Immediately
the government passed three acts viz.,
 Deccan Agriculture Relief Act (1879)
 Land Improvement Loan Act ( 1883)
 Agriculturists Loan Act (1884)

In 1892, the Madras government appointed Federick Nicholson to

study and examine the village banks organized on cooperative lines in Germany. After
coming from there Nicholson submitted a report and raised a slogan “Find Raiffeissen”.
During 1901, Indian Famine Commission and another committee
headed by Sir Edward Law recommended the formation of credit societies on Raiffeissen
model. These recommendations resulted in the enactment of Cooperative Credit Societies
Act (1904).
Important/salient features of 1904 Cooperative Credit Societies Act:.

 Classification of cooperative societies into rural and urban was made. According
to this, rural societies are those having 4/5ths of the total members from farming
community and urban societies are those having 4/5ths of the total members from
non-agriculturists.
 Both the organization and control of these societies was to be done by Registrar of
cooperatives.
 Loans could be extended to the members on personal and collateral security.
 The principle of “one man one vote” was specified in the Act.
Modification phase (1912-1918):
Cooperative Societies Act of 1912 was enacted for rectifying the shortcomings
of 1904 Act.
Important features of 1912 Cooperative Societies Act:
 It provided legal protection to all types of cooperatives
 Liability is limited in the case of primary societies and unlimited for central
societies.
 As this act of 1912 gave provision for registration of all types of cooperative
societies, it led to the emergence of rural cooperatives both on credit and non-
credit fronts. But this growth was uneven spatially i.e. localized in some areas
only.
During the year 1914, the Government appointed a committee under the
chairmanship of Edward Mac Lagan to look in to the performance of the societies. He
presented his report in 1915. The Mac Lagan committee’s recommendations and
Cooperative Societies Act of 1912 introduced the cooperative planning process in India.
The important observations of Mac Lagan committee were:
 Illiteracy among the members.
 Misappropriation of funds.
 Rampant nepotism.
 Undue delays in sanctioning of loans.
 Irregularity in repayment of loans.

Suggestions offered by Mac Lagan committee for the effective functioning of

cooperatives:
 All the members of the society should be made aware of the cooperative
principles.
 Dealings should be restricted to the members only.
 Honesty should be the main criterion for extending a loan to some one.
 Careful scrutiny of applications before advancing a loan and effective follow up
for proper utilization of loan amount.
 Loans should not be advanced for speculative purposes like investment in stock
markets, lotteries etc.
 Ultimate authority should be with all the members but not with the office bearers.
 Thrift should be encouraged among the members, so as to build reserve fund.
  The principle of “one man one vote” should be strictly followed.
 As far as possible, the capital should be raised from the savings of the members
only.
 Punctuality in repayment should be strictly insisted up on the borrowers.
Expansion phase (1919-1929):
This phase was considered as “Golden Era” for the cooperative movement
in India. Cooperative movement got impetus as the cooperatives became a provincial
subject under Montague Chelmsford Act of 1919. The economic prosperity during the
period 1920-1929 also contributed to the growth of cooperative movement.
During the same period, the birth of Land Mortgage Banks (LMBs) took
place first in Punjab (1924) subsequently in Madras (1925) and in Bombay (1926).
Restructuring phase (1930-1946):
In the year 1931, Indian Central Banking Enquiry Committee also
emphasized shortcomings with reference to undue delays in advancing loans and
inadequacy of credit.
In the year 1932, Madras Cooperative Societies Act came into existence
aiming at the growth of the cooperative movement. Madras Cooperative Land Mortgage
Banks Act (1934) came into force for the development of long-term credit. Excessive and
abnormal fall in prices of agricultural commodities and the economic depression of early
thirties lead to the collapse of the cooperative movement. Various enquiry committees
were also constituted for restructuring and reorganization of cooperative societies. They
were
 Vijayaraghavacharya committee in Madras.
 Rehabilitation Enquiry committee of Travancore (Kerala) and Mysore.
 Kale committee of Gwalior.
 Wace committee of Punjab.
The Agricultural Finance sub-committee under the chairmanship of Prof.
D.R. Gadgil, in 1944 recommended the
 Adoption of limited liability for cooperatives.
 Assessing the credit –worthiness of a farmer based on his repayment capacity.
 Subsidizing the cost of administration of small cooperative societies.
  Linking credit with marketing.
In 1945, the Cooperative Planning Committee (CPC) under the
chairmanship of Sri. R.G. Saraiya pointed out that the limited progress of cooperatives is
due to the Laissez-faire policy of Government and illiteracy of the people, etc.
b) Post-Independence Era:
Planning commission was established in March, 1950, prepared first
five year plan (1951-1956) in 1951 under which main objectives with regard to
cooperatives were
 Involvement of cooperatives in rural development programmes.
 Development of well organized credit system.
 Extending cooperatives to the fields of farming, industry, housing,
marketing etc.
 Training of higher level personnel engaged in cooperatives.
During the year 1951, All India Rural Credit Survey Committee
(AIRCSC) appointed under the chairmanship of Sri. A.D. Gorwala pointed
out two main drawbacks of cooperative credit. They were
 Cooperative credit was unevenly distributed.
 Cooperative credit was inadequate and mostly lent to the asset-oriented
large cultivators rather than small and marginal farmers.
He also pointed that weakest link in chain of cooperatives was the
primary credit societies. The All India Rural Credit Survey Committee also observed that
“Cooperation has failed in India but must succeed”. This All India Rural Credit Survey
Committee also recommended an integrated scheme as a remedy for the then existing
situation. The important recommendations of it were

 State/Govt partnership in cooperatives at all levels.

 There should be coordination between cooperative credit, marketing and
processing.
 Development of adequate warehousing.
 Giving adequate training for cooperative personnel engaged at all levels.
 Under Second five year plan (1956-1961), on the recommendations of All
India Rural Credit Survey Committee during the year 1956, National Cooperative
Development and Warehousing Board (NCDWB) was established. Apart from this, the
second five year plan initiated the setting up of producers’ cooperatives and processing
cooperatives.
During the year 1959, the Committee on Cooperative Credit under the
chairmanship of Sri. V. L. Mehtha opined that the membership in a cooperative should
not be too large and each village falling under the service area of the cooperative should
be at a distance of less than 3-4 miles.
The Committee on Taccavi (Govt) loans and cooperative credit under the
chairmanship of Sri. B.P Patel in 1961-62, stressed that the cooperatives should provide
loans to the farmers for carrying out agricultural operations and land improvement. These
loans should be given only to the farmers under distressed conditions.
The Committee on Cooperative Administration headed by Sri. V. L. Mehta said
that the supervision of cooperatives at grassroots level i.e. PACSs should be done by
District Cooperative Banks.

During Third five year plan (1961-1966), the emphasis was placed on the
revitalization of dormant societies apart from increased emphasis on cooperative credit
and cooperative farming. During this period National Cooperative Development
Corporation (NCDC) was established in 1963 and also National Federation of
Cooperative Sugar Factories (NFCSF).

All India Rural Credit Review Committee (AIRCRC) was constituted

during July, 1966 under the chairmanship of Sri. B. Venkatappaiah. He submitted his
final report in the year 1969 and recommended the
 Setting up of Small Farmers Development Agency (SFDA), Marginal Farmers
and Agricultural Labourers Development Agency (MFAL) and Rural
Electrification Corporation (REC).
 Reorganization of primary societies into economically viable units.
 Revitalization of weak cooperative central banks.
  Checking of overdues.
 Greater flexibility in conversion of short-term loans into medium-term loans.
 Simplification of loan application.
 Disbursement of a part of loan in kind form.
During the third five year plan period itself the new concept of transport
cooperatives was initiated.

After the third five year plan, during 1966-1968 there were three annual plans
called rolling plans. In the year 1967, Vaikunth Mehta National Institute of Cooperative
Management (VAMNICOM) was started in Poona.
Fourth five year plan (1969-1974), gave impetus for the rehabilitation and
reorganization of District Cooperative Credit Societies for the smooth flow of
cooperative credit. During this plan, Indian Farmers Fertilizer Cooperative Limited
(IFFCO) was established at Kandla, Gujarat.
During Fifth five year plan (1975-1979) new fertilizer projects were
initiated with the success during fourth five year plan.
National Bank for Rural Development (NABARD) was established for
providing credit to agriculture and allied activities under Sixth plan (1980-1985) .The
strengthening of dairy cooperatives was also given importance in this period.
Seventh five year plan (1985-1990), stressed up on
a) Organizing of special cooperative loan recovery camps
b) Strengthening of National and State Consumer Federation (NSCF)
c) Introduction of single window system of credit in Andhra Pradesh.
Eighth five year plan (1992-1997) emphasized replication of Anand
Pattern of cooperatives for milk and strengthening of processing cooperatives.

During Ninth Five Year Plan (1997-2002) measures have been initiated
to revitalize the co-operatives to make them vibrant democratic institutions with
economic viability and active involvement of members by the Government. These
include the framing of national policy on cooperatives and finalisation of a new Multi
State Cooperative Societies Bill to replace the existing Multi State Cooperative
Societies Act, 1984.
 Broadly, the following issues have been addressed in the proposed
legislation.

(i) Greater degree of autonomy of Multi State Cooperative Societies

(ii) Reduction in the control and level of intervention of the Government

(iii) Establishment of Quasi-judicial Dispute Settlement Authority

(iv) Provisions for safeguarding the interest of members

(v) Removal of some restrictive provisions on the functioning of societies

(vi) Freedom of societies to determine their own priorities

Amendments to the NCDC Act are proposed. The main features of the
proposed amendment are as follows: (a) expansion of NCDC’s scope to include
animal husbandry, forestry, horticulture, pisiculture, etc. (b) extension of NCDC’s
coverage to livestock, industrial goods, handicrafts and the services sector, and (c)
provision of loans directly to cooperative societies on appropriate security to be
furnished by the borrower.

Tenth Five Year Plan (2002-2007)

The following initiatives were taken with respect of cooperatives during tenth five
year plan

 To make a special study of the role of the cooperatives and challenges to be

met in the wake of globalization of Indian economy and also the issues
relating to competitive efficiency of the cooperatives, constraints and
remedial measures for improving the commercial and economic viability of
the cooperatives with regard to modernization, diversification, technology
upgradation, quality improvement, marketability and export promotion, etc.
  To study the regional disparity in the development of cooperatives, identify
the factors inhibiting the development of cooperatives in the states and
suggest suitable programmes for encouraging cooperatives in the
cooperatively underdeveloped states.
 To suggest measures for human resource development in the cooperatives.
 To review the role and functioning of consumer cooperatives and suggest
suitable measures for their improvement

Lecture: 16
Classification of co-operative credit institutions- Short Term (ST),
Medium Term (MT) and Long Term (LT) Credit- Primary
Agricultural Cooperative Credit Societies (PACS)- Farmers Service
Societies (FSS)- Multi-Purpose Cooperative Credit Societies (MPCS)
and Large-Sized Adivasi Multipurpose Cooperative Societies
(LAMPS)- Objectives and functions- Reorganization of Rural Credit
Delivery System and concept of single window system- Andhra
Pradesh mutually aided Co-operative Societies Act,1995

_____________________________________________________________

Government of India realized that cooperatives were the only alternative to

increase agricultural credit and development of rural areas, as recommended by All India
Rural Credit Survey Committee (AIRCSC) headed by Sri. Gorwala. Hence, cooperatives
received substanti al help in getting credit from Reserve Bank of India and large-scale
assistance and encouragement from both central and state governments for their growth
and development. Many schemes of Government with components of subsidies and
concessions to the weaker sections were enrooted through the cooperatives. With this the
cooperative institutions registered a remarkable progress in the post-independence period.
Cooperative structure was delineated into two types viz., three-tier structure for providing
short-term and medium-term loans and two-tier structure for long-term loans in all states
except Bihar, Jammu and Kashmir, Maharashtra and Uttar Pradesh, where the structure is
unitary i.e. concentrated at a single point. The cooperative credit structure is illustrated in
Fig

Co-operative Credit Organization

ST & MT Loans LT loans

(Three tier system) (Two tier system)

State Cooperative Bank (SCB) Central Land Development Banks

(At state level) (CLDBs) (At state level)

District Cooperative Central Bank (DCCB) Primary Land Development Banks

(At district level) (PLDBs)(Erstwhile taluk level)

Primary Agricultural Cooperative Credit Societies

(PACS)
(At village level)
Fig:Cooperative credit structure

State Cooperative Banks (SCBs):

These are the apex credit organizations existing at the state level. District
cooperative central banks (DCCBs) and primary agricultural cooperative credit societies
will act as members of these banks. These SCBs supervise the activities of the member
banks and mobilize and deploy the financial resources among the member banks. They
serve as a bridge between RBI and PACS.

Specific functions of SCBs are

 They help the state governments in formulating developmental plans pertaining to
cooperative institutions.
 They also help in coordinating the cooperatives with the government.
 They formulate and implement uniform credit policies pertaining to cooperative
development in the state.
 They act as bankers bank to DCCBs.
 They will grant subsidies for the smooth functioning of DCCBs
 Similar to any other commercial bank, they also perform the normal banking
operations.
District Cooperative Central Banks (DCCBs):

They act as link between state cooperative banks and primary agricultural
cooperative credit societies. DCCBs also undertake normal banking functions like
accepting of deposits from public, collection of bills, cheque and drafts etc. They also
provide required credit for needed persons.
In DCCBs membership is open to individuals and other societies falling
under its area of operation. Marketing societies, consumers’ societies, farming societies,
urban banks and PACS usually enroll as its members.
Specific functions of DCCBs are:
 They supervise and inspect the activities and functions of PACS and help them to
function smoothly.
 Apart from providing guidance they also provide leadership to PACS
  They also undertake non-credit activities like supply of seeds, fertilizers and also
consumer items like sugar, kerosene etc.
 They provide requisite credit for societies under their control.
 They accept deposits from the member societies as well as from public.
Primary Agricultural Cooperative Credit Societies (PACS):

With the enactment of Cooperative Societies Act of 1904, PACS came into
existence following the guidelines of Raiffeissen model. The cooperative principles are
framed for their smooth and efficient functioning.
These societies will function at village level providing the farmers the
required short term and medium term loans. Supply of other agricultural inputs and
essential consumer items is also taken up by these societies. PACS also help in
formulating and implementing the agricultural developmental plans.

Specific functions of PACS are:

 They borrow adequate and timely funds from DCCBs and help its members by
providing required finances.
 To inculcate the habit of thrift they attract local savings of members towards share
capital and deposits from the villagers.
 They supervise the end use of credit.
 They distribute fertilizers, seeds and pesticides to the needy farmers.
 They provide machinery to the farmers on hire basis.
 They also associate themselves with the plans and programmes meant for the
socio-economic development of the village.
 They help the farmers in marketing of farm produce.
 They provide storage facilities and marketing finance.
 They help in supplying certain consumer goods like rice, wheat, sugar, kerosene,
clothes etc, at fair prices.
Central Land Development Bank (CLDB):
 Central Land Development Bank is an apex bank in the two-tier
cooperative credit structure providing long-term credit to PLDBs and its
subsidiary/affiliated branches. The branches of CLDBs, PLDBs and individual
entrepreneurs are the members of CLDB.
National Bank for Agriculture and Rural Development and Life Insurance
Corporation (LIC) subscribe for its debentures. NABARD is a refinancing agency to the
CLDBs. CLDB is a link between NABARD and government in long-term transactions.

Specific functions of CLDB are:

 CLDB inspects, supervises and guides PLDBs in their banking operations.
 It floats debentures for raising the necessary funds.
 It inculcates the spirit of thrift among the members by mobilizing savings and
stimulating capital formation i.e. asset creation.
 It provides loans to the member banks for the redemption of old debts,
development of land, purchase of machinery and equipment, development of
minor irrigation, etc.
Primary Land Development Banks (PLDBs):

The establishment of land mortgage banks on cooperative lines was initiated

in Punjab during the year 1920 itself. During 1920-29 i.e. in the expansion phase many
Land Mortgage Banks (LMBs) were established in Mysore, Madras, Assam, Bengal,
Bombay, etc.
Even though there was slow progress of these banks until 1945, good
progress of these banks was achieved in the post independence era i.e. 1948-53. During
this period only large and affluent farmers obtained loans from the LMBs and small and
marginal farmers were benefited very little. Later on LMBs received massive support
from institutional agencies like RBI, SBI, LIC and ARDC. With this LMBs directed their
lending policies towards small and marginal farmers emphasizing agricultural
development.
In the year 1974, LMBs were renamed as Land Development Banks (LDBs)
in Andhra Pradesh.
Specific functions of PLDBs are:
  To provide long-term credit to the needy farmers for the land development,
increased agricultural production and productivity of land.
 They provide loans for minor irrigation, purchase of land and for redemption of
old debts.
 They finance farmers in purchase of tractors, machinery and equipment.
 They provide finance to farmers for the construction of farm buildings.
 They mobilize rural savings, etc.
Farmers Service Societies (FSS)

Farmers Service Societies are well organized and registered units

functioning on the principles of cooperation. As many cooperatives are rendering their
services only to affluent farmers, the National Commission on Agriculture (NCA)
strongly felt that separate societies for meeting the needs of weaker sections in rural areas
are envisaged. Hence with the recommendations of NCA, the FSS were organized in the
year 1971, on cooperative lines to provide integrated credit services to weaker sections of
rural areas viz., small farmers, marginal farmers and agricultural labourers and rural
artisans.
Important functions of FSS are:

 To supply all types of loans i.e. crop loans (ST), MT and LT loans to weaker
sections.
 To provide adequate supplies of requisite inputs and technical guidance for their
development.
 To encourage dairy, poultry, fisheries, farm forestry and other subsidiary
occupations in rural areas.
 To make arrangements for bringing about improvements in agricultural markets.
 To mobilize deposits and small savings from weaker sections by providing
incentives.
The area of operation of these societies is SFDA and MFAL districts. The
sponsorship of these societies is done by lead bank of the respective district. The number
of directors in the board of management varies from 9 to 13 based on the size of the
society. One full- time Managing Director is deputed by lead bank. Of the nine members,
five will be elected members (3 from SF and MF category and 2 from LF category) and
four will be representatives of financial institutions, Department of Agriculture and
cooperative societies besides Block Development Officer (BDO).
Multi-purpose Cooperative Societies (MPCS)

As the name itself indicates these societies offer assistance in many

ways like providing credit, supplying of farm inputs like fertilizers, seeds ( sometimes on
subsidized rates), offering marketing facilities, technical guidance etc.
Large-Sized Adivasi Multipurpose Cooperative Societies (LAMPS):

In line with the objectives of FSS, LAMPS were organized for the first
time in December, 1971 on the recommendations of Bawa team appointed by
Government of India in tribal areas of the country.

Objectives of LAMPS:

 To provide all types of credit including consumption credit.

 Intensification and modernization of agriculture with appropriate technical
guidance.
 Improving the marketing of agricultural and forest products in tribal areas.

Management of LAMPS include eleven board of directors. These

eleven members are
 Five tribal members
 Two Non-tribal members
 Two nominated by Registrar of co-operatives.
 Two nominees of lead bank

Single Window System:

Till 1987 the farmers in Andhra Pradesh depended on primary agricultural

credit societies functioning under three - tier structure for short-term and medium-term
credit requirements and on primary land development banks functioning under two-tier
structure for ling-term credit needs. It means that the farmers have to obtain their total
credit requirements from two different cooperative institutions. In addition to this the
performance of PLDBs was not satisfactory. In marketing their farm produce also,
farmers faced many difficulties in getting marketing services from PACS in three- tier
structure.
Against this backdrop, to make cooperatives render their meaningful
services, the Government of A.P thought to bring some appropriate organizational
changes in the working of cooperatives in the state. Subsequently, a committee under the
chairmanship of Sri. Mohan Kanda, an IAS officer was constituted to bring out some
meaningful and practicable alternatives in the structure of cooperatives. The committee
submitted its report in May, 1985 and recommended the establishment of “Single
Window System” and a bill was passed for its establishment in the AP state assembly in
January, 1987. The main intention and idea of introducing the single window system is to
supply all types of agricultural credit needed by the farmers through PACS and provide
adequate marketing facilities to farm produce through District Cooperative Marketing
Societies (DCMS).
Single window system is a three-tier structure in cooperative credit and two-
tier structure in cooperative marketing as shown below.

Single Window System

Credit (Three Tier Structure) The AP State Cooperative

(ST, MT &LT) Marketing Federation Ltd
(MARKFED)

Andhra Pradesh State Cooperative Bank

for Agriculture & Rural Development District Cooperative Marketing Societies
(APCOBARD) (DCMS)

District Cooperative Bank for

Agriculture & Rural Development
(DISCOBARD)
Primary Agricultural Cooperative
Credit Societies (PACS)

With the introduction of single window system in Andhra Pradesh during the year 1987
 No of PACS were reduced from 6801 to 4257.
 Primary Cooperative Agricultural Development Banks (PCADBs)
numbering 218 were merged with DCCBs.
 Primary cooperative marketing societies were amalgamated with DCMS

Major functions of PACS under single window system are:

 To advance short, medium and long term loans.

 To supply required farm inputs like seeds, fertilizers and pesticides.
 To distribute essential commodities like rice, wheat, sugar, kerosene etc.
 To arrange for marketing of farm produce of the members through DCMS.

Andhra Pradesh Mutually Aided Cooperative Societies Act, 1995:

The Andhra Pradesh Mutually Aided Cooperative Societies (APMACS) Act,

1995 (the APMACS Act or the 1995 Act) was passed unanimously by the Andhra
Pradesh Legislative Assembly on 4th May 1995. It was notified on 1st June 1995. The
Government of Andhra Pradesh had decided to undertake legislation in order to promote
self-reliant and autonomous cooperative societies and make the cooperative movement
more vibrant in the State. The salient features of the Act are,
 to enable not less than ten individuals belonging to different families to form a
cooperative society and confer on it the status of a body corporate.
 to enable the cooperative societies to regulate their functioning by framing
byelaws subject to the provisions of the Act in respect of the various matters
specified in the legislation.
 to enable the cooperative societies to change the form or the extent of their
liability, to transfer their assets and liabilities, to divide or amalgamate in
furtherance of their stated objectives.
 to enable the societies registered under the Andhra Pradesh Cooperative Societies
 Act, 1964 to become cooperative societies registered under this Act by making a
suitable provision therefore.
 to enable the cooperative societies to mobilize their own funds;
 to empower the cooperative societies to provide for the qualifications and
disqualifications for membership.
 to provide for the constitution, powers and functions of the board of directors and
for matters incidental thereto.
 to define the powers and functions of the general body
 to make the cooperative societies responsible to hold the elections and to regulate
the process thereof.
 to provide for proper accountability and for that purpose to conduct audit, special
audit, inquiry and for the recovery of loss caused to the society by misconduct.
 to provide for the settlement of disputes by constituting a cooperative tribunal.

REFERENCES

 Ghosal, SN., Agricultural Financing in India, Asia Publishing House, Bombay, 1966
 Johi, S.S. and C.V.Moore., Essentials of Farm Financial Management, Today and
Tommorow’s Printers and Publishers, New Delhi, 1970
 John, J.Hamptron., Financial Decision Making: Concepts, Problems and Cases,
Prentice-Hall of India , New Delhi, 1983
 Kenneth, Duft D., Principles of Management in Agribusiness, Reston Publishing
Company, Reston, 1979
 Mamoria, C.B. and R.D. Saksena., Co-operation in India, Kitab Mahal, Allahabad,
1973
 Mamoria, C.B. and Saxena., Agricultural Problems in India, Kitab Mahal, Allahabad
 Mukhi, H R. 1983. Cooperation in India and Abroad. New Heights Publishers, New
Delhi.
 Muniraj, R., Farm Finance for Development, Oxford & IBH Publishing Company
Private Ltd., New Delhi, 1987
 Subba Reddy, S. and P.Raghuram., Agricultural Finance and Management, Oxford &
IBH Publishing Company Private Ltd., New Delhi, 2005
 Subba Reddy, S., P.Raghu ram., P. Sastry, T.V.N. and Bhavani Devi I. 2010.
Agricultural Economics., Oxford & IBH Publishing Company Private Ltd., New Delhi,
2010
 William, G. Murray and Nelson Aarson, G., Agricultural Finance, The Iowa State
University Press, Ames, Iowa, 1960
 1

LECTURE NOTES

Course No. AECO 141

Principles of Agricultural Economics

Compiled by

Dr.N Sunanda
Assistant Professor
Department of Agricultural Economics
Acharya N G Ranga Agricultural University
Agricultural College, NAIRA
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Lecture no.1
Economics – Meaning, Definitions, Subject matter of Economics – Traditional
approach – consumption, production, exchange and distribution

ECONOMICS

Economics is popularly known as the “Queen of Social Sciences”. It

studies economic activities of a man living in a society. Economic activities are those
activities, which are concerned with the efficient use of scarce means that can satisfy the
wants of man. After the basic needs viz., food, shelter and clothing have been satisfied,
the priorities shift towards other wants. Human wants are unlimited, in the sense, that as
soon as one want is satisfied another crops up. Most of the means of satisfying these
wants are limited, because their supply is less than demand. These means have alternative
uses; there emerge a problem of choice. Resources being scarce in nature ought to be
utilized productively within the available means to derive maximum satisfaction. The
knowledge of economics guides us in making effective decisions. The subject matter of
economics is concerned with wants, efforts and satisfaction. In other words, it deals with
decisions regarding the commodities and services to be produced in the economy, how to
produce them most economically and how to provide for the growth of the economy.

Subject matter of economics

Economics has subject mater of its own . Economics tells how a man utilises his
limited resources for the satisfaction of unlimited wants. Man has limited amount of time
and money. He should spend time and money in such away that he derives maximum
satisfaction. A man wants food, clothing and shelter. To get these things he must have
money. For getting money he must make an effort. Effort leads to satisfaction. Thus,
wants- efforts- satisfaction sums up the subject mater of economics initially in a primitive
society where the connection between wants efforts and satisfaction is direct .
Divisions of Economics
The subject matter of economics can be explained under two approaches viz.,
Traditional approach and Modern approach.
Traditional Approach
It considered economics as a science of wealth and divided it into four divisions
viz., consumption, production, exchange and distribution
1. Consumption: It means the use of wealth to satisfy human wants. It also means
the destruction of utility or use of commodities and services to satisfy human
wants.
2. Production: It is defined as the creation of utility. It involves the processes and
methods employed in transformation of tangible inputs (raw materials, semi-
 3

finished goods, or subassemblies) and intangible inputs (ideas, information, know

-how) into goods or services.
3. Exchange: It implies the transfer of goods from one person to the other. It may
occur among individuals or countries. The exchange of goods leads to an increase
in the welfare of the individuals through creation of higher utilities for goods and
services.
4. Distribution: Distribution refers to sharing of wealth that is produced among the
different factors of production .It refers to personal distribution and functional
distribution of income. Personal distribution relates to the forces governing the
distribution of income and wealth among the various individuals of a country.
Functional distribution or factor share distribution explains the share of total
income received by each factor of production viz., land, labour, capital and
organisation.

Lecture No.2
Modern Approach – Microeconomics and macroeconomics - Methods of economic
investigation – Deduction & , Induction

Modern Approach :
This approach divides subject matter of economics into two divisions i.e., micro
economics and macro economics. The terms „micro-„ and „macro-„ economics were first
coined and used by Ragnar Frisch in 1933.
1. Micro-Economics or Price Theory:
The term „micro-economics‟ is derived from the Greek word „micro‟, which means small
or a millionth part. It is also known as „price theory‟. It is an analysis of the behaviour of
small decision-making unit, such as a firm, or an industry, or a consumer, etc. It studies
only the employment in a firm or in an industry. It also studies the flow of economic
resources or factors of production from the resource owners to business firms and the
flow of goods and services from the business firms to households. It studies the
composition of such flows and how the prices of goods and services in the flow are
determined.
A noteworthy feature of micro-approach is that, while conducting economic
analysis on a micro basis, generally an assumption of „full employment‟ in the economy
as a whole is made. On that assumption, the economic problem is mainly that of resource
allocation or of theory of price.
Importance of Micro-Economics: Micro-economics occupies a very important place in
the study of economic theory.
 Functioning of free enterprise economy: It explains the functioning of a free
enterprise economy. It tells us how millions of consumers and producers in an
economy take decisions about the allocation of productive resources among millions
of goods and services.
 4

 Distribution of goods and services: It also explains how through market mechanism
goods and services produced in the economy are distributed.
 Determination of prices: It also explains the determination of the relative prices of
various products and productive services.
 Efficiency in consumption and production: It explains the conditions of efficiency
both in consumption and production. Formulation of economic policies: It helps in
the formulation of economic policies calculated to promote efficiency in production
and the welfare of the masses.
Limitations of Micro-Economics: Micro-economic analysis suffers from certain
limitations:
 It does not give an idea of the functioning of the economy as a whole. It fails to
analyse the aggregate employment level of the economy, aggregate demand, inflation,
gross domestic product, etc.
 It assumes the existence of „full employment‟ in the whole economy, which is
practically impossible.

2. Macro-Economics or Theory of Income and Employment:

The term „macro-economics‟ is derived from the Greek word „macro‟, which means
“large”. Macro-economics is an analysis of aggregates and averages pertaing to the
entire economy, such as national income, gross domestic product, total employment, total
output, total consumption, aggregate demand, aggregate supply, etc. Macro-economics
looks to the nation's total economic activity to determine economic policy and promote
economic progress.

Importance of Macro-Economics:
 It is helpful in understanding the functioning of a complicated economic system. It
also studies the functioning of global economy. With growth of globalisation and
WTO regime, the study of macro-economics has become more important.
 It is very important in the formulation of useful economic policies for the nation to
remove the problems of unemployment, inflation, rising prices and poverty.
 Through macro-economics, the national income can be estimated and regulated. The
per capita income and the people‟s living standard are also estimated through macro-
economic study.
Limitations of Macro-Economics:
 Individual is ignored altogether. For example, in macro-economics national saving is
increased through increasing tax on consumption, which directly affects the consumer
welfare.
 The macro-economic analysis overlooks individual differences. For instance, the
general price level may be stable, but the prices of food grains may have gone up
which ruin the poor. A steep rise in manufactured articles may conceal a calamitous
 5

fall in agricultural prices, while the average prices were steady. The agriculturists
may be ruined.

DEFINITIONS OF ECONOMICS

The word economics has been derived from the Greek Word “OIKONOMICAS” with “
OIKOS” meaning a household and “ NOMOS” meaning management. Kautilya, the
great Indian statesman, named his book on state crafts as „Arthashastra‟.
WEALTH DEFINITION OF ECONOMICS : Adam smith defined Economics as “
An enquiry into the nature and causes of wealth of nations” in his book, entitled „ Wealth
of Nations‟. He is regarded as the “Father of Economics”.
Criticisms of Adam smith definition:

WELFARE DEFINITION OF ECONOMICS : Alfred Marshall in his book

“Principles of Economics” defined “Political Economy or Economics as a study of
mankind in the ordinary business of life, it examines that part of individual and social
action which is most closely connected with the attainment and with the use of the
material requisites of well- being . Thus it is on the one side a study of wealth, and on
the other, and more important side, a part of the study of man.
Criticisms of Alfred Marshall definition:

SCARCITY DEFINITION OF ECONOMICS: In his publication „Nature and

Significance of Economic Science‟ Lionel Robbins formulated his conception of
Economics based on the scarcity concept. “Economics is the science which studies
human behaviour as a relationship between ends and scarce means which have alternative
uses.

GROWTH DEFINITION OF ECONOMICS: John Maynard Keynes is known as the

Father of Modern Economics. He defined economics as “the study of the administration
of scarce resources and of the determinants of employment and income”.
In the words of Nobel prize winner Prof. Samuelson, “Economics is the study of how
people and society end up choosing with or without the use of money, to employ scarce
productive resources that could have alternative uses, it produces various commodities
over time and distributes them for consumption, now or in the future, among various
persons and groups in society. It analyses costs and benefits of improving patterns of
resources allocation.”

Importance
Economics analyses the economic problems of the society. It plays a major role in the
economic development of the country by proposing the optimum allocation of resources.
 6

Knowledge of economics is useful in understanding various national and international

events and trends.
Amarthya Sen, Bharat Ratna recipient was awarded Nobel Prize for Economics.

Methods of Economics Investigation :

There are two methods of economic investigation that are used in economic
theory i.e., 1) Deductive method and 2) Inductive Method
1. Deductive Method: This method involves reasoning or inference from
the general to the particular or from the universal to the individuals. It is
also known as the abstract, analytical, hypothetical or apriori method.

Deduction involves four steps:

(1) Selecting the problems

(2) Formulating the assumptions

(3) Formulating the hypothesis through the process of logical reasoning whereby
inferences are drawn and

(4) Verifying the hypothesis.

2. Inductive Method: This method is also known as Concrete method,

historical method or realistic method. It involves reasoning from particulars to the general
or from the individual to the universal. This method derives economic generalisations on
the basis of experiments and observations. In this method detailed data are collected on
certain economic phenomenon and effort is then made to arrive at certain generalizations
which follow from the observations collected.

Is Economics a Science or an Art

Science is a systematized body of knowledge in which the facts are so arranged
that they speak for themselves. Judged by this standard, economics is certainly a
science.
Economics is also an art because it lays down precepts or formulas to guide
people to reach their goals.
Economics therefore is a science as well as an art.

Economics – A Social Science

 7

Economics deal with the activities of people living in an organized community

or society, in such activities which relate to the earning and use of wealth or with the
problems of scarcity, choice and exchange. Hence it called a social science.

Positive Economics and Normative Economics:

1. Positive economics is concerned with „what is‟ whereas Normative economics is

concerned with „what ought to be‟.

2. Positive economics describe economic behaviours without any value judgment while
normative economics evaluate them with moral judgment.

3. Positive economics is objective while normative economics is subjective.

4. The statement, “ Price rise as demand increase” is related to positive economics,

whereas the statement, “ Rising prices is a social evil” is related to normative economics.

Lecture No.3
Agricultural Economics – Definitions, Meaning, Importance of Agricultural
Economics – Branches of agricultural economics

AGRICULTURAL ECONOMICS

Introduction
A study of economic principles, with emphasis on their application to the solution of
farm, agribusiness, and agricultural industry problems in relationship to other sectors is
known as Agricultural Economics. In other words, it applies principles of economics to
issues of agricultural production, natural resources, and rural development. It mainly
focuses on principles of microeconomics.
Agricultural economics began in the 19th century as a way to apply economic
principles and research methods to crop production and livestock management. The roots
of the discipline, however, can be found in the writings of the classical economists like
Adam Smith.

The word, agriculture comes from the Latin word ager, referring to the soil and
cultura, to its cultivation. Agriculture, in its widest sense can be defined as the cultivation
and /or production of crop plants or livestock products. It is synonymous with farming:
the field or field –dependent production of food, fodder and industrial organic materials.

Having known the meaning of agriculture, let us know what economics is.
Economics is the science that studies as to how people choose to use scarce productive
 8

resources to produce various goods and to distribute these goods to various members of
society for their consumption. Now having defined agriculture and economics, we look
into the field of agricultural economics.

Definition

Agricultural economics is an applied field of economics in which the principles of

choice are applied in the use of scarce resources such as land, labour, capital and
management in farming and allied activities. It deals with the principles that help the
farmer in the efficient use of land, labour and capital. Its role is evident in offering
practicable solutions in using scarce resources of the farmers for maximization of
income.

Prof. Gray has defined agricultural economics as “The science in which the
principles and methods of economics are applied to the special conditions of agricultural
industry”

According to Prof.Hibbard, “Agricultural economics is the study of relationships

arising from the wealth-getting and wealth-using activity of man in agriculture”

Snodgras and Wallace defined agricultural economics as “an applied phase of

social science of economics in which attention is given to all aspects of problems related
to agriculture.”

Importance of agricultural economics

Akin to economics, the field of agricultural economics finds to seek relevance between
cause and effect using the most advanced methods viz, production functions and
programming models. It uses theoretical concepts of economics to provide answers to the
problems of agriculture and agribusiness. Initially earnest efforts were made by the
economists to use the economic theory to agricultural problems. Now the subject matters
of agricultural economics is enriched in many directions and fields taking the relevant
tools of sciences particularly mathematics and statistics. Agricultural depression which
occurred in last quarter of 19th century and middle of 20th century brought about
increased attention and concern to find out plausible cause and solutions for world
agricultural depression. Here in this context the contribution made by agronomists,
economists, horticulturists, etc., is noteworthy. Agriculture is the integral part of the
world food system, having the foundation links between crops and animal production
system. Agricultural economists here have to play a major role in understanding the
intricacies involved in the foundation systems. Knowledge regarding problems in
production, finance, marketing and government policies and their impact on production
and distribution is very essential to find out suitable solutions for the farm problems.
Students of agricultural economics are taught the subject disciplines viz.,
 9

microeconomics, macroeconomics, agricultural production economics, farm

management, agricultural marketing etc., to fulfill the requirements.

Lecture No.4.
Agricultural production economics- Meaning- Definitions- Subject matter –
Objectives - Farm Management – Meaning – scope – Definitions- Objectives

Agricultural production economics

Agricultural production economics is a field of specialization within the subject of

Agricultural Economics. It is concern with the selection of production pattern and
resource use efficiency in order to optimize the objective function of farming community
or the nation within a frame work of limited resources. The goals of agricultural
production economics are:

(1) To provide guidance to individual farmers in using their resources most

efficiently and
(2) To facilitate the most efficient use of resources from the stand point of economy.

Definition

Agricultural production economics is an applied field of science wherein the

principles of choice are applied to the use of capital, labour, land and management
resources in the farming industry.

Subject matter

Agricultural production economics involves analysis of production relationships and

principles of rational decisions in order to optimize the use of farm resources on
individual farms and to rationalize the use of inputs from nation‟s point of view. The
primary interest is applying economic logic to problems that occur in agriculture.

Agricultural production economics is concerned with the productivity of inputs.

As a study of resource productivity, it deals with resource use efficiency, resource
combination, resource allocation, resource management and resource administration.

The subject matter of production economics involves topics like factor-product

relationship, factor-factor relationship and product- product relationship, size of farm,
returns to scale, credit and risk and uncertainty, etc.

Objectives:
 10

1. To determine and outline the conditions which give the optimum use of capital,
labour, land and management resources in the production of crops and livestock.
2. To determine the extent to which the existing use of resources deviates from the
optimum use.
3. To analyse the forces which condition existing production pattern and resource
use.
4. To explain means and methods in getting from the existing use to optimum use of
resources.
Farm management

In the context of increased accent on commercialization there is a greater need to

improve the managerial abilities of the farmers. So far the managers in general have
responded admirably to technological changes that occurred in Indian agriculture. But
response of some of the farmers is not in line with needed direction. We can always
differentiate those farmers performing against those not performing. Hence, it is of
paramount importance for the farm managers to identify the changes that take place and
respond suitably, for any lapse on his part does not help him to survive in the changing
economy. This speaks of the need for the managers to sharpen the skills to tackle varying
problems that crop up from time to time in the organization of farm business.

The role of farm management, therefore, is to supply the information from the
farmers for sound planning. All farm management tools are helpful to the farmers in
solving their managerial problems for successful operation of the farm business.

Scope

Farm management is considered to fall in the field of microeconomics. It treats every

farm as separate unit because of differences in the ability of resources, problems and
potentiality. The main concern of farm management is the farm as a unit. Farm
management deals with the allocation of inputs at the level of individual farms. The
objective of farm management is to maximize returns from the farm as a whole. It is
interested in the profitability along with practicability. What crops, livestock enterprises
and their combination to grow, what amount of resources to be applied, how the various
farm activity to be performed, etc., all these fall within the scope of farm management.

Definitions

Farm management is defined as the science that deals with organization and operation of
the farm in the context of efficiency and continuous profits (J. N.Efferson)

Farm management is defined as the art of managing a farm successfully as measured by

the test of profitableness (Gray)

Farm management is a branch of agricultural economics, which deals with wealth earning
and wealth spending activities of farmer in relation to the organization and operation of
 11

the individual farm unit for securing maximum possible net income (Bradford and
Jhonson)

Objectives

1. To examine production pattern and resource use on the farm.

2. To identify the factors responsible for the present production pattern and resource
use on the farm.
3. To determine the conditions of optimality in the resource use and the production
pattern on the farm.
4. To analyse the extent of sub optimality in the resource use on the farm, and
5. To suggest ways and means in getting the present use of resources to optimality
on the farm.

Lecture No.5

Agricultural finance – Meaning – Definitions – micro vs macro finance –need for

agricultural finance-Agricultural marketing – meaning, definition , importance of
agricultural marketing

Agricultural finance

Agricultural finance generally means studying, examining and analyzing the

financial aspects pertaining to farm business, which is the core sector of the country. The
financial aspects include money matters relating to production of agricultural products
and their disposal.

According to Murray (1953), “It is an economic study of borrowing finds by farmers; of

the organization and operation of farm lending agencies, and of society‟s interest in credit
for agriculture.”

According to Tandon and Dhandyal (1962), “as a branch of agricultural economics,

which deals with the provision, and management of bank services and financial resources
related to individual farm units”

Micro Vs Macro finance

Agricultural finance is viewed both at macro level and micro level. Macro finance
deals with the different sources of raising funds for agriculture as a whole in the economy
and it is also concern with the lending procedures, rules, regulations, monitoring and
 12

controlling procedures of different agricultural institutions. Thus, macro finance pertains

to financial agriculture at the aggregate.

Micro finance deals with financing the individual farm business units and it is
concern with the study as to how the individual farmer considers various sources of credit
to be borrowed from each source and how he allocates the same among the alternative
uses within the farm.

Need for agricultural finance

Given the requirement of finance in agricultural sector, very few farmers will have
capital of their own to invest in agriculture. Therefore, a need arises to provide credit to
all those farmers who require it. Even if we look into the expenditure pattern of the farm
families, they have hardly any savings to fall back on. Therefore, credit enables the
farmers to advantageously use seeds, fertilizers, irrigation, machinery, etc. Farmer has to
invariably search for a source which supplies adequate farm credit. Above all, small and
marginal farmers constitute majority of the farming community.

Agricultural Marketing

The term, agricultural marketing implies selling of goods and services by the farmers and
ranchers. It includes various functions viz., assembling, transportation, storing, buying,
selling, standardization, grading, processing, sales promotion, etc.

According to Thomsen, “agricultural marketing comprises all the operations, and

the agencies conducting them involved in the movement of farm produced foods, raw
materials and their derivatives, such as textiles, from the farms to the final consumer and
effects of such operations on farmers, middlemen and consumers.”

Importance of agricultural marketing

Marketing gives signals to increase production and thereby ensures the availability of
goods, and services. If the marketing activity is developed, demand for goods increases as
a result, production of goods also increases. Due to increased production, the demand for
inputs increases i.e., demand for input is derived from the increase in demand for the
output. To distribute the required input to the farm sector, the input marketing has to be
strengthened.

Lecture No.6

Basic terms and concepts in economics – Goods & Services – free and economic
goods, Utility – Cardinal and Ordinal approaches. Characteristics of utility - Forms
of utility.

BASIC TERMS AND CONCEPTS IN ECONOMICS

 13

GOODS and SERVICES

Economics is concerned with the production and distribution of goods and services.

Goods: It is defined as anything that satisfies human wants or needs.

Characteristic features of goods:

1. They are tangible in nature

2. They are the material outcome of production

Example: Foodgrains, Machinery, Seeds, Fertilizers etc.,

Services would be the performance of any duties or work for another or professional
activity. .

Characteristic Features of Services:

1. They are intangible

2. Non- Materialistic
3. Inseparable
4. Variable
5. Perishable
Example: Services rendered by agricultural labourers, doctors, teachers etc.,

Classification of Goods

The goods are classified based on supply, durability, consumption and transferability.

1) Based on Supply: The goods are categorized as economic goods and free goods based
on the supply criteria

Free goods are those goods that exist in lenty that can be used as much as we like. They
are gifts of nature and used without payment Example: Air, sunshine etc.

The economic goods, on the other hand, are scarce and can be had only on payment.
They are limited and generally man- made and hence those can be available only on
payment. In Economics, we are concerned with economic goods only. Economic goods
mean wealth.

Thus there would have been no science of economics if all goods had been free goods.
The distinction between free goods and economic goods, of course is not permanent, for
instance air is a free good but when we receive it under fan it is an economic good.

2) Based on Consumption: The Goods are categorized as Consumer goods and Producer
Goods.
 14

Consumer goods are those which yield, satisfaction directly. They are used by consumer
directly to satisfy the wants Example: food, clothing, etc. These goods are known as the
Goods of First order.

Producer goods are these goods which help us to produce other goods. They give
satisfaction indirectly by producing other goods which will yield final satisfaction.
Example: machinery, tools etc. They are also termed goods of the second order.

.3) Based on Durability: This classification emphasized on the nature of the goods and
their usage.

Mono Period Goods are those goods which can be used only once in the production and
consumption process. Example: Seeds, Fertilizers,food etc.,

Poly Period Goods are those which can be used repeatedly during the production and
consumption process over several periods. Example:refrigerator machinery, implements
etc.,

4) Based on Transferability:
External Material Transferable good. Example: Land, Buildings etc.,

External material non-Transferable good. Example: Degree Certificate, PAN Card etc.,

External non material transferable good. Example: Goodwill of a business

External non material Non-transferable good. Example: Friendship,light

Internal non material Non-Transferable good. Example: Intelligence Quotient ,ability

,cruelty etc.,
 15

CLASSIFICATION OF GOODS

GOODS

SUPPLY CONSUMPTION DURABILITY TRANSFERABILITY

Free Economic Consumer Producer Mono Poly External Internal

Goods Goods Goods Goods Period goods Period goods

Material non material

Transferable Non- Transferable Non - transferable transferable goods

goods goods goods
 16

UTILITY

The basis of consumer behaviour is that people tend to choose those goods
and services they value high. Based on this premise economists developed the notion of
utility to describe the consumption patterns adopted by the consumers.
Definition : Utility means the power to satisfy a human want. Any commodity or
service which can satisfy a human want is said to have utility
Characteristics of Utility :
1. Utility is subjective: Utility varies from person to person, for Eg:- A high yielding
variety seed gives more utility to the farmer. The same seed provided to a cloth
merchant gives zero utility.
2. Utility varies with purpose : For Eg:- Coconut oil is used as coking oil or hair oil or
as lubricant.
3. Utility varies with time : The Intensity of a person‟s desire for a commodity is
different at various time periods, for Eg:- Labour requirement for paddy is peak
during transplantation harvesting and threshing period than other operations taken
up in paddy cultivation.
4. Utility varies with ownership : Ownership of a good creates greater utility from a
good than when it is hired Eg:- owning a tractors gives more utility than hiring it.
5. Utility need not be synonymous with pleasure: For Eg:- A sick man has to consume
medicines for getting cured. He does not get pleasure during the process.
6. Utility does not mean satisfaction: utility is distinct from satisfaction. It implies
potentiality of satisfaction in a given commodity. But the satisfaction is the end result
of consumption. Satisfaction is what we get and the utility is the quality in agood
which gives satisfaction.

KINDS OR TYPES OF UTILITY

The kinds or types of utilities are 1) Form utility 2) Place utility 3) Time utility and
4) Possession utility.

1. Form Utility : The Change in the form offers greater utility to the good than in its
original form. For example: Processing of paddy into rice. Rice, fetches superior price
than paddy because of processing.

2. Place Utility : The utility obtained by spatial movement of the goods is termed as
place utility. Transportation aids in place utility i.e., through the transfer of goods from
surplus production area to deficit or slack areas. Example: Shimla apples are transported
to all parts of the country thereby increasing the utility of apples.
 17

3. Time utility: Storing the commodity at the times of surplus production and make
them available during scarcity creates time utility. Storage aids in creation of time utility
by the supply of seasonal products during off season as per the consumers requirements.

4. Possession Utility: The Utility obtained due to possession or transfer of ownership

of the commodity is called possession utility. Buying and selling creates possession
utility. For Eg:- Agriculture land sold to real estate for plots would increase the utility for
the same piece of land.

Cardinal and Ordinal Utility

Cardinal utility : This is based on the premise that utiIity could be measured and can be
aggregated across individuals. It quantitatively measures the preference of an individual
towards a certain commodity. Numbers assigned to different goods or services can be
compared. A utility of 100 units towards a cup of coffee is twice as desirable as a cup of
tea with a utility level of 50 units. The only limitation is its subjectivity.

Ordinal utility: this is the ordinal measurement of utility. According to this utility can not
be quantified.For Example: If the utility is 100 units towards a cup of coffee and 50 units
for a cup of tea, the conclusion drawn is that Coffee is preferred over tea. The ordering is
important rather than the magnitude of the numerical values like 100 and 50 in the given
instance. This approach faces the limitation of utilities not being compared.
 18

Lecture No.7
Value – Definition – Characteristics; Price – Meaning, Wealth – Meaning Attributes
of wealth, Types of wealth, Distinction between wealth and welfare.

Value and wealth

Value
The word “Value” in economics conveys value-in-exchange. It does not include free
goods which have only value-in-use. In other words, value of a commodity refers to those
goods that can be obtained in exchange for itself or purchasing power of a commodity in
terms of other commodities and services. Value can be referred to as the capacity of a
good to command other things in exchange.
Characteristics of Value.
1. It must possess utility
2. It must be scarce and
3. It must be transferable and marketable.

Price
In Pre historic times, people did not know money and they had a barter system in which
goods are exchanged with goods. Therefore, in those days value and price were used
synonymously. But now days, goods are exchanged for money. Therefore, Value
expressed in monetary terms is Price

Wealth
In ordinary language, “Wealth” conveys an idea of prosperity and abundance. A man of
wealth understood as a rich person. But in Economics Wealth is synonymous with
economic goods. In short, Wealth means anything which has value.

Definition: It consists of all potentially exchangeable means of satisfying human wants

(J.M.Keynes)

Characteristics of wealth :
1. It should possess utility
2. It must be scarce
3. It must be transferable
4. It must be external to person

Relation between Money and Wealth : Money is a form of wealth .All money is wealth
but all wealth is not money
 19

Relation between Income and Wealth : Income is different from wealth. Wealth yields
income. Therefore, Wealth is a fund whereas income is a fl
Types of Wealth :
1. Individual Wealth : It consists of all tangible and intangible possessions of the
individuals besides loans due to them. Example: Land, bonds, deposits are tangible
possessions while, intangible possessions are copyrights, patents etc.,
2. Social Wealth : It is the wealth, which is collectively used by all the people in a
nation. Example: Railways, Public Parks, Government colleges etc.,
3. Representative Wealth : It is that form of wealth in the form of title deeds
4. National Wealth : It is an aggregate of all individuals wealth and social wealth of the
country inclusive of loans due to people and to the nation debts have to be deducted.
Example: Rivers, mountains.
5. Cosmopolitan Wealth: It is wealth of the whole word. It is a sum total wealth of all
nationals.
6. Negative Wealth : It refers to the exclusive debts owed by the individuals and the
nation.

Wealth and Welfare compared

Wealth Welfare
It is the means to an end It is the end itself
It is objective It is subjective
It includes harmful goods It does not include harmful goods
It does not include free goods Free and economic goods lead to welfare
 20

Lecture No.8
Law of Diminishing Marginal Utility – statement, assumptions of law, explanation,
limitations of the law, Importance.

LAW OF DIMINISHING MARGINAL UTILITY (LDMU)

The law of diminishing marginal utility is a generalization drawn from the characteristics
of human wants, H.H Gossen was the first to formulate this law in 1854.
Marshall has stated the law of diminishing marginal utility as follows “The additional
benefit which a person derives from a given increase of his stock of a thing diminishes
with every increase in the stock that he already has”. In other words, the law simply states
that other things being equal, the marginal utility derived from successive units of a given
commodity goes on decreasing. Hence the more we have of a thing; the less we want of
it, because every successive unit gives less and less satisfaction.
Marginal Utility: The addition to the total utility by the consumption of the last unit
considered just worthwhile.
Total utility : The sum total of utilities obtained by the consumer from consumption of
different units of a commodity
ASSUMPTIONS :
1. There should be a single commodity with homogeneous units wanted by an individual
consumer
2. There should not be any change in the taste, habit, custom, fashion and income of
the consumer
3. There should be continuity in the consumption of the commodity
4. Units of the commodity should be of a suitable size
5. Pries of the different units of the commodity and of the substitutes of the commodity
should remain the same
6. The commodity should be divisible
7. The consumer should be an economic man who acts rationally
8. Goods should be normal goods.
 21

Schedule showing marginal utility and total utility

Units of apples consumed Total utility in utils Marginal utility in utils

1 7 7

2 11 4 (11 - 7)

3 13 2 (13 - 11)

4 14 1 (14 - 13)

5 14 0 (14 - 14)

6 13 -1 (13 - 14)

The above table shows that when a person consumes no apples, he gets no satisfaction.
His total utility is zero. In case he consumes one apple, he gains seven units of
satisfaction. His total utility is 7 and his marginal utility is also 7. In case he consumes
second apple, he gains extra 4 utils (MU). Thus given him a total utility of 11 utils from
two apples. His marginal utility has gone down from 7 utils to 4 utils because he has a
less craving for the second apple. Same is the case with the consumption of third apple.
The marginal utility has now fallen to 2 utils while the total utility of three apples has
increased to 13 utils (7 + 4 + 2). In case the consumer takes fifth apple, his marginal
utility falls to zero utils and if he consumes sixth apple also, the total utility starts
declining and marginal utility becomes negative. Total utility and marginal utility from
the successive utits of the commodity are plotted in the figure below:

i. The total utility curves starts at the origin as zero consumption of apples yield
zero utility.
ii. The TU curve reaches at its maximum or a peak at M when MU is zero.
 22

iii. The MU curve falls throughout the graph. A special point occurs when the
consumer consumes fifth apple. He gains no marginal utility from it. After this
point, marginal utility becomes negative.
MUa = TUa – TU(a-1)

Importance of the Law:

1. The law of diminishing marginal utility is the basic law of consumption. The law of
demand, the law of equimariginal utility and the concept of consumers surplus are
based on it.
2. The law helps in bringing variety in consumption and production.
3. The law helps to explain the phenomenon in the value theory that the price of a
commodity falls when its supply increases. It is because with the increase in the
stock of a commodity its marginal utility diminishes.
4. The famous diamond –water paradox of Smith can be explained with the help of this
law. Diamonds are scarce and hence possess high marginal utility and hence higher
price. On the otherhand, water is relatively abundant because of which it possess low
marginal utility and low price even though its total utility is high
5. The principle of progressive taxation is based on this law. As a person „s income
increases, the rate of tax rises because the marginal utility of money to him falls with
the rise in his income. The law underlines the socialist plea for an equitable
distribution of wealth.

Exceptions to LDMU are as follows:

1. Hobbies: In case of certain hobbies like stamp collection or old coins, every
additional unit gives more pleasure. MU goes on increasing with the acquisition of
every unit.
2. Drunkards: It is believed that every dose of liquor Increases the utility of a drunkard.
3. Miser: In the case of miser, greed increases with the acquisition of every additional
unit of money.
4. Reading: The habit of reading of more books gives more knowledge and in turn
greater satisfactions.
 23

Lecture No.9
Law of Equi-marginal Utility – Meaning, Assumptions, Explanation of the Law,
Practical Importance, Limitations.

LAW OF EQUI MARGINAL UTILITY

The principle of equal marginal utility occupies an important place in the cardinal utility
analysis. According to this, a consumer is in equilibrium when he distributes his given
money income among various goods in such a way that marginal utility derived from the
last rupee spent on each good is the same. The Marshallian approach to consumer‟s
equilibrium is based on the following assumptions.

Assumptions

The main assumptions of the law of equi-marginal utility are as under:

(1) Independent utilities. The marginal utilities of different commodities are independent
of each other and diminishes with more and more purchases.

(2) Constant marginal utility of money. The marginal utility of money remains constant
to the consumer as he spends more and more of it on the purchases of goods.

(3) Utility is cardinally measurable.

(4) Every consumer is rational in the purchase of goods.

(5) Limited money income. A consumer has limited amount of money income to spend.

Definition and explanation of the law:

The law of equi-marginal utility is simply an extension of the law of diminishing

marginal utility to two or more than two commodities. The law of equi-marginal, is
known, by various names. It is named as the Law of Substitution, the Law of Maximum
Satisfaction, the Law of Indifference, the Proportionate Rule and the Gossen‟s Second
Law. In cardinal utility analysis, this law is stated by Lipsey in the following words. “The
household maximizing the utility will so allocate the expenditure between commodities
that the utiliIity of the last penny spent on each item is equal”. As we know, every
consumer has unlimited wants. However, the income at his disposal at any time is
limited. The consumer is therefore, faced with a choice among many commodities that he
can and would like to pay. He therefore, consciously or unconsciously compares the
satisfaction which he obtains from the purchase of the commodity and the price which he
pays for it. If he thinks the utility of the commodity is greater than the utility of money,
he buys that commodity. As he buys more and more of that commodity, the utility of the
successive units begins to diminish. He stops further purchase of the commodity at a
point where the marginal utility of the commodity and its price are just equal. If he
 24

pushes the purchase further from his point of equilibrium, then the marginal utility of the
commodity will be less than that of price and the household will be a loser. A consumer

will be in equilibrium with a single commodity symbolically when:

Consumer‟s equilibrium with two or more than two goods purchased. A prudent
consumer in order to get the maximum satisfaction from his limited means compares not
only the utility of a particular commodity and the price but also the utility of the other
commodities which he can buy with his scarce resources. If he finds that a particular
expenditure in one use is yielding less utility than that of other, he will try to transfer a
unit of expenditure from the commodity yielding less marginal utility to commodity
yielding higher marginal utility. The consumer will reach his equilibrium position when it
will not be possible for him to increase the total utility by transferring expenditure from
less advantageous uses to more advantageous uses.

The consumer will maximize total utility from his given income when the utility from
the last rupee spent on each good is the same. Algebrically, this is

when; Here (a), (b), (c), … n are large number

goods consumed.

It may here be noted that when a consumer is in equilibrium there is no way to increase
utility by reallocating his given money income.

The doctrine of equi-marginal utility can be explained by taking an example. Suppose a

person has Rs.5 with him which he wishes to spend on two commodities, Pencil and
Erasers. The marginal utility derived from both these commodities is as under:

Units of Money MU of Pencils MU of Erasers

1 10 12

2 8 10

3 6 8

4 4 6

5 2 3

Rs.5 Total Utility = 30 Total Utility = 39

A rational consumer would like to get maximum satisfaction from Rs. 5.00. He can
spend this money in three ways.
 25

(1) Rs. 5.00 may be spent on Pencils only

(2) Rs. 5.00 may be utilized for the purchase of Erasers only.

(3) Some rupees may be spent on the purchase of Pencils and some on the purchase of
Erasers.

If the prudent consumer spends Rs. 5.00 on the purchase of Pencils, he gets 30 utility. If
he spends Rs. 5.00 on the purchase of Erasers, the total utility derived is 39 which is
higher than Pencils. In order to make the best of the limited resources, he adjusts his
expenditure.

(1) By spending Rs. 4.00 on Pencils and Rs. 1.00 on Erasers, he gets 40 utility
(10+8+6+4+12=40).

(2) By spending Rs. 3.00 on Pencils and Rs. 2.00 on Erasers, he derives 46 Utility
(10+8+6+12+10=46).

(3) By spending Rs. 2.00 on Pencils and RPs. 3.00 on Erasers, he gets 48 utility
(10+8+12+10+8=48).

(4) By spending Rs. 1.00 on Pencils and Rs. 4.00 on Erasers, he gets 46 utility
(10+12+10+8+6=46).

The sensible consumer will spend Rs. 2.00 on Pencils and Rs. 3.00 on Erasers and will
get the maximum satisfaction. When he spends Rs. 2.00 on Pencils and Rs. 3.00 on
Erasers, the marginal utility derived from both these commodities is equal to 8. When the
marginal utilities of the two commodities are equalized, the total utility is then maximum
i.e., 48 as is clear from the schedule given above.

The law of equi-marginal utility can be explained with the help the diagrams.

PENCILS ERASERS

In the diagram, MU is the marginal utility curve for Pencils and KL of Erasers. When a
consumer spends OP amount (Rs.2) on Pencils and OC (Rs.3) on Erasers, the marginal
utility derived from the consumption of both the items (Pencils and Erasers) is equal to 8
 26

units (EP=NC). The consumer gets the maximum utility when he spends Rs. 2.00 on
Pencils and Rs. 3.00 on Erasers and by no other alteration in the expenditure.

We now assume that the consumer spends Rs. 1.00 on Pencils (OC‟ amount) and Rs.
4.00 (OQ‟) on erasers. If CQ‟ more amount is spent on erasers, the added utility is equal
to the area CQ‟ N‟N. On the other hand, the expenditure on Pencils falls from OP amount
(Rs.2) to OC‟ amount (Rs. 1.00). There is a loss of utility equal to the area C‟PEE‟. The
loss in utility (Pencils) is greater than that of its gain in erasers. The consumer is not
deriving maximum satisfaction except the combination of expenditure of Rs. 2.00 on
Pencils and Rs. 3.00 on erasers.

This law is known as the Law of Maximum Satisfaction because a consumer tries to get
the maximum satisfaction from his limited resources by so planning his expenditure that
the marginal utility of a rupee spent in one use is the same as the marginal utility of a
rupee spent on another use. It is known as the Law of Substitution because consumer
continues substituting one good for another till he gets the maximum satisfaction. It is
called the Law of Indifference because the maximum satisfaction has been achieved by
equating the marginal utility in all the uses. The consumer then becomes indifferent to
read just his expenditure unless some change fakes place in his income or the prices of
the commodities, etc.

Limitations of the Law

(i) Effect of fashions and customs. The law of equi-marginal utility may become
inoperative if people forced by fashions and customs spend money on the purchase of
those commodities which they clearly know yield less utility but they cannot transfer the
unit of money from the less advantageous uses to the more advantageous uses because
they are forced by the customs of the country.

(ii) Ignorance or Carelessness. Sometimes people due to their ignorance of price or

carelessness to weigh the utility of the purchased commodity do not obtain the maximum
advantage by equating the marginal utility in all the uses.

(iii) Indivisible Units. If the unit of expenditure is not divisible, then again the law may
become inoperative.

(iv) Freedom to Choose. If there is no perfect freedom between various alternatives, the
operation of law may be impeded;

Practical Importance of Law of LEMU:

1. Consumption: A wise consumer acts on this law while arranging his expenditure and
obtains maximum satisfaction.
2. Production: To obtain maximum net profit, he must substitute one factor of producing
to another so as to have most economical combination.
 27

3. Exchange: Exchange implies substitution of one thing to another and hence this law is
important.
4. Distribution: It is on the principle of the marginal productivity that the share of each
factor of production is determined.
5. Public finance: The Government is also guided by this law in public expenditure by
allocation of revenue (money) in such a way that it will secure maximum welfare of
the people.

Lecture No.10

Consumer‟s Surplus – Meaning, Assumptions, Explanation, Difficulties in

measuring Consumer‟s Surplus, Importance.

CONSUMER‟S SURPLUS

Importance:
The concept of consumers surplus is based on the theory of demand. It was
introduced by marshal in 1895 in his publication „principles of economics.‟
According to marshal consumer‟s surplus is “the excess of the price which he
would be willing to pay rather than go without the thing, over that which he actually does
pay, is the economic measure of this surplus satisfaction”. In brief, consumers surplus is
the difference between what the consumer is willing to pay and what he actually pays.
Assumptions:
1. Marginal utility of money for the consumer is assumed to be the same through out the
process of exchange.
2. Commodity does not have substitutes
3. In the market at the given point of time, there are no differences of income, tastes,
preferences and fashions among the consumers and
4. Each commodity is considered independent of others.
Explanation:
To illustrate let us suppose that a consumer is willing to buy jamun if it price were
Rs.1/-, 2 jamun if the price were 75 paise. 3 jamun at 50 paise and 4 at 25 paise. Suppose
the market price is 25 paise per jamun. At this price the consumer will buy 4 jamun and
enjoy a surplus of Rs.1.50 (0.75 +0. 50 + 0.25). This is shown in table.

Units of Marginal Utility Actual Price Consumer

Jamun (Price willing to pay) Surplus
1 1.00 0.25 0.75
2. 0.75 0.25 0.50
3. 0.50 0.25 0.25
4. 0.25 0.25 --
 28

Our hypothetical consumer is prepared to pay Rs.2.50/-(Rs.1.00 + 0.75 + 0.50 + 0.25) for
four jamuns but actually pays Rs.1/- and therefore derives a surplus of Rs.1.50/-
(Rs.2.50/- - Rs.1.00/-). It can also be expressed as
CS = Total utility – Marginal Utility
CS = TU – (Price x NO. Of units of the commodity)

Consumer‟s surplus is represented diagrammatically

A
Jamun (Rs)

P R

Price per units is OQ. At this price, the consumer will demand OQ quantity of
commodity, he will get total satisfaction equal to the area OQRA, and thus gets a surplus
satisfaction equal to PRA (OQRA – OQRP). Thus surplus satisfaction has been defined
as consumer‟s surplus.

Difficulties in measuring Consumer‟s Surplus:

1. The cardinal measurement of utility is difficult because it is close to impossible for a
consumer to say that the first unit of commodity gave him 10 units of satisfaction and the
second unit of commodity gave him 5 units of satisfaction.
2. Marginal utility for the same commodity id different to different consumers. Marginal
utility for a particular commodity varies from person to person depending upon their
income, tastes and preferences.
3. Existences of substitutes: In the real world a number of substitutes for a commodity
exist, thus making the work of measuring consumer‟s surplus a complicated task.
4. Marginal utility of money is not constant: Marshall based his concept of consumer‟s
surplus on the simplifying assumption that the marginal utility of money is constant. As
the consumer buys more and more units of a commodity x, the amount of money with
him diminished, in this case, the marginal utility of money is bound to increases rather
than remain constant.
5. Lack of awareness of different price: It is not possible for a consumer to be aware of
the entire demand schedule.
Importance of Consumers Surplus
 29

1. Conjunctural Importance : When the people enjoy larger consumer‟s surplus, it does
not indicate that they are better off. Thus it serves as an index of economic betterment.
2. Useful to the Monopolist : The monopolist can freely raise the process of the goods if
they bring in higher consumer‟s surplus, without any fear of foregoing the sales.
3. Helps in Public Finance and Taxation : More taxes can be impose by the government
to get more revenue, on those goods for which consumer‟s surplus is high
4. Helps to measure benefits from International Trade: International trade implies
transaction of commodities across the frontiers. Generally, those commodities which
happen to be cheaper in the foreign markets are imported thereby resulting in higher
consumers surplus of satisfaction for the commodity.
 30

Lecture No.11&12
Demand – Meaning, Definition, Types of demand - income demand, price demand,
cross demand- Demand Schedule, demand curve, Law of demand – contraction and
extension, increase and decrease in demand

DEMAND

Meaning of Demand
Demand in economics means a desire to possess a good supported by willingness and
ability to pay for it. If you have a desire to buy a certain commodity, say, a tractor, but do
not have the adequate means to pay for it, it will simply be a wish, a desire or a want and
not demand. Demand is an effective desire, i.e., a desire which is backed by willingness
and ability to pay for a commodity in order to obtain it. In the words, "Demand means the
various quantities of a good that would be purchased per unit of time at different prices in
a given market. There are thus three main characteristics of demand in economics.
i. Willingness and ability to pay. Demand is the amount of a commodity for which a
consumer has the willingness and also the ability to buy.
ii. Demand is always at a price. If we talk of demand without reference to price, it will be
meaningless. The consumer must know both the price and the commodity. He will then
be able to tell the quantity demanded by him.
iii. Demand is always per unit of time. The time may be a day, a week, a month, or a year.

Individual's Demand for a commodity:

The individual‟s demand for a commodity is the amount of a commodity which the
consumer is willing to purchase at any given price over a specified period of time. The
individual's demand for a commodity varies inversely with price ceteris paribus. As the
price of a good rises, other things remaining the same, the quantity demanded decreases
and as the price falls, the quantity demanded increases. Price (p) is here an independent
variable ad quantity (q) dependent variable.

The Market Demand for a Commodity:

The market demand for a commodity is obtained by adding up the total quantity
demanded at various prices by all the individuals over a specified period of time in the
market. It is described as the horizontal summation of the individuals‟ demand for a
commodity at various possible prices in market.
In a market, there are a number of buyers for a commodity at each price. In order
to avoid a lengthy addition process, we assume here that there are only four buyers for a
commodity who purchase different amounts of the commodity at each price. The
 31

horizontal summation of individuals‟ demand for a commodity will be the market

demand for a commodity as is illustrated in the following schedule:
Demand Schedule
Demand schedule is a tabular representation of the quantity demanded of a commodity at
various prices. For instance, there are four buyers of apples in the market, namely A, B, C
and D.
Demand schedule for apples

PRICE (Rs. Buyer A Buyer B Buyer C Buyer D Market

per dozen) (demand in (demand in (demand in (demand in Demand
dozen) dozen) dozen) dozen) (dozens)

10 1 0 3 0 4

9 3 1 6 4 14

8 7 2 9 7 25

7 11 4 12 10 37

6 13 6 14 12 45

The demand by buyers A, B, C and D are individual demands. Total demand by the four
buyers is market demand. Therefore, the total market demand is derived by summing up
the quantity demanded of a commodity by all buyers at each price.

Demand Curve
Demand curve is a diagrammatic representation of demand schedule. It is a graphical
representation of price- quantity relationship. Individual demand curve shows the highest
price which an individual is willing to pay for different quantities of the commodity.
While, each point on the market demand curve depicts the maximum quantity of the
commodity which all consumers taken together would be willing to buy at each level of
price, under given demand conditions.

1) Derived demand.
Derived demand refers to demand for goods which are needed for further production. It is
the demand for producer‟s goods like industrial raw material, machine tools and
equipments.
2) Autonomous demand
Autonomous demand is independent of the other product or main product. It‟s not linked
or tie-up with the other goods or commodity.eg: food articles,clothes.
 32

Price Demand:It refers to various quantities of a good or service that a consumer would
be willing to purchase at all possible prices in a given market at a given point in time,
ceteris paribus.
Income Demand:It refers to various quantities of a good or service that a consumer would
be willing to purchase at different levels of income, ceteris paribus.

Cross Demand : It refers to various quantities of a good or service that a consumer would
be willing to purchase not due to changes in the price of the commodity under
consideration but due to changes in the price of related commodity. For example:
Demand for tea is more not because price of tea has fallen but because price of coffee has
risen. Thus demand for substitutes take the form of cross demand.

Law of Demand

1. The law of demand states that as price increases (decreases) consumers will purchase
less (more) of the specific commodity. Demand varies inversely with price.

As price falls from P1 to P2 the quantity demanded increases from Q1 to Q2. This is a
negative relation between price and quantity, hence the negative slope of the demand
schedule; as predicted by the law of demand.

Demand curve has a negative slope, i.e, it slopes downwards from left to right depicting
that with increase in price, quantity demanded falls and vice versa. The reasons for a
downward sloping demand curve can be explained as follows-
1. Income effect- With the fall in price of a commodity, the purchasing power of
consumer increases. Thus, he can buy same quantity of commodity with less money or he
can purchase greater quantities of same commodity with same money. Similarly, if the
price of a commodity rises, it is equivalent to decrease in income of the consumer as now
he has to spend more for buying the same quantity as before. This change in purchasing
power due to price change is known as income effect.
 33

2. Substitution effect- When price of a commodity falls, it becomes relatively cheaper

compared to other commodities whose prices have not changed. Thus, the consumer tend
to consume more of the commodity whose price has fallen ,i.e, they tend to substitute that
commodity for other commodities which have now become relatively dear.
3. Law of diminishing marginal utility– It is the basic cause of the law of demand. The
law of diminishing marginal utility states that as an individual consumes more and more
units of a commodity, the utility derived from it goes on decreasing. So as to get
maximum satisfaction, an individual purchases in such a manner that the marginal utility
of the commodity is equal to the price of the commodity. When the price of commodity
falls, a rational consumer purchases more so as to equate the marginal utility and the
price level. Thus, if a consumer wants to purchase larger quantities, then the price must
be lowered. This is what the law of demand also states.

Changes in demand for a commodity can be shown through the demand curve in two
ways: (1) Movement along the demand curve(Extension and contraction ) and (2) Shifts
of the demand curve( Increase and decrease).
(1) Movement along the Demand Curve:
Demand is a multivariable function. If income and other determinants of demand such as
tastes of the consumers, changes in prices of related goods, income distribution etc
remain constant and there is a change only in price of the commodity, then we move
along the same demand curve, In this case, the demand curve remains unchanged. When,
as a result of change in price, the quantity demanded increases or decreases, it is
technically called extension and contraction in demand.
A movement along a demand curve is defined as a change in the quantity demanded due
to changes in the price of a good will result in a movement along the demand curve. For
instance, a fall in the price of apples from P1 to P2 causes an increase in the quantity
demanded from Q1 to Q2

Shifts in the demand curve

A shift of the demand curve is referred to as a change in demand due any factor other
than price. A demand curve will shift if any of these occurs:
1. Change in the price of other goods (complements and substitutes); leading to increase
/ decrease of real income
 34

2. Change in the income level

3. Change in consumers‟ tastes and preferences
Each of these factors tends the demand curve to shift downwards to the left or upwards to
the right. While downward shift signifies decrease in demand, an upward shift of the
demand curve shows an increase in the demand.
As shown in the figure the demand curve will shift to D2 from D1 and accordingly the
price and quantity demanded will change.

Movements along a demand curve is the result of increase or decrease of the price of the good,
while the demand curve shifts when any demand determinant other than price changes

Determinants of demand
Various factors affect the quantity demanded by a consumer of a good or
service. The key determinants of demand are as follows
1. Price of the good: This is the most important determinant of demand. The relationship
between price of the good and quantity demanded is generally inverse as we will see later
while studying law of demand
2. Price of related goods:
 Substitutes: If the price of a substitute goes down than the quantity demanded of the
good also goes down and vice versa.
 Complementary goods: If the price of gasoline goes up the quantity demanded of
automobiles will go down. Thus the price of complements have an inverse
relationship with the demand of a good
3. Income: Higher the income of the consumer the more will be quantity demanded of
the good. The only exception to this will be inferior goods whose demand decreases
with an increase in income level
 35

4. Individual tastes and preferences: a preference for a particular good may affect the
consumer‟s choice and he / she may continue to demand the same even in rising
prices scenario
5. Expectations about future prices & income: If the consumer expects prices to rise in
future he / she may continue to demand higher quantities even in a rising price
scenario and vice versa

Exceptions to the law of demand

Unlike other laws, law of demand also has few exceptions i.e. there is no inverse
relationship between price and quantity demanded for these goods. Few of them are as
follows:
1. Giffen goods: These are those inferior goods whose quantity demanded decreases
with decrease in price of the good. This can be explained using the concept of income
effect and substitution effect

2. Commodities which are regarded as status symbols: Expensive commodities like

jewellery, AC cars, etc., are used to define status and to display one‟s wealth. These
goods doesn‟t follow the law of demand and quantity demanded increases with price
rise as more expensive these goods become, more will be their worth as a status
symbol.
3. Expectation of change in the price of the goods in future: if a consumer expects the
price of a good to increase in future, it may start accumulating greater amount of the
goods for future consumption even at the presently increased price. The same holds
true vice versa
 36

Lecture No.13&14

Elasticity of demand – Meaning, elastic and inelastic demand, kinds of elasticity of

demand, perfectly elastic, perfectly inelastic, relatively elastic, relatively inelastic,
unitary elastic demand-types of elasticity of demand-price elasticity of demand-
income elasticity-cross elasticity of demand-factors affecting elasticity of demand-
practical importance of elasticity of demand

Elasticity of Demand:

The elasticity of demand measures the responsiveness of quantity demanded to a change

in any one of the above factors by keeping other factors constant. When the relative
responsiveness or sensitiveness of the quantity demanded is measured to changes in its
price, the elasticity is said be price elasticity of demand.
Types of Elasticity of Demand
The quantity of a commodity demanded per unit of time depends upon various factors
such as the price of a commodity, the money income of the consumer and prices of
related goods, the tastes of the people, etc. Whenever there is a change in any of the
variables stated above, it brings about a change in the quantity of the commodity
purchased over a specified period of time. The three main types of elasticity are now
discussed in brief.
(1) Price Elasticity of Demand:
The concept of price elasticity of demand is commonly used in economic literature. Price
elasticity of demand is the degree of responsiveness of quantity demanded of a good to a
change in its price. Precisely, it is defined as the ratio of proportionate change in the
quantity demanded of a good caused by a given proportionate change in price. The
formula for measuring price elasticity of demand is:

Price Elasticity = Percentage change in quantity demanded

Percentage change change in price

= Δq / q † ΔP / P
Example. Let us suppose that price of a good falls from Rs.10 per unit to Rs.9 per unit in
a day. The decline in price causes the quantity of the good demanded to increase from
125 units to 150 units per day, The price elasticity using the simplified formula will be:
Ep = Δq / ΔP x P / q
Δq = 150 - 125 = 25 ΔP = 10 - 9 = 1
Original quantity = 125 Original price = 10

Ep = 25 / 1 x 10 / 125 = 2. The elasticity coefficient is greater than one.

Therefore the demand for the good is elastic.
 37

(2) Income Elasticity of Demand:

Income is an important variable affecting the demand for a good. When there is a change
in the level of income of a consumer, there is a change in the quantity demanded of a
good, other factors remaining the same. The degree of change or responsiveness of
quantity demanded of a good to a change in the income of a consumer is called income
elasticity of demand. Income elasticity of demand can be defined as the ratio of
percentage change in the quantity of a good purchased, per unit of time to a percentage
change in the income of a consumer.

Ey = Percentage change in demand

Percentage change in income

Ey = Δq / Δy x y / q

Let us assume that the income of a person is Rs.4000 per month and he purchases six
CDs per month. Let us assume that the monthly income of the consumer increases to
Rs.6000 and the quantity demanded of CD's per month rises to eight .The elasticity of
demand for CDs will be calculated as under:
Δq = 8 - 6 = 2 Δy = 6000 - 4000 = 2000

Original quantity demanded = 6 Original income 4000

Ey = Δq / Δy x y / q = 2 / 200 x 4000 / 6 = 0.66
The income elasticity is 0.66 which is less than one.

(3) Cross Elasticity of Demand:

The concept of cross elasticity of demand is used for measuring the responsiveness of
quantity demanded of a good to changes in the price of related goods. Cross elasticity of
demand is defined as the percentage change in the demand of one good as a result of the
percentage change in the price of another good.. The formula for measuring cross
elasticity of demand is:

Exy = % change quantity demanded of good X

% change in price of good Y

The numerical value of cross elasticity depends on whether the two goods in question are
substitutes, complements or unrelated.
For example: Coke and Pepsi
 38

Degrees of Price Elasticity of Demand:

The economists grouped various degrees of elasticity of demand into five categories. (1)
Infinitely elastic, (2) Perfectly inelastic, (3) Unit elasticity, (4) Relatively elastic, and (5)
Relatively inelastic demand.

(1) Perfectly inelastic demand: When the quantity demanded of a good does not change
at all to whatever change in price, the demand is said to be perfectly inelastic or the
elasticity of demand is zero.

(2) Perfectly elastic demand: A perfectly elastic demand curve DD/ is a horizontal line
which indicates that the quantity demanded is extremely (infinitely) responsive to price.
Even a slight rise in price drops the quantity demanded of a good to zero. The curve DD /
is infinitely elastic. This elasticity of demand as such is equal to infinity.

(3) Unitary elastic demand: When the quantity demanded of a good changes by exactly
the same percentage as price, the demand is said to be unitary elastic.

(4) Relatively elastic demand: If a given proportionate change in price causes relatively
a greater proportionate change in quantity demanded of a good, the demand is said to be
relatively elastic. Alternatively, we can say that the elasticity of demand is greater than I.
 39

(5) Relatively Inelastic demand: When a given proportionate change in price causes a
relatively less proportionate change in quantity demand, demand is said to be inelastic.
The elasticity of a good here is less than I or less than unity.

Factors Determining Price Elasticity of Demand:

(i) Degree of necessity: If the consumption of the commodity or commodities is essential
and necessary, the demand for those commodities is said to be relatively inelastic. In
developing countries of the world, the per capital income of the people is generally low.
They spend a greater amount of their income on the purchase of necessaries of life such
as wheat, milk, course cloth etc. They have to purchase these commodities whatever be
their price. The demand for goods of necessities is, therefore, less elastic or inelastic. The
demand for luxury goods, on the other hand is greatly elastic whose consumption can be
postponed. For example, refrigerators, televisions etc

(ii) Availability of substitutes. If a good has greater number of close substitutes available
in the market, the demand for the good will be greatly elastic. For examples, if the price
 40

of Coca Cola rises in the market, people will switch over to the consumption of Pepsi
Cola. which is its close cheaper substitute. So the demand for Coca Cola is elastic.
(iii) Proportion of the income spent on the good: If the proportion of income spent on
the purchase of a good is very small, the demand for such a good will be inelastic. For
example, if the price of a box of matches or salt rises by 50%, it will not affect the
consumers‟ demand for these goods. The demand for salt, match box therefore will be
inelastic. On the other hand, if the price of a car rises from Rs.6 lakh to Rs.9 lakh and it
takes a greater portion of the income of the consumers, its demand would fall. The
demand for car is, therefore, elastic.
(iv) Time. The period of time plays an important role in shaping the demand curve. In the
short run, when the consumption of a good cannot be postponed, its demand will be less
elastic. In the long run if the rise price persists, people will find out methods to reduce the
consumption of goods. For example: if the price of electricity goes up, it is very difficult
to cut back its consumption in the short run than in the long run by adoption of available
alternatives.
(v) Number of uses of a good. If a good can be put to a number of uses, its demand is
more elastic (Ep > 1). For example, if the price of coal falls, its quantity demanded will
rise considerably because demand will be coming from households, industries, railways
etc.

Practical Importance of Elasticity of Demand:

1. Importance in taxation policy: The concept has immense importance in the sphere of
government finance. When a finance minister levies a tax on a certain commodity, he has
to see whether the demand for that commodity is elastic or inelastic. If the demand is
inelastic, he can increase the tax and thus can collect larger revenue.
2. Price discrimination by monopolist: If the monopolist finds that the demand for his
commodities is inelastic, he will at once fix the price at a higher level in order to
maximize his net profit. In case of elastic demand, he will lower the price in order to
increase, his sales and derive the maximum net profit.
3. Importance to businessmen: When the demand of a good is elastic, they increases sale
by lowering its price. In case the demand is inelastic, they charge higher price for a
commodity.
4. Help to trade unions. The trade unions can raise the wages of the labor in an industry
where the demand of the product is relatively inelastic. On the other hand, if the demand,
for product is relatively elastic, the trade unions cannot press for higher wages.
5. Use in international trade: The terms of trade between two countries are based on the
elasticity of demand of the traded goods.
6. Determination of rate of foreign exchange: The rate of foreign exchange is also
considered on the elasticity of imports and exports of a country.
7. Guideline to the producers: The concept of elasticity provides a guideline to the
producers for the amount to be spent on advertisement. If the demand for a commodity is
 41

elastic, the producers shall have to spend large sums of money on advertisements for
increasing the sales.
8. Use in factor pricing: The factors of production which have inelastic demand can
obtain a higher price in the market then those which have elastic demand. This concept
explains the reason of variation in factor pricing.
 42

Lecture No.15
Supply – meaning, definition, law of supply, supply schedule, supply curve

SUPPLY

Meaning of supply
It is the amount of a commodity that sellers are able and willing to offer for sale at
different prices per unit of time. In the words of Meyer “Supply is a schedule of the
amount of a good that would be offered for sale at all possible prices at any period of
time; e.g., a day, a week, and so on”.

Difference/Distinction between Supply and Stock:

Supply refers to that quantity of the commodity which is actually brought into the market
for sale at a given price per unit of time. While Stock is meant the total quantity of a
commodity this exists in a market and can be offered for sale at a short notice. The supply
and stock of a commodity in the market may or may not be equal if the commodity is
perishable, like vegetables, fruits, fish, etc; then the supply and stock are generally the
same. But in case if a producer finds that the price of his product is low as compared to
its cost of production, he tries to withhold the entire or a part of a stock. In case of a
favorable price, the producer may dispose off large quantities or the entire stock of his
commodity; it will all depend upon his own valuation of the commodity at that particular
time.

Market supply
Consider the supply schedule below:

Price Quantity supplied by Market Supply

Rs A B C A+B+C
10 40 60 80 180
8 30 45 60 135
6 22 33 44 99
4 15 23 30 68
2 10 15 20 45

We can see in the above table, the supply schedule of three producers A, B and C for
various price levels. As seen in the table above the supply of goods decreases as the price
of the goods fall. Now consider that the market consists of only these three suppliers, so
the market supply will be the sum of the goods supplied at various price levels all other
things remaining same. The same is depicted using the charts below. The first three charts
 43

show the individual supply curve of A, B and C as per the supply schedule above, while
the chart below that depicts the market supply curve i.e. the aggregate supply of A, B and
C

Law of Supply

The law of supply states that the quantity of a good offered or willing to offer by the
producer/owners for sale increase with the increase in the market price of the good and
falls if the market price decreases, all other things remaining unchanged
An increase in price will increase the incentive to supply which means that supply curves
will slope upwards from left to right. Supply curves can be curves or straight lines.
Consider the supply of labour as in the figure below:
 44

The above supply curve shows the hours per week at job by the labour on the X axis and
hourly wages on the Y axis. As we can see that as the hourly wages increase the hours
spent on job also increases. Thus the supply curve is a left to right upward sloping curve

Determinants of supply
Quantity supplied of a good/ service is affected by various factors. Several key factors
affecting supply are discussed as below:
 Price of the product: Since the producer always aims for maximising his
returns/profit, so the quantity supplied changes with increase or decrease in the price of
the good.
 Technological changes: Advanced technology can yield more quantity and at lesser
costs. This may result in the producer to be willing to supply more quantity of the goods
 Resource supplies and production costs: Changes in production costs like wage costs,
raw material cost and energy costs might impact the producers‟ production and
eventually the supply. An increase in such cost might result in lesser quantities produced
and thus lesser quantities supplied and vice versa
 Tax or subsidy: Since the producer aims to minimise costs and expand profit, an
increase in tax will increase the total cost, thereby decreasing the supply. Similarly a
subsidy might incentivize the producer to supply more of that goods in order to maximise
his profits. Tax and subsidy are two important tools used by central government to
control supplies of certain goods. For example an increase in tax can be used to reduce
the supply of cigarettes, while increase in subsidy can be used to increase the supply of
fertilizers
 Expectations of prices in future: An expectation that the prices of goods will fall in
future might lead to lessen the production by the producer and thereby decrease the
supply and vice-versa.
 45

 Price of other goods: A producer might have several options to produce. Since the
money to invest is limited with the producer he would decide to produce the good which
offers him the maximum profit. Thus if the producer is currently producing good A and
the price of good B increases than he might switch to producing good B as this would
result in better returns for him.
 Number of producers in the market: This is a very important factor or determinant of
supply. If there are large number of producers or sellers in the market willing to sell
goods then the supply of good will increase and vice versa

Supply function

Supply function expresses the relationship between supply and the factors (the
determinants of supply, as discussed above) affecting the producer/supplier to offer goods
for sale.
For instance take the supply function as below
Qs = f( P, Prg, S )
where;
P = price;
Prg = price of related goods; and
S = number of producers.
The supply curve is the graphical representation of the supply function and it
shows the quantity of a good that the seller is offering or willing to offer at various prices
 46

Lecture No.16
Increase and decrease in supply, contraction and extension of supply, factors
affecting supply.
Movement along the Supply curve (Extension and contraction)
Movement along the supply curve happens due to change in the price of the good and
resulting change in the quantity supplied at that price.
For instance, an increase in the price of the good from P1 to P2 in the figure below results
in an increase of quantity supplied of the good from Q1 to Q2. This movement from point
A to point B on the supply curve S due to change in price of the good all other factors of
supply remaining unchanged is called movement along the supply
curve.

Shifts in the Supply curve

Shift in the supply curve is also sometimes referred as a change in supply. This happens
due to changes in factors of supply other than that of price of the good
For example, if the price of a factor or of a related good increases the supply curve shifts.
Similarly changes in technology and government tools like tax and subsidy tends to shift
supply curve.
 47

The supply curve can shift to the right or left as shown in the figure. A shift towards the
right i.e. from S1 to S2 curve denotes an increase in supply of the good. Similarly a shift
in the supply curve from S1 to S3 denotes a decrease in supply of the good.
As seen in the figure above a rightward shift in the supply curve from S1 to S2 increases
supply from Q1 to Q2 while the price of the good remains same at P1. Similarly a
leftward shift from S1 to S3 decreases supply from Q1 to Q3 whilst the price remaining
unchanged at P1

Factors affecting changes in supply:

The factors causing Shifts in supply curve are
i.Changes in Factor Prices: If the prices of the various factors of production fall down, it
will result in lowering the cost of production and so an increase in the supply on varying
prices.

i. Changes in Technique: If an improvement in technique takes place in a particular

industry, it will help in reducing its cost of production. This will result in greater
production and so an increase in the supply of the commodity. The supply curve will
shifts to the right of the original supply curve.
ii. Improvement in the Means of Transport: The supply of the commodity may also
increase due to improvement in the means of communication and transport. If the means
of transport are cheap and fast, then supply of the commodity can be increased at a short
notice at lower price.
iii. Climatic Changes in case of Agricultural Products: The supply of agricultural
products is directly affected by the weather conditions and the use of the better methods
of production. If rain is timely, plentiful, well-distributed and improved methods of
cultivation are employed then other things remaining the same, there will be bumper
crop. It would then be possible to increase the supply of the agricultural products.
iv. Political Changes: The increase or decrease in supply may also take place due to
political disturbances in a country. If country wages wars against another country or some
kind of political disturbances take place just as we had at the time of partition, then the
channels of production are disorganized. It results in the decrease of certain goods the
supply curve shifts to the left of originals curve.
v. Taxation Policy: If a government levies heavy taxes on the import of particular
commodities, then the supply of these commodities is reduced at each price. The supply
curve shifts to the left, conversely, if the taxes on output in the country are low and
government encourages the import of foreign commodities, then the supply can be
increased easily. The supply curve shifts to the right of original supply curve.
vi. Goals of firms. If the firms expect higher profits in the future, they will take the risk
and produce goods on large scale resulting in larger supply of the commodities. The
supply curve shifts to the right.
 48

Lecture No.17
Elasticity of supply, kinds of elasticity of supply – perfectly elastic, perfectly
inelastic, relatively elastic, relatively inelastic and unitary elastic - factors affecting
elasticity of supply.

Elasticity of Supply:
Elasticity of Supply: it is defined as the responsiveness or sensitiveness of supply to the
changes in the price of the good.
The extent to which quantity supplied of a commodity changes with the given
change in the price refers to elasticity of supply.
There are five degrees of elasticity of supply. They are discussed in brief as under:
(i) Perfectly elastic supply. Supply curve in graph 7.1 (a) is perfectly elastic (horizontal).
The firm will supply any amount of output at Rs.4 per unit. If the price falls below Rs.4
(say Rs.3.5) per unit, then the quantity supplied falls to zero. The price is too low to
sustain any producer in the market. Elasticity of supply is infinite.
(ii) Perfect inelastic supply. A perfectly inelastic supply represents a situation in which
sellers sell a fixed quantity of good for sale. The price increase from Rs.4 to Rs. 8 has not
fed to increase in quantity supplied. The quantity supplied is totally unresponsiveness to
changes in price. The supply curve is vertical = Es = 0.
(iii) Unit elastic supply. In case of unit elasticity of supply, the percentage change in
price brings about the same percentage change in quantity supplied of a good. In figure
7.1(c) doubling the price of a good from Rs.4 to Rs.8 per unit doubles the quantity
supplied .from 40 to 80 units Es = 1.

(iv) Elastic supply. When the percentage increase in the price of a good brings about, a
larger percentage increase in the supply of a good, the supply of a good said to elastic
Fig. 7.1(d) shows a 25% increase in the price of a good (Rs.4 to Rs.5), causes a 100%
increases in the supply of goods (from 40 to 80 units per day) (Es >1). The supply curve
has a flatter slope.
 49

(v) Inelastic supply. When the percentage change in price of a good causes a smaller
percentage in quantity supplied, the supply is said to be inelastic (Es < 1). In fig. there is
an 100% increase in the price of good (from Rs.4 to Rs.8) but it
brings a 25% increase in-the quantity supplied (40 to 50 units per day). The supply curve
is steeply sloped.

Note: The category of elasticity of supply at any point on the supply curve can be judged
by drawing a tangent to the point of the curve under consideration. If the tangent meets
the vertical axis, then supply is elastic at that point and its value will be between one and
infinity.. In case it touches, the horizontal axis, then the supply of the good is inelastic at
that point and its value will lie between zero and one. Any straight line supply curve
through the origin will have unitary elastic.

Determinants of Price Elasticity of Supply:

The main factors which determine the degree of price elasticity of supply are as under:
(i) Time period. Time is the most significant factor which affects the elasticity of supply.
If the price of a commodity rises and the producers have enough time to make adjustment
in the level of output, the elasticity of supply will be more elastic. If the time period is
short and the supply cannot be expanded after a price increase, the supply is relatively
inelastic.
(ii) Ability to store output. The goods which can be safety stored have relatively elastic
supply over the goods which are perishable and do not have storage facilities.
 50

(iii) Factor mobility. If the factors of production can be easily moved from one use to
another, it will affect elasticity of supply. The higher the mobility of factors, the greater is
the elasticity of supply of the good and vice versa.
(iv) Changes in marginal cost of production. If with the expansion of output, marginal
cost increases and marginal return declines, the price elasticity of supply will be less
elastic to that extent.
(v) Excess supply. When there is excess capacity and the producer can increase output
easily to take advantage of the rising prices, the supply is more elastic. In case the
production is already up to the maximum from the existing resources, the rising prices
will not affect supply in the short period. The supply will be more inelastic.
(vi) Availability of infrastructure facilities. If infrastructure facilities are available for
expanding output of a particular good in response to the rise in prices, the elasticity of
supply will be relatively more elastic.
(vii) Agricultural or industrial products. In agriculture, time is required to increase output
in response to rise in prices of goods. The supply of agricultural goods is fairly inelastic.
As regards the supply of manufactured consumer goods, it is comparatively easy to
increase production in a short period. Therefore, the supply of consumer goods is fairly
more elastic; In case of supply of aero planes or any other heavy machinery, the supply is
relatively inelastic as it takes time to manufacture heavy machinery.
 51

Lecture no:18
Price determination – equilibrium price and quantity – determination of market
price

PRICE DETERMINATION UNDER PERFECT COMPETITION

Having studied the demand and supply, we know that market demand curve is
the horizontal summation of the individual demand curves , and similarly the horizontal
summation of the individual supply curves become market supply curve.
The intersection of market demand curve and the market supply curve indicates
the equality of quantity demanded by the consumers and that supplied by the producers.
This equality of quantity demanded and quantity supplied is called equilibrium quantity
and the price that occurs at this balancing point is called equilibrium price where the
quantity demanded is equal to quantity supplied. When such condition prevails in the
market, the market is said to be in equilibrium, because there are neither shortages nor
surpluses of commodity.
DETERMINATION OF MARKET PRICE
Market price is determined by the equilibrium between demand and supply in
market period or very short run. This market period may be an hour, a day or a few days
or even a few weeks depending upon the nature of the product. The period being short,
stock is limited and cannot be produced to meet the increase in demand. Therefore, the
sellers have to confine to the produce available with them. Example: Perishable
commodities like fish. The nature of supply curve in a market period under the two
situations of perishable and non-perishable goods are discussed

Market Price of a Perishable Commodity

The graphical representation for the market price of Perishable Commodity like
fish is presented in Figure . The supply is limited by the available quantity on that day,
and it cannot be kept back for the next period and therefore, the whole of it must be sold
away on the same day at prevailing prices.
 52

The supply curve of fish is a vertical straight line MS, when OM is the quantity of fish
available on that day. DD is the market demand curve. With perfect competition between
buyers and sellers, an equilibrium price OP will be determined at which the quantity
demanded is equal to the available supply. That is, equilibrium price will be established
at the point where downward slopping demand curve DD intersects the vertical supply
curve MS.
Now suppose that there is a sudden increase in demand from DD to D‟D‟ with the
supply of fish remaining unchanged, the larger demand will raise the market price sharply
from OP to OP‟. On the contrary, if there is a decrease in demand from DD to D‟‟ D‟‟ the
price will fall and the quantity sold will remain the same.
Market Price of Non-Perishable and Reproducible Goods
In case of non-perishable but reproducible goods, supply curve cannot be a
vertical straight line and the seller rough out its length, because some of the goods can be
preserved or kept back from the market and carried over to the next market period. There
will then be two critical price levels. The first, if price is very high the seller will be
prepared to sell the whole stock. The second level is set by a low price at which the seller
would not sell any amount in the present market period, but will hold back the whole
stock of some better time. The price below which the seller will refuse to sell is called
the Reserve Price.
Given the two price levels, one at which the seller is prepared to sell the whole
stock and the other at which he will refuse to sell at all, the amount which he will offer
for sale will vary with price. Given his anticipations of future price and intensity of his
need for cash, etc., he will be prepared to supply more at a higher price than at a lower
one. The supply curve of a seller will, therefore, slope upward to the right. Beyond a
price at which he is prepared to sell the whole stock, the supply curve will be a vertical
straight line whatever the price.
In Figure SRFS‟ is the supply curve of the durable goods while OQ is the total
amount of the stock of the goods. Up to price OP‟, the quantity

Supplied varies with price so that at a higher price more is supplied that at a lower one.
At the price OS, nothing is sold, the whole stock being held back. Therefore, SF portion
of the supply curve slopes upwards from left to right. At price OP‟ the whole of the stock
is offered for sale, and beyond the price OP‟ the quantity supplied remains the same what
 53

ever the price. Therefore, beyond the price OP‟, the market supply curve will be
vertical straight line (FS‟). DD is the demand curve which slope downwards from left to
right. Market price comes to settle at OP, because at this price the quantity demanded is
equal to the quantity supplied. At this equilibrium price OP, OM amount from the stock
is sold , while the rest of the stock i.e., MQ (=RC) is held back from the market.
Suppose now the demand increases from DD to D‟ D‟, the price will rise to OP‟,
and the whole stock OQ will be sold. If now the demand, further increase

from D‟ D‟ to some higher level, the quantity supplied or sold will remain the some, i.e.,
equal to OQ, and only the price will rise so that, at the new equilibrium level, the quantity
demanded is equal to the available supply. If the demand decreases from DD to D‟ D‟,
the price will be fall to OP‟‟, and the amount sold will decrease to OM‟.
Since, in a perfectly competitive market, the product is homogeneous and no
buyer has any preference for a particular seller, therefore, a single uniform market price
will be established in the market. Once the market price is determined, an individual
seller in the market will take the price as given and constant. Thus, the demand curve
which is downward slopping for all sellers is for a single seller a horizontal straight line,
i.e., perfectly elastic at the level of the ruling market price.
One important conclusion that follows from the above analysis of price
determination in the market period is that costs of production do not enter into the
calculation of the seller, and therefore, have little influence on the market price.
 54

Lecture No.19

Markets – definition, essentials of market, classification of market structure –

perfect and imperfect markets

MARKET

The word market has been derived from the Latin word „marcatus‟ which means
merchandise or trade.

Definitions:

 A market is any place where the sellers of a particular good or service can meet with
the buyers of that goods and service where there is a potential for a transaction to take
place. The buyers must have something they can offer in exchange for there to be a
potential transaction.
 A market is the sphere within which price determining forces operate.
 A market is the area within which the forces of demand and supply converge to
establish a single price.
 Economists understand by the market not any particular market place in which things
are bought and sold but the whole of any region in which buyers and sellers are in
such free contact with one another that the prices of the same goods tend to equality
easily and quickly.

Essentials of a Market :

They may also be termed as the components of a market.

1. The existence of a good or commodity for transactions.

2. The existence of buyers and sellers
3. Business relationship or intercourse between buyers and sellers
4. Demarcation of area such as place, region, country or the whole world.

Market Structure : It refers to the size and design of the market. It relates to those
organizational characteristics of a market which influence the nature of competition and
pricing and affect the conduct of business firms.

Monopsony is a market structure in which there is only one buyer instead of one seller.

Oligopsony is a market structure in which there are only few buyers.

Bilateral monopoly is a market structure in which a single seller faces a single buyers
 55

Markets are classified based on the degree of competition as perfect and imperfect market

Perfect market : A market is said to be perfect when all the potential sellers and buyers
are promptly aware of the prices at which transaction take place and all the offers made
by other sellers, and buyers, and when any buyer can purchase from any seller and
conversely. Under such a condition, the price of a commodity will tend to be the same (
after allowing far cost of transport including import duties ) all over the market.

Imperfect market : A market is said to be imperfect when some buyers or sellers or both
are not aware of the offers being made by others. Different prices prevail for the same
commodity at the same time.

Comparative Characteristics of Markets

Perfect Monopolistic Oligopoly Monopoly

Competition Competition

Number & • Many ( small Many (small to • Few ( large ) One

Nature of sellers ) medium )

• Inter - depend
ent

Sellers

• Independent

Price No control Some control Considerable Absolute

control control
Some t i m e s
Nature of Homogeneous ( no Some but No substitutes

Product differentiation ) differentiation not always

Barriers to None Low Considerable Entry is

entry blocked

Profit Normal Profits in Some profits in Considerable Large Profits

Profits in SR
Potential LR SR & LR & i n SR & LR

LR

Product None or minim al Considerable Heavy Some but not

PromotIon & directed to

Advertising competition,

but to

increase sales
PERFECT COMPETITIVE MARKET

Perfect competition market is the world of price-takers. A perfectly competitive firm sells
a homogeneous product [one identical to the product sold by others in the industry]. It is
so small relative to its market that it cannot affect the market price; it simply takes the
price as given.
Perfect competition market is a market under which no buyer or seller can affect
unilaterally
Characteristics of Perfect Competition Market:

The main characteristics of perfect competition market are as follows:

01. Large Number of Buyers and sellers:

One condition of perfect competition is that there should be operating in the market a
large number of buyers and sellers. If that is so, no single seller or purchaser will be able
to influence the market price, because the output of any single firm is only a small
proportion of the total output and of the total demand.

02. Homogeneous Product:

The second condition is that the commodity produced by all firms should be standardized
or identical

03. Free Entry or Exit:

There should be no restrictions, legal or otherwise, on the firms‟ entry into, or exit from,
the industry. In this situation, all the firms will be making just normal profit. If the profit
is more than normal, new firms will enter and extra profit will be competed away; and if,
on the other hand, profit is less than normal, some firms will quit, raising the profits for
the remaining firms. But if there are restrictions on the entry of new firms, the existing
firms may continue to enjoy supernormal profit. Only when there are no restrictions on
entry or exit, the firms will earn normal profit.

04. Perfect Knowledge: Another assumption of perfect competition is that the purchasers
and sellers should be fully aware of the prices that are being offered and accepted. In case
there is ignorance among the dealers, the same price cannot rule in the market for the
same commodity. When the producers and the customers have full knowledge of the
prevailing price, nobody will offer more and none will accept less, and the same price
will rule throughout the market. The producers can sell at that price as much as they like
and the buyers also can buy as much as they like

05. Absence of Transport Costs: If the same price is to rule in a market, it is necessary
that no cost of transport has to be incurred. If the cost of transport is there, the prices must
differ to that extent in different sectors of the market.

1
06. Demand Curve of Perfect Competition Market is Completely Horizontal:

Figure-01: Demand curve looks horizontal to a perfect competitor.

The industry demand curve has inelastic demand at the market equilibrium. However, the
demand curve for the perfectly competitive firm is horizontal (i.e. completely elastic).

07. No Government Regulation: Government does not intervene in the marketing

functions.

Pure competition differs from perfect competition in the sense that it excludes the
features of Perfect mobility of resources and Perfect knowledge.

2
Lecture No.20
Characteristics of monopolistic competition, monopoly, oligopoly

Monopolistic Competition, Monopoly and Oligopoly

Chamberlin is associated with Monopolistic Competition

Characteristic features of Monopolistic Competition:
i) Large Number of firms: The number of firms operating under monopolistic
competition is sufficiently large. Moreover there is freedom of entry. There are no
quantitative restrictions or differences in market conditions. However, each firm differs
from its rivals in some qualitative respect.
ii) Close Substitutes: Under monopolistic competition firms produce very close
substitutes. Chocolates of one company may serve a similar purpose as that of some other
firm. The only difference may be of some variation in the quality of the product.
iii) Group: Firms under monopolistic competition together form a group. They cannot be
called an industry. This is because their products are somewhat dissimilar and not
homogenous as under competitive industry.
iv) Product Differentiation: Under monopolistic competition products are
differentiated. This is the outstanding feature of this form of market. Otherwise
monopolistic competition closely resembles perfect competition. The fundamental
difference between the two is that products are no more homogenous. Goods produced
are deliberately differentiated by trade name or brand name or salesmanship or quality
etc.
(v) Selling (Advertising) Cost: Selling Cost i.e., advertisement expenditure and Product
Differentiation together enable the producer to maintain some control over market
conditions and influence the shape of the demand curve. Whenever a product is
differentiated it is necessary to inform buyers; and advertisement is the only medium
through which buyers can be told about superiority of that product.

Features of Monopoly: Monopoly is another traditional form of market. It is an extreme

form, opposed to a competitive market structure. As against this, a competitive market is
one with a large number of firms or producers.

1. Monopoly is a case where there is only a single seller in the market. This, however, is a
theoretical concept.

2. Absence of substitutes: for the goods produced and sold by the monopolists. Buyers
have no other option except to purchase goods from the monopolist at whatever price he
charges. This results in a situation in which the monopolist has complete control over
market conditions. He can decide his own price and earn profits without any fear of

3
competition from his rivals. The Cross Elasticity of Demand is negligible or very low.
Yet a monopolist has certain constraints arising out of demand and technical conditions.

3. There is no distinction between the firm and industry in monopoly market situation.

4. There is complete negation of competition.

Oligopoly

The word OLIGOPOLY is derived from the Greek words „olig‟means a few and „poly‟
which means sellers.
Oligopolistic Market refers to a market characterized by the presence of a small number
of producers who often act together to control the supply of a particular good and its
market price.
It is dominated by a few large suppliers who are interdependent on each other, before
making any pricing and investment decisions. It is also explained as a market condition in
which sellers are so few that an action of any one of them will materially affect price and
have a measurable impact on competitors; in other words; since there are few participants
in this type of market, each Oligopolist is aware of the actions of the other.
OPEC is an example of Oligopoly since few countries control the production of oil, the
steel and the automobile industry in United States of America is another example.
The Key characteristics of an Oligopolistic Market are as follows: -
 It is a market dominated by a small number of participants who are able to
collectively exert control over supply and market prices.
 Few firms sell branded products which are close substitutes of each other.
 Entry barriers for the other firms are high; the barriers can be due to patents,
copyrights, government rules / regulations or ownership of scare resources.
 Firms are interdependent for decision making.
 Products can be homogenous (standardized) or heterogeneous (differentiated).
 The sellers are the price makers and not price takers, since the few sellers mutually
dominate the pricing decisions.
 The sellers can achieve supernormal profits in the long run.
 The sellers can achieve economies of scale; since for the large producers as the level
of production rises, the cost per unit of products decreases; thus ensuring higher profits.
 There is high degree of market concentration, since the four-firm concentration ratio
is often used, where the market shares of four largest firms are measured (as a
percentage) since they form the major portion of the market share.
An Oligopolist faces a downward sloping demand curve; however; the price elasticity
depends on the rival‟s reaction to change its price, investment and output.

4
 The Kinked Demand Curve Graph

 This assumes that firms seek to maximise profits

 If they increase price, then they will lose a large share of the market because they become
uncompetitive compared to other firms, therefore demand is elastic for price increases.

 If firms cut price then they would gain a big increase in Market share, however it is
unlikely that firms will allow this. Therefore other firms follow suit and cut price as well.
Therefore demand will only increase by a small amount: Demand is inelastic for a price
cut

 Therefore this suggests that prices will be rigid in Oligopoly

The below diagram suggests that a change in Marginal Cost still leads to the same price,
because of the kinked demand curve ( profit maximization occurs where MR = MC

5
Lecture No.21

National Income –concepts of national income - Gross domestic product, gross

national product, net national product, net domestic product- national income at
factor cost, personal income, disposable income.

NATIONAL INCOME

Introduction

For understanding the concept of national income, it is necessary to know how an

economy works. In any economy, its people are engaged in on productive activity or the
other, whereby they earn income and spend their income on goods and services to satisfy
their wants. The health and progress of an economy are to be judged from how much they
are able to produce arid spend i.e. Country‟s total output, income and expenditure. Those
aggregates of the economy are but different aspects of its national, income.

Circular Flow: The Wheel of the Wealth

In every economy there are households on the one hand and productive enterprises or
firms on the other. The function of house holds is to consume goods and services for the
satisfaction of their wants. Thus the household is the basic consuming unit in the
economy. The function of productive enterprises (forms) is to produce goods and services
for the satisfaction of the wants of households and thus the firm or productive enterprise
is the basic producing unit in the economy. The household here may be family unit while
producing unit (firm) may be grocery shop, factory etc. Besides, Government is another
sector which occupies an important Position. It like households, purchases goods and
services arid since it runs many public enterprises it act as, producing unit. Thus
households, firms and government are the main components of the entire economic
organization of a country which is know as an economy. Economy is the sum total of the
operations of the households, firms and government.

6
In every economy there is always a circular flow (movement) of resource services (i.e.
services of land, labour capital and enterprise) from the household to firms and the
reverse movement of goods and services from the firms to the households. This is
depicted in the diagram given below.
The inner circuit shows the real flows would take place only in barter economy where
goods and services are exchanged for goods and services. But in the modern economy
where use of money as medium of exchange is widely adopted

Households supply the resource services or factors to firms and receive in return
payments in terms of money for goods and services they want. The firms sell goods and
services for money and use the money so received to pay the households for their supply
of resource services. Thus labour gets Wages; capital gets interest land gets rent and
enterprise gets profits all in terms of money, this circular flow of money also known as
Wheel of Wealth. This flow of money is not continuously at steady level. It may contract
or expand when depression and prosperity occur, respectively in an economy. The
diagram explains circular flow of closed economy where savings and role of Government
is totally absent.

Definition of National Income

1) National Income is that part of objective income of the community, including income
derived from abroad, which can be measured in money” - Pigou.
2) National income may be defined as the money value of the flow of commodities and
services (excluding imports) reckoned at current prices less the sum of following/items,
at current prices.

Money value of diminution in stocks

Money value of goods and services used up in the course of production

Money value of goods and services used to maintain intact existing capital equipments.

Receipts from indirect taxation.

Favorable balance of trade

Net increase in the country‟s foreign indebtedness.

In short, National Income is the aggregate factor income (i.e. earning of labour and
property) which arises from the current production goods and services by the nation‟s
economy. Here nation‟s economy refers to the factors of production Labour and property,
supplied by the normal residents of the/ national territory. The national income has three
interpretations

7
1) It represents a receipts total.

2) It represents expenditure total.

3) It represents a total value of production.

These three - fold interpretation arises out of fact that, every expenditure is at the same
time a receipt and of goods and services purchased (bought) are valued at their sales
prices. Thus

Value Received = Value paid = Value of goods & services

Concepts of National Income

The important concepts of National Income are:

1. Gross Domestic Product (GDP)

2. Gross National Product (GNP)

3. Net National Product (NNP) at Market Prices

4. Net National Product (NNP) at Factor Cost or National Income

5. Personal Income

6. Disposable Income

1. Gross Domestic Product (GDP): Gross Domestic Product (GDP) is the total market
value of all final goods and services currently produced within the domestic territory of a
country in a year.

It measures the market value of annual output of goods and services currently produced.
This implies that GDP is a monetary measure. All goods and services produced in any
given year must be counted only once so as to avoid double counting. It ignores the
transactions involving intermediate goods.

2. Gross National Product (GNP): Gross National Product is the total market value of all
final goods and services produced in a year. GNP includes net factor income from abroad
whereas GDP does not. Therefore,

GNP = GDP + Net factor income from abroad.

Net factor income from abroad = factor income received by Indian nationals from abroad
– factor income paid to foreign nationals working in India.

8
3. Net National Product (NNP) at Market Price: NNP is the market value of all final
goods and services after providing for depreciation. That is, when charges for
depreciation are deducted from the GNP we get NNP at market price. Therefore, NNP =
GNP – Depreciation

Depreciation is the consumption of fixed capital or fall in the value of fixed capital due to
wear and tear.

4.Net National Product (NNP) at Factor Cost (National Income): NNP at factor cost or
National Income is the sum of wages, rent, interest and profits paid to factors for their
contribution to the production of goods and services in a year. It may be noted that:

NNP at Factor Cost = NNP at Market Price – Indirect Taxes + Subsidies.

5. Personal Income: Personal income is the sum of all incomes actually received by all
individuals or households during a given year. In National Income there are some
income, which is earned but not actually received by households such as Social Security
contributions, corporate income taxes and undistributed profits. On the other hand there
are income (transfer payment), which is received but not currently earned such as old age
pensions, unemployment allowances, relief payments, etc. Thus, in moving from national
income to personal income, the incomes earned but not received should be deducted and
add incomes received but not currently earned. Therefore,

Personal Income = National Income – Social Security contributions – corporate income

taxes – undistributed corporate profits + transfer payments.

Disposable Income: It is the amount of money available with the private individuals to
spend. From personal income if we deduct personal taxes like income taxes, personal
property taxes etc. what remains is called disposable income. Thus,

Disposable Income = Personal income – personal taxes.

Disposable Income can either be consumed or saved. Therefore,

Disposable Income = consumption + saving.

9
Lecture No.22

Methods of measurement of NI – product method, income method and expenditure

method

MEASUREMENT OF NATIONAL INCOME

Production generate incomes which are again spent on goods and services produced.
Therefore, national income can be measured by three methods:

1. Output or Production method

2. Income method, and

3. Expenditure method.

Let us discuss these methods in detail.

1. Output or Production Method: This method is also called the value-added

method. This method approaches national income from the output side. Under this
method, the economy is divided into different sectors such as agriculture, fishing, mining,
construction, manufacturing, trade and commerce, transport, communication and other
services. Then, the gross product is found out by adding up the net values of all the
production that has taken place in these sectors during a given year.

In order to arrive at the net value of production of a given industry, intermediate goods
purchased by the producers of this industry are deducted from the gross value of
production of that industry. The aggregate or net values of production of all the industry
and sectors of the economy plus the net factor income from abroad will give us the GNP.
If we deduct depreciation from the GNP we get NNP at market price. NNP at market
price – indirect taxes + subsidies will give us NNP at factor cost or National Income.

The output method can be used where there exists a census of production for the year.
The advantage of this method is that it reveals the contributions and relative importance
and of the different sectors of the economy.

2. Income Method: This method approaches national income from the distribution side.
According to this method, national income is obtained by summing up of the incomes of
all individuals in the country. Thus, national income is calculated by adding up the rent of
land, wages and salaries of employees, interest on capital, profits of entrepreneurs and
income of self-employed people.

This method of estimating national income has the great advantage of indicating the
distribution of national income among different income groups such as landlords,
capitalists, workers, etc.

3. Expenditure Method: This method arrives at national income by adding up all the
expenditure made on goods and services during a year. Thus, the national income is
10
found by adding up the following types of expenditure by households, private business
enterprises and the government: -

(a) Expenditure on consumer goods and services by individuals and households denoted
by C. This is called personal consumption expenditure denoted by C.

(b) Expenditure by private business enterprises on capital goods and on making additions
to inventories or stocks in a year. This is called gross domestic private investment
denoted by I.

(c) Government‟s expenditure on goods and services i.e. government purchases denoted
by G.

(d) Expenditure made by foreigners on goods and services of the national economy over
and above what this economy spends on the output of the foreign countries i.e. exports –
imports denoted by

(X – M). Thus,

GDP = C + I + G + (X – M).

Difficulties in the Measurement of National Income

1. Prevalence of non monetized transactions in agriculture still lot of product does

not come into the market, It consumed at farm level.
2. Illiteracy - Due to illiteracy it is not possible to keep regular account.
3. Occupational specialization is incomplete.
4. Lack of adequate statistical data.
5. Estimation of value of inventories i.e. raw material is very difficult.
6. Estimation of depreciation on capital goods and avoiding double counting is too
much difficult.

Use of National Income data: It is very useful to measure economic welfare, determine
standard of living of a community, similarly to assess economic development and for
comparison purpose the national income is must.

11
Lecture No.23
Public Finance – meaning, Role and importance of Public finance -
functions of the government – Differences between public finance and private
finance

PUBLIC FINANCE

Every Government has to perform different functions and for this purpose it requires
funds. These funds however are contributed by the every citizen of the country. The
contribution may be less or more but it is necessary. Thus Public Finance deals with
“Why Government takes money how it gets money and where it spends money?”

Distinction between Public and Private Finance:

Individual and states are similar in that they

1. Both require resources

2. Both have to maximum results from their resources.
3. Both attempts to get the best out of all items of expenditure.

There are, however, some important differences between private and public finance:
They are

Public Finance Private Finance

State‟s proposed expenditure determines its

1 Income determines its expenditure
income.

A public authority can vary the amount of An individual can not change his income
2
its income and expenditure within limits and expenses easily.

A state is always repay its funds to people After meeting the needs, individual
3
in services and does not save the funds. prefers for saving the income.

For individual there is no fixed period

4 State budgets are generally for one year of time. The income expenditure is
continuous.

5 The state budget is public It is kept a secret.

State can issue paper Currency to meet its

6 It is not possible for individual
Expenditure.

Importance of Public Finance

Every body realizes necessity of money. The importance of money is too much not only
for individual but for state (Government) also. The state has to perform number of
12
functions for which money (funds) is required. In developing countries like India,
Government is performing many important functions like education, industrial and
agricultural developments but lack of funds is one of the constraints. For beginning of
any function funds (finance) is must and in view of this the public finance nowadays has
vital importance. Its importance can be easily understood from the functions of the
Government. They are
1) Allocative Function: It refers to the process by which total resource use is divided
between private and social goods by which the mix of social goods is chosen, this is done
by the budgetary policy.
2) Distributive function: The budgetary policy also affects the distribution of income in
the community. The tax and expenditure measures are adopted to modify the existing
distribution with a view to reducing economic inequalities.
3) Stabilization function: The budgetary policy can also be used to maintain a high level
employments reasonable degree of price level stability, an appropriate rate of economic
growth and stability in the balance of payment.

Apart from these, public finance is important because it is an effective instrument of state
control over the economy. The study of public finance is especially important for the
under developed countries as management of state finances is essential to break the
vicious circle of poverty.

13
Lecture No.24

Public revenue – meaning, major and minor sources of public revenue

PUBLIC REVENUE
The expenditure of the Government has to be met from the revenue that is accrued by the
Government from various sources.
Sources of revenue
The functions of Government are very important and extensive which require heavy
expenditure. Government has to undertake important functions like defense (internal and
external), Social welfare, education, health, industry, agriculture. For all of these a huge
amount of funds is required.

The major sources of revenue for the Government are in the form of Taxes and Prices
while the minor sources are Fees, Special assessment, Escheat, Grants, gifts donations,
tributes and indemnities.
Major Sources:

1. Tax: A compulsory contribution imposed on the public. (Details discussed in the next
chapter)
2. Price: A price is the payment for a service of business character, for example, charges
for travelling on railways. The price is different from fee. The fee is for public interest.
You can escape a price by not purchasing the said service / commodity.
Minor Sources:

1. Fee: It is also a compulsory payment but made only by those who obtain a definite
service in return from the government. The fee covers the part of the cost of service
provided to the consumer / client. The licence fee, however, is much more than the cost
of service and there is not much of a positive service in return.
2. Special Assessment: This is a compulsory contribution, levied in proportion to the
special benefit derived, to defray the cost of a specific improvement to property
undertaken in the public interest. Suppose the government build a road or bridge or
provide mass transport system or makes suitable sewerage and water supply
arrangements, all the property will appreciate in value. The State has the right to levy a
special tax on the owners of land or property known as „special assessment‟.
3. Rates: They are levied by the local bodies, municipalities and district boards for local
purposes. They are generally levied on immovable property of the residents, but not
necessarily for any special improvements effected or special benefits conferred.
4. Escheat: It refers to the property that is claimed by Government of the deceased
without successors or will.
5. Tributes and indemnities: Tributes are paid by the conquered countries. Indemnities
are paid for any damage done to the country by way of war of aggression.

14
6. Grants, gifts and donations: Grants are the funds provided by the apex organizations
to its sub-ordinate organizations. For Example: ICAR grants to SAU‟s. Gifts are those
funds granted by the foreign countries during natural calamities etc., Donations are for
specific purposes like educational buidings etc., funded by individuals.

15
 SOURCES OF PUBLIC REVENUE

PUBLIC REVENUE

MAJOR SOURCES MINOR SOURCES

Tax Price Fee Special Rates Escheat Tributes Grants

Assessment Indemnities Gifts

Donation

1
Lecture No.25

Tax – meaning, classification – direct and indirect taxes, methods of taxation -

proportional, progressive, regressive and degressive taxation, Agril taxation – other
types of taxation, VAT.

Seligman defines tax as a compulsory contribution from a person to the state to

defray the expenses incurred in the common interest of all, without reference to special
benefit conferred.

METHODS OF TAXATION

1. Proportional & Progressive Tax: A proportional tax is one in which, whatever the
size of income, same rate or percentage of tax is charged.

On the contrary, progressive tax refers to the tax system in which the rate of tax increases
with the increase in income. It is based on the principle „higher the income, higher the
tax‟.

2. Regressive & Degressive Tax: A tax is said to be regressive when its burden falls
more heavily on low-income earners / poor than the high-income earners / rich. It is
opposite of progressive tax.

A tax is called degressive when the higher income does not make a due sacrifice, or when
the burden imposed on them is relatively less. This tax may be progressive up to a
certain limit beyond which a uniform rate is charged.

CLASSIFICATION OF TAXES:

Specific Tax, Advolarem Tax & VAT: A specific tax is according to the weight of the
commodity. An advolarem tax is according to the value of a commodity. Value Added
Tax(VAT) is levied on businessmen on all the processes carried out by them.

Direct & Indirect Tax: Direct tax is one which is paid by the person on whom it is
charged. The examples of direct taxes are income tax, wealth tax, etc.

On the contrary, the indirect tax is paid by one person and its burden is fallen on other,
generally the consumer. The examples of indirect taxes are sales tax, central excise duty,
custom duty, recreational tax, etc.

Agricultural Income :Agriculture income is exempt under the Indian Income Tax Act.
This means that income earned from agricultural operations is not taxed. The reason for
exemption of agriculture income from Central Taxation is that the Constitution gives
exclusive power to make laws with respect to taxes on agricultural income to the State
Legislature. However while computing tax on non-agricultural income agricultural
income is also taken into consideration.

1
As per Income Tax Act income earned from any of the under given four sources meant
Agricultural Income;
(i) Any rent received from land which is used for agricultural purpose:
(ii) Any income derived from such land by agricultural operations including processing
of agricultural produce, raised or received as rent in kind so as to render it fit for the
market, or sale of such produce.
(iii)Income attributable to a farm house
(iv) Income earned from carrying nursery operations is also considered as agricultural
income and hence exempt from income tax.

2
Lecture No.26

Canons of Taxation – Adam Smith„s canons of taxation – equality, economy,

certainity and convenience – other canons of taxation

CANONS OF TAXATION

Adam Smith‟s was a pioneer in the field of taxation and made notable contributions
popularly known as Canons of taxation.
1. Canon of Equality: means the principle of justice, i.e., in accordance to „ability to
pay‟. It means the equality of sacrifice. The amount of the tax paid is to be in proportion
to the respective abilities of the taxpayers. For example: Progressive taxation.
2. Canon of Sacrifice: The principle states that tax amount should be in proportion to the
respective abilities of the tax payer. The abilities represents the various income levels.
3. Canon of Certainty: prescribes that the tax which each individual is bound to pay
ought to be certain, and not arbitrary. The time of payment, the manner of payment, the
quantity to be paid, ought to be clear and simple to the taxpayer. Uncertainty in taxation
encourages insolence or corruption.
4. Canon of Convenience: The tax is to be levied at the time or the manner in which it is
most convenient for the taxpayers to pay their dues. For example, Cess has to be
collected from the farmers after the principal crops are harvested and marketed.
5. Canon of Economy: It means that the tax will be economical only when the cost of
collection is small. Huge and unnecessary administrative costs will make the tax
collection an extravagant task.
Other Canons of Taxation

1. Fiscal Adequacy or Productivity: The State should meet its expenditure from the
revenue raised from the people in the form of taxes. However, the government should not
hamper the productive capacity by taxing the community heavily.
2. Canon of Elasticity: The revenue should increase to cater the needs of the State. This
is to ensure the government adequate financial resources to meet an emergency situation.
3. Canon of Flexibility: It means that there should be no rigidity in the tax system so that
it can be quickly adjusted to new conditions.
4. Canon of Simplicity: This aims at tax which is simple, plain and intelligible to the
common understanding. This canon is essential if corruption or oppression is to be
avoided.
5. Canon of Diversity: The tax should be a wise admixture of direct and indirect taxes.
On the other hand, too great multiplicity will be bad and uneconomical.

3
6. Social and Economic Objectives: This states that the social and economic objectives
of a standard tax system viz., (i) Reduction of inequalities in the distribution of income
and wealth, (ii) Accelerating economic growth and (iii) Price stability

7. Canon of Neutrality: Taxation system should be used to control threats of economic

instability and stagnation.

4
Lecture No.27 &28

Public expenditure – meaning, need for public expenditure. principles of public expenditure

PUBLIC EXPENDITURE

Public Expenditure aids in employment creation through public works programme thus
raising the level of income and employment. It helps in toning down the inequalities of
income and wealth distribution in the country.

Need for Public Expenditure

1. Social and Economic Overheads: Economic overheads like roads and railways,
irrigation and power projects are essential for speeding-up economic development.
Social overheads like hospitals, schools, and colleges and technical institutions are
essential. Public expenditure has to build up the economic and social overheads.

2. Balanced Regional Growth: Special attention has to be paid to the development of

backward areas and under-developed regions to facilitate balanced regional growth. This
requires huge amounts for which reliance has to be placed on public expenditure.

3. Development of Agriculture and Industry: Economic development is regarded

synonymous with industrial development but agricultural development provides the base
and has to be given the priority. Government has to incur lot of expenditure in the
agricultural sector, For example: Irrigation and power, seed farms, fertilisers factories,
warehouses, etc., and in the industrial sector by setting up public enterprises like the steel
plants, heavy electrical, heavy engineering, machine-making factories, etc. All these
enterprises are calculated to promote economic development.

4. Exploitation and Development of Mineral Resources: Minerals provide a base for

further economic development. The government has to undertake schemes of exploration
and development of essential minerals, For example:, gas, petroleum, coal, etc. Public
expenditure has to play its pivotal role in the exploration and development of mineral
resources.

5. Subsidies and Grants to Provinces, Local Governments, and Exporters: The central
government gives grants to State governments which inturn directs to local governments
to induce them to incur some desirable expenditure. Subsidies have also to be given to
encourage the production of certain goods especially for export to earn much needed
foreign exchange.

5
PRINCIPLES OF PUBLIC EXPENDITURE

The Principles of Public Expenditure are

1. Principle of maximum social benefits

2. Principle of economy, i.e., wasteful expenditure should be avoided
3. Principle of sanction, i.e., authorized expenditure
4. Principle of balanced budget
5. Canon of elasticity, i.e., fairly flexible
6. Avoidance of unhealthy effects on production and distribution

1. Principle of Maximum Social Benefits: According to Dalton, the best system of public
expenditure is that which secures the maximum social advantage from the operations
which it conducts.

2. Principle of Economy: It means that extravagance and waste of all types should be
avoided. Public expenditure has great potentiality for public good but it may also prove
injurious and wasteful. If the revenue collected from the taxpayer is heedlessly spent, it
would be obviously uneconomical.

To satisfy the principle of economy, it will be necessary to avoid all duplication of

expenditure and overlapping of authorities. Further, public expenditure should not
adversely affect saving. In case government activity damaged the individual‟s will or
power to save, it would be repugnant to the canon of economy.

3. Principle of Sanction: Another important principle of public expenditure is that before

it is actually incurred, it should be sanctioned by a competent authority. Unauthorised
spending is bound to lead to extravagance and over-spending. It also means that the
amount must be spent on the purpose for which it was sanctioned.

4. Principle of Balanced Budget: Every government must try to keep its budgets well
balanced. There should be neither ever-recurring surpluses nor deficits in the budgets.
The government, therefore, must try to live within its own means.

5. Principle of Elasticity: Another same principle of public expenditure is that it should

be fairly elastic. It should be possible for public authorities to vary the expenditure
according to the needs. A fair degree of elasticity is essential if financial breakdown is to
be avoided.

6. Avoidance of Unhealthy Effects on Production or Distribution: It is also necessary to

see that public expenditure exercises a healthy influence both on production and
6
distribution of wealth in the community. It should stimulate productive activity so that
the volume of production in the country increases and it may be possible to raise the
standard of living. The wealth should be fairly distributed.

7
Lecture No. 29 & 30
Inflation – meaning, definition, types of inflation - demand pull and cost push
inflation- comprehensive and sporadic inflation – suppressed and repressed
inflation – creeping, walking, running and galloping inflation – mark up inflation
Related concepts of inflation, Rate of inflation

INFLATION

Inflation indicates the rise in price of a basket of commodities on a point-to-point

basis. It basically suggests an increase in the cost of living over a period of time, For
example: 10 essential commodities on 1 st January 2009 for Rs. 100; and the same set of
10 commodities costs Rs. 105 on January 1, 2010; the difference in the price is the
inflation rate, that is 5 percent. It means that prices are rising at 5 percent per annum.
“Too much money chasing too few commodities” is termed as Inflation.
Inflation may be defined as a persistent and appreciable rise in the general price level.
Inflation is statistically measured in terms of percentage increase in the price index over a
period of time usually a year or a month.

Related concepts of inflation

1. Deflation : A general decline in prices, often caused by a reduction in the supply of

money or credit. Deflation can be caused also by a decrease in government, personal or
investment spending. The opposite of inflation, deflation has the side effect of increased
unemployment since there is a lower level of demand in the economy, which can lead to
an economic depression.
2. Disinflation: A slowing in the rate of price inflation. Disinflation is used to describe
instances when the inflation rate has reduced marginally over the short term. Although it
is used to describe periods of slowing inflation, disinflation should not be confused with
deflation.
3. Stagflation : A condition of slow economic growth and relatively high
unemployment - a time of stagnation - accompanied by a rise in prices, or inflation.
4. Reflation : A fiscal or monetary policy, designed to expand a country's output and
curb the effects of deflation. Reflation policies can include reducing taxes, changing the
money supply and lowering interest rates.

Types/ Classification of Inflation

There are several types of inflation in the economy which are classified on different
basis. Some of the important types of inflation are discussed below.

8
1. Creeping Inflation: When the rise in prices is very slow (less than 3% per annum) like
that of a snail or creeper, it is called creeping inflation. Such an increase in prices is
regarded safe and essential for economic growth.
2. Walking or Trotting Inflation: When prices rise moderately and the annual inflation
rate is a single digit (3% - 10%), it is called walking or trotting inflation. Inflation at
this rate is a warning signal for the government to control it before it turns into
running inflation.
3. Running Inflation: When prices rise rapidly like the running of a horse at a rate of
speed of 10% - 20% per annum, it is called running inflation. Its control requires
strong monetary and fiscal measures, otherwise it leads to hyperinflation.
4. Galloping or Hyperinflation: When prices rises between 20% to 100% per annum or
even more, it is called galloping or hyperinflation. Such a situation brings a total
collapse of the monetary system because of the continuous fall in the purchasing
power of money.
5. Open inflation: In open inflation, free market mechanism in permitted to fulfill is
historic function of rationing the short supply of goods and distribute them according
to consumer‟s ability to pay.
6. Repressed inflation : When the government interrupts a price rise, there is repressed
or suppressed inflation. Thus, suppressed inflation refers to those conditions in which
price increase are prevented at the present time though adoption of certain measures
like price control and rationing by the government, but they rise in future on the
removal of such controls and rationing.
7. Mark-up Inflation: This type of inflation resulted from the peculiar method of pricing
adopted by the big business organizations. According to this method, the big business
organizations calculate their production costs first and then add to these costs a
certain mark-up to yield the targeted rate of profit.
8. Comprehensive inflation : When prices of every commodity throughout the economy
rise, it is called economy-wide or comprehensive inflation. It is a normal inflationary
phenomenon and refers to the rising prices of the general price level.
9. Sporadic inflation : This is a kind of sectional inflation; it consists of cases in which
the averages of a group of prices rise because of increase in individual prices due to
abnormal shortage of specific goods. When the supply of some goods becomes
inelastic, at least temporarily, due to the physical or structural constraints, the
sporadic inflation has its way.
10. Profit induced Inflation: During inflation, the entrepreneur class may tend to expect
an upward shifting of the marginal efficiency of capital (MEC); hence, entrepreneurs
are induced to invest more even by borrowing at higher interest rates. Eventually,
investment exceeds savings and economy tends to reach a higher level of money
income equilibrium. If economy is operating at full employment level or if there are
bottlenecks of market imperfections, real output will not rise proportionately, so the
imbalance between money income and real income is corrected through rising prices.
9
 11. Demand-pull Inflation: At the full-employment output, aggregate demand may be
greater than aggregate supply, an inflationary gap exists at full-employment level
with the price level bid up.
12. Cost-push Inflation: It is caused by an autonomous rise in money wages or other input
prices. If producers response by raising prices, it becomes a wage-price spiral.
13. Demand-shift Inflation: Aggregate demand often changes faster than the change on
resource allocation. Whenever demand changes, the changes in output may not catch
up with the change in demand, the excess demand may lead to inflation, at least in the
short run.
Measurement of Inflation

Inflation in India is calculated considering various price index tools.

A price index is a normalized average (typically a weighted average) of prices for a given
class of goods or services in a given region, during a given interval of time.

Some notable price indices include Consumer price index, wholesale price index Producer
price index and GDP deflator.

Rate of inflation: It is defined as the rate of change of the price level as measured by the
Consumer price index

Rate of inflation in tth period = Price level (tth year) –Price level (t - 1th year) X 100

Price level (t - 1th year)

Consumer Price Index (CPI)

Consumer Price Index measures the cost of a fixed basket of products and services. It is a
weighted average measure of changes in price of products or services within the basket.
The consumer price index is also known as cost-of-living index.
The consumer price basket includes transportation, food and medical care.
Large rises in CPI in a short time typically denotes a period of inflation.
C P I (Cost of the bundle in a given period /Cost of the bundle in the base year ) X 100

Wholesale Price Index (WPI) or Producer Price Index (PPI)

Wholesale price is the price of representative basket of wholesale goods.
Wholesale price index concentrates on price of goods that are transported within corporates
rather than consumers. The changes in WPI indicate the price changes in industry which
will in turn represent the changes in supply and demand.

10
Let‟s calculate the WPI for the year 2009 for a particular commodity. Let‟s assume that
price of a kilogram of wheat in 1993 is Rs 15.00 and in 2009 it is Rs 18.00. The WPI of
wheat for the year 2006 is
(Price of Wheat in 2009 – Price of Wheat in 1993)/ Price of Wheat in 1993 x 100
i.e. ((18 – 15)/15) x 100 = 20.
Since WPI for the base year is assumed to be 100, WPI for 2009 will be 100+20 = 120.
Calculation of Inflation from WPI
The WPI values at two time zones are considered , say, beginning and end of year, the
inflation rate of the year can be calculated as
(WPI of end of year – WPI of beginning of year)/WPI of beginning of year x 100.

The GDP or GNP Deflator

It is an index of the prices of all final goods and services constituted the GDP or GNP.

GDP Deflator = ( Nominal GDP / Real GDP ) X 100

Food inflation
The food price inflation in the country can be attributed to low growth in food grain
production, low competition and poor integration of supply over time and space. The
remedial measures therefore include increase in domestic production and imports, and
promote competition in food markets.

11
Lecture No.31 &32

Causes of inflation – Remedial measures – monetary – fiscal measures.

Causes of Inflation – Remedial measures

Broadly speaking inflation arises when the aggregate demand exceeds the aggregate
supply of goods and services. The factors which lead to increase in demand and the
shortage of supply are discussed.

Factors Causing Increase in Demand:

1. Increase in Money Supply: Inflation is caused by an increase in the supply of money

which leads to increase in aggregate demand. The higher the growth rate of nominal
money supply, the higher is the rate of inflation.
2. Increase in Disposable Income: When the disposable income of the people increases,
it raises their demand for goods and services. Disposable income may increase with
the rise in national income or reduction in taxes or reduction in the saving of the
people.
3. Increase in Public Expenditure: In modern world government activities have been
expanding which resulted in increase government expenditure. This raised the
aggregate demand for goods and services, thereby causing inflation.
4. Increase in Consumer Spending: The demand for goods and services also increases
when consumer spending increases due to conspicuous consumption or demonstration
effect.
5. Cheap Monetary Policy: Cheap monetary policy or the policy of credit expansion also
leads to increase in the money supply which raises the demand for goods and services
in the economy thereby leading to inflation. This is also known as credit-induced
inflation.
6. Deficit Financing: In order to meet it‟s mounting expenses, the government resorts to
deficit financing by borrowing from the public and even by printing more notes. This
raises aggregate demand in relation to aggregate supply, thereby leading to
inflationary rise in prices.
7. Increase in Exports: When the demand for domestically produced goods increases in
foreign countries, this raises the earnings of industries producing export commodities.
These, in turn, create more demand for goods and services within the economy.
Apart from the above factors, expansion of the private sector, existence of black
money and the repayment of public debt by the government also increases the
aggregate demand for goods and services in the economy.

Factors Causing Shortage of Supply: Following are the factors which result in a reduction
in the supply of goods and services:

12
1. Shortage of factors of production: When there is shortage of factors of production like
labour, capital, raw materials, etc. there is bound to be reduction in the production of
goods and services.
2. Industrial Disputes: In countries where trade unions are powerful, they resort to
strikes and lock-outs which resulted in a fall in industrial production thereby reducing
the supply of goods.
3. Natural Calamities: Natural calamities like droughts, floods, etc. adversely affects the
supplies of agricultural products. This creates shortage of food products and raw
materials, thereby helping inflationary pressures.
4. Artificial Scarcities: Artificial scarcities are created by hoarders and speculators who
indulge in black marketing. Thus, they are instrumental in reducing supplies of goods
and raising their prices.
5. Increase in Exports: When the country produces more goods for exports than for
domestic consumption, this creates shortages of goods in the domestic market. This
leads to inflation in the economy.
6. Lop-sided production: If the stress is on the production of comforts, luxuries, or basic
products to the neglect of essential consumer goods in the country this creates
shortages of consumer goods. This again causes inflation.
7. Law of Diminishing Returns: If industries in the country are using old machine and
outmoded methods of production, the law of diminishing returns operates. This raises
cost per unit of production, thereby raising the prices of products.
8. International Factors: In modern times, inflation is a worldwide phenomenon. When
prices rise in major industrial countries, their effects spread to almost all countries
with which they have trade relations. Often the rise in price of a basic raw material
like petrol in the international market leads to rise in the price of all related
commodities in a country.
Measures to control Inflation

Inflation is caused by the failure of aggregate supply to equal the increase in aggregate
demand. The various measures to control inflation are:

Monetary Measures

(a) Credit Control: The central bank could adopt a number of methods to control the
quantity and quality of credit to reduce the supply of money. For this purpose, it raises
the bank rates, sells securities in the open market, raises reserve ratio, and adopts a
number of selective credit control measures, such as raising margin requirements and
regulating consumer credit.

(b) Demonetisation of Currency: Another monetary measure is to demonetise currency of

higher denominations. Such a measure is usually adopted when there is abundance of
black money in the country.

13
(c) Issue of New Currency: The most extreme monetary measure is the issue of new
currency in place of the old currency. Under this system, one new note is exchanged for a
number of the old currency. Such a measure is adopted when there is an excessive issue
of notes and there is hyperinflation in the economy.

Fiscal Measures

(a) Reduction in Unnecessary Expenditure: The government should reduce unnecessary

expenditure on non-development activities in order to curb inflation.

(b) Increase Taxes: To cut personal consumption expenditure, the rates of personal,
corporate and commodity taxes should be raised and even new taxes should be levied, but
the rates of taxes should not be too high as to discourage saving, investment and
production.

(c) Increase in Savings: Another measure is to increase savings on the part of the people
so that their disposable income and purchasing power would be reduced. For this the
government should encourage savings by giving various incentives.

(d) Surplus Budgets: An important measure is to adopt anti-inflationary budgetary policy.

For this purpose, the government should give up deficit financing and instead have
surplus budgets. It means collecting more in revenues and spending less.

(e) Public Debt: In addition, the government should stop repayment of public debt and
postpone it to some future date till inflationary pressures are controlled. Instead, the
government should borrow more to reduce money supply with the public.

Other measures to control inflation generally aims at increasing aggregate supply and
reducing aggregate demand directly. These are :-

(a) Increase production.

(b) Rational Wage Policy:

(c) Price Control: Price control and rationing is another measure of direct control to check
inflation. Price control means fixing an upper limit for the prices of essential consumer
goods.

(d) Rationing:

(e). Enhance imports

14
 Reference Books:

1. Dewett, K.K. and Chand, A.1979 Modern Economic Theory S.Chand and Co.,
New Delhi
2. Dewett, K.K. and Varma, J.D. 1986 Elementary Economics S.Chand and Co.,
New Delhi.
3. Jhingan, M.L.1990 Advanced Economic Theory Vikas Publishing House, New
Delhi
4. Subba Reddy, S, Raghu Ram, P., Sastry, T.V.N. and Bhavani Devi, I. 2009
Agricultural Economics Oxford & IBH Publishing Co., Pvt. Ltd., New
Delhi

15
 Lecture notes

Course No: AECO 342

Course Title: AGRIBUSINESS MANAGEMENT
No. of credits: 2(1+1)

Compiled by
Dr. R.Vijaya Kumari
Assoc. Professor
Dept. of Agricultural Economics
College of Agriculture
Rajendranagar

&

Dr G Raghunadha Reddy
Assistant Professor
Dept. of Agricultural Economics
Agricultural College
Bapatla – 522 101
Lecture 1

Agribusiness – Meaning - Definition – Structure of Agribusiness (Input sector, Farm

sector and Product sector) – Importance of Agribusiness in Indian Economy.

AGRIBUSINESS:
Agri-business as a concept was born in Harvard University in 1957 with the publication of a
book “A concept of Agri-business”, written by John David and A. Gold Berg. It was introduced in
Philippines in early 1966, when the University of the Philippines offered an Agri-business
Management (ABM) programme at the under-graduate level. In 1969, the first Advanced Agri-
business Management seminar was held in Manila.

Definition of Agri-business:

“Agri-business is the sum total of all operations involved in the manufacture and
distribution of farm supplies, production activities on the farm, storage, processing and
distribution of farm commodities and items made from them” (John David and Gold Berg)

Agri-business involves three sectors:

1. Input sector: It deals with the supply of inputs required by the farmers for raising crops,
livestock and other allied enterprises. These include seeds, fertilizers, chemicals, machinery
and fuel.
2. Farm sector: It aims at producing crops, livestock and other products.
3. Product sector: It deals with various aspects like storage, processing and marketing the
finished products so as to meet the dynamic needs of consumers.
Therefore, Agribusiness is sum total of all operations or activities involved in the business of
production and marketing of farm supplies and farm products for achieving the targeted objectives.

Importance of Agri-business:
1. It deals with agricultural sector and also with the portion of industrial sector, which is the major
source of farm inputs like fertilizers, pesticides, machines, processing and post harvest
technologies.
2. It suggests and directs the government and private sectors for development of sub sectors.
3. It contributes a good part of the national economy.

Dimensions of Agri-business:
1. It deals with different components of both agricultural and industrial sector, their inter-
dependence and influence of one sector on other.
2. It deals with decision making process of farm either private or government in relation to
production and selling aspects.
3. It deals with strengths and weaknesses of a project and thereby their viability in competing
enterprises.
4. Agri-business is always market oriented.
5. Structure of Agri-business is generally vertical and it comprises the following
a. Govt. policies and programmes regarding raising of crops or taking enterprises etc.,
b. Research and extension programmes of the Govt.
c. Farm supplies or inputs
d. Agricultural production
e. Processing
f. Marketing of agricultural products

Scope of Agri-business:
1) Our daily requirements of food and fiber products at desired place at required form and
time come from efficient and hard working of many business personnel in input, farm and
food production and also in marketing them. The entire system in brief is called Agri-
business.
2) Agribusiness, of late, is combining the diverse commercial enterprises, using heterogeneous
combination of labour, materials, capital and technology.
3) It is a dynamic sector and continuously meets current demands of consumers in domestic and
world markets.
4) Agri-business establishment leads to strengthening of infrastructural facilities in that area,
expansion of credit, raw materials supply agencies, adoption of modern technology in
production and marketing of agricultural products.
5) Agri-business provides crucial forward and backward linkages.
(Backward linkage include supply of inputs, credit, production technologies, farm
services etc.,
A forward linkage includes storage, processing, transportation and marketing aspects.)
6) Agri-business generates potential employment opportunities.
7) It adds value to products and thereby increases the net profits.

Structure of Agri-business:

As mentioned earlier agri-business sector provides crucial backward and forward linkages. It involves
two important sectors.

1. Farm input sector: It deals with agro-based industries providing seeds, fertilizers, feed,
chemicals etc., The industries supplying machinery or equipment, implements and petroleum etc are
also important in this regard.
2. Farm product sector: It deals with production and distribution of farm commodities. Large co-
operative bodies also exist in Agri-business, but they are few in number, whereas small scaled agro-
industries are large in number. The vertical integration of a farm is very common in poultry, fruit
and vegetable farms.

(Horizontal integration: If one firm assumes the functions of other firm is called the horizontal integration
Ex: Co-operative marketing societies, Co-operative farming societies.

Vertical integration: If one firm assumes other functions which are having close relationship.
a. If one firm assumes other functions (succeeding) related to consumption function is called forward
integration.
Ex: A wholesaler firm assuming the function of a retailer.
 b. If one firm assumes the other functions (proceeding) related to the production function is called backward
integration.
Ex: A wholesaler firm assumes the functions such as assembling, processing, packing etc.,

Conglomerate integration: If one firm assumes several functions which do not have any relationship.
Ex: Hindustan Lever Ltd.)

******
Lecture 2
Agribusiness Management - The distinctive features of Agribusiness Management- The
importance of good management - Definitions of Management.

Distinctive Features of Agri-business Management:

The important distinctive features or the principle characteristics of agribusiness are
as follows:

1. Management varies from business to business depending on the kind and type of business. It
varies from basic producer to brokers, wholesalers, processors, packagers, manufacturers,
storage proprietors, transporters, retailers etc.,

2. Agri-business is very large and evolved to handle the products through various marketing
channels from producers to consumers.

3. Management varies with several million of farmers who produce hundreds of food and livestock
products

4. There is very large variation in the size of agri-business; some are very large, while many
other are one person or one family organization.

5. Most of the Agri-business units are conservative and subsistence in nature and family oriented
and deal with business that is run by family members.

6. The production of Agri-business is seasonal and depends on farm production. They deal with
vagaries of nature.

7. Agri-business is always market oriented.

8. They are by far vertically integrated, but some are horizontally integrated and many are
conglomerated.

9. There is direct impact of govt. programmes on the production and performance of Agri-
business.

 People in many countries flock to the cities, complicating the problem of food, transportation,
distribution and marketing. In the developing new nations, this marks the beginning of a shift
from subsistence farming to commercial agriculture. The commercial agriculture can not exist
with out the support of Agri-business and other industries.

 The hungry countries are usually those with the highest percentage of their people in farming.
This is because of their farmers are still close to subsistence farming. The role of agricultural
economist is to advice farmers on the commodities to be produced and the most economical
methods of combining resources so as to maximize profits from the farm.
 MANAGEMENT
Definitions:

 Management is the administration of business concerns of public undertaking.

 It is decision making process through which purposes and objectives of business firms or
organizations or human groups are determined, clarified and effectuated.
 MANAGEMENT is the whole activities by means of which the business units direct their desired
actions towards achieving their set goals.
 It is accomplishment of desired objectives through establishing an environment favourable to
performance by people operating in organized groups.
 Management is unifying and coordinating action, which combines different activities of
individual personnel into meaningful and purposeful group endeavour.

Hence, management in brief is the efficient use of men, material and resources towards
achieving specific objectives.

In order to achieve the desired objectives of an organisation through group action,

“MANAGEMENT” is a must to direct, coordinate and integrate the activities and affairs of the
organisation.

Manager: Manager is defined as a person, who provides the organization with leadership and who
acts as a catalyst for change. Good managers are most effective and permit desirable changes.
Ordinarily there are the two main functions of each manager: Decision Making and Implementation.

Elements of good management:

1. There are two dimensions of it. Human dimension: It is related to skill and ability of people.
Technical dimension: It is related to intellectual capacity of people thereby efficient execution
of activities. Among these two, human dimension is very important.
2. Management is an art but not science. But every manager should use the Management principles,
knowledge, skill and past experience as guidance to successfully operate the firm.
3. Good management is the key to success of firm
4. Successful managers stimulate highest potential returns from the given resources by recognizing
the optimality of input use, enterprise combination and by minimizing the risk through plans and
programmes.

Concepts of Management

1. Some describe Management as division of the area of responsibility into finance, marketing,
production and personnel.
2. Others look at the Management as six M concepts. These are money, market, materials,
machinery, methods and manpower. Here the management is conceptualized as effective use of
resources available.
3. Another concept is its division into approaches and processes. This includes industrial
engineering management, institutional or organizational management and behavioral
management.
4. Another concept is functional approach to management.

Functional Approach to management:

Recently developed concept of management, is to view management as series of functions. These

are:
1. Planning
2. Organizing
3. Directing
4. Controlling
5. Co-ordinating
6. Communicating
7. Motivating
Execution of these functions is important for success of business firm. In fact, this is the best
concept of management.
 Some management specialists have divided the functions as main and subsidiary as below:
Main functions Subsidiary functions
1. Planning 1. Communication
2. Organizing 2. Decision making
3. Staffing 3. Innovation
4. Directing
5. Controlling
6. Co-ordinating
7. Motivating

 Management is needed to convert the disorganised resources of men, machines , materials and
methods into useful and effective enterprise
 It is like a pipeline; the inputs are fed at the one end and they are processed through
management functions like planning, organising, directing and controlling and ultimately we get
the end results or outputs in the form of goods and services, productivity, satisfaction,
information etc.,
 It is the unifying and coordinating activity which combines the sections of individuals into
meaningful and purposeful endeavour.

 The purpose of management is to achieve certain organisational ends and to maintain or improve
the ability of an organisation to efficiently achieve objectives.
 The essence of management is coordination of people and functions.
 The manager directs and controls the organisation and its activities towards chosen objectives.

Management can also be represented as a wheel:

 Manager: Hub
Functions of management: 5 spokes (planning, organization, directing, controlling &
Coordinating)
Communication: Axle
Motivation: Torque or speed
Goals or Objectives: Outer frame of the wheel

 Each management function is compared to each spoke of the wheel.

 The axle on which the entire wheel of management turns is communication. With out good
communication the wheel of management begins to unstable.
 Motivation is compared to speed and torque with which the functions are done.
 Goals are tied to outer frame of the wheel.
 Poor management can hold back progress of the agri-business. It is the not the matter how
hard the manager works in the given situation, but how intelligently he solves the problem
and handles to the success of the firm is important.
SIX ELEMENTS OF DECISION MAKING PROCESS:
1. Being aware of the opportunities
2. Establishment of objectives
3. Development of premises
4. Discovering alternate courses of action
5. Budgeting
6. Establishing and the best course of action selected followed by evaluation

*****
 Lecture No. 3 & 4
Management Functions - Planning, Characteristics of sound plan – steps in planning.

PLANNING:

Planning is the process by which a manager looks to the future and discovers alternate
courses of action. Planning describes the adoption of specific programme in order to achieve desired
results. It means the selection from among alternatives of future courses of action for the enterprise
as a whole and each department with in it. It is determining goals, policies and courses of action and
it involves the processes like work scheduling, budgeting, setting up procedures, setting goals or
standards, preparing agenda and programming.

In the body of management knowledge, Planning is the MUSCLE and it allows the other
functions to move in the desired direction. Planning is not a forecast but an action oriented
statement.

Definition:
The forward thinking (looking ahead) about course of action or activity (developing alternatives)
based on full understanding of all the related factors and directed at specified objectives.

Why we need planning? Importance of planning:

1. Agri-business is a more complex activity.

2. Planning is essential for the business survival and development.
3. Planning reduces risks and safeguards against uncertainty.
4. It helps to achieve the objectives or goals and thereby move the things in a right direction.
5. It improves operational efficiency of resources
6. It is most basic function of management and a requisite to other functions.
7. Planning is an antecedent process. Planning process may be divided into different steps, such that a
highest priority will be given to immediate need and later to the less priority needs.
8. After dividing the entire planning process in to different steps, the problems are stated and
objectives are framed. These problems and objectives will serve as boundaries for thinking process
to prepare a plan of action.
9. While stating problems and objectives certain assumptions should be made depending up on
situation which may or may not be under the control of management. After stating the objectives
and assumptions, the plan of action will be prepared to accomplish objectives and goals.
10. Planning necessitates faithfulness to objectives.

Types / Levels of planning: In agri-business planning may be of several types.

1. Financial planning
2. Industrial relations planning
3. Research and development planning
4. Physical facilities planning
POLICY LEVEL MIDDLE LEVEL SUPERVISOR LEVEL PRODUCTION LEVEL
Very flexible Somewhat flexible Discretionary changes Inflexible
Long range Intermediate term Short term Immediate
 Written Written Outlined Unwritten
Analyses Reports - -
Complex Less detailed Highlighted Simple
detailed Outlined - -
Broad General Some what specific Very specific
 The above table shows the different levels at which various types of planning occur.
Planning moves from chief executive to the worker. Several notable changes occur in
between.

 At the top level plans have a tendency towards flexibility, are longer range, are usually
written, are more complex, and are broader in nature. At production (lower) they are vice
versa as shown in above table.

 All the plans would benefit from being written down because written plans tend to
consolidate thoughts, are easier to communicate, and to provide a source for further
reference.

 The executives make plans that are generally add or subtract resources from the
agribusiness, while those plans that are made at the lower levels generally relate to using
the existing resources in the most efficient manner.

Characteristics/ attributes / features of a sound (good) plan:

1. The objectives formulated in plan should be with in available resources and available
information. (Generally while setting the objectives for any enterprise the important factors to be kept in mind
are: Market share and market stand among the competitors, How fast in growth?, amount of profits?, employee’s
relation and performance, profit distribution percentage, public relations, kind of equipment needed, research for
new products etc.,)
2. The plan should be flexible i.e. it can be suitably changed according to situations.
3. The plan should increase the resource use efficiency and should reduce wastage.
4. The objectives formulated in plan should be very clear without any confusion
5. The plan should carry various alternative courses of action with in available resources.
6. The plan should employ modern techniques in production and marketing of agricultural
products.
7. Plan should stabilize the earnings of the firm.
8. plan should avoid possible risks and uncertainties
9. Plan should give consideration for efficient marketing of products.
10. Plan should provide programme for obtaining usage and repayment of credit and loan.

Six steps involved in the planning process:

1. Gathering the facts and information that have a bearing on the situation. (Assessment of
resources available with business firm)
2. Analyzing what the situation is and what problems are involved? (Analyzing the existing
operations in business firm)
3. Forecasting the future developments (Identification of defects in existing plan of business
firm)
4. Setting goals, the benchmark for achieving the objectives. (Discussions with specialists to
examine possible improvements in existing plan)
 5. Preparation of various alternative plans with in the existing level of resources under the
guidance of specialists or scientists and selecting the most suitable one.
6. Developing a means of evaluating progress and readjusting one’s sights as the planning
process moves along.

TYPES OF PLANS or HIRARCHY OF PLANS:

It is very easy to see that a major programme, such as to built and equip a new factory, is a
plan. But what is sometimes overlooked is that a number of other courses of future action are also
plans. So a plan encompasses any course of future action, we can see that plans are varied. They are
classified as Purposes or mission, objectives, strategies, policies, procedures, rules, programmes,
and budgets.

Purposes or Missions:
Every kind of organization should have a purpose of establishment or mission. Generally
many organizations may have a social purpose of producing and distribution of economic goods and
services, it may accomplish this by fulfilling a mission of producing certain lines of products. The
mission of Reliance Oil Company is to search, produce, refine, market and producing wide variety of
petroleum products.

Every kind of enterprise in the society should know who its customers are and what they
expect. It is some times thought that the mission of a business, as well as objective is to make
profit, to survive and do the task society entrusted to it. But this basic objective is accomplished by
undertaking activities, going in clear directions, achieving goals and accomplishing a mission.

Objectives or Goals:

The planning process starts with setting of objectives. Objectives or goals are the ends
towards which the activity is aimed at. Objectives are the statements developed by the top
management, board of directors, and chief executives to define what they believe to be the
organizations mission. These are the shining stars that provide light to the path of subsequent
planning and thinking. They are the targets towards which goals are aimed.

The enterprise objectives constitute the basic plan of the firm, while the departmental
objectives are attained through fulfilling the assigned goal. For example Philips Company’s objective
is to make certain profit by producing a given line of production of music systems, while the goal of
the manufacturing department might be to produce the required number of said systems.

These also the most neglected of all the planning segments. This neglect occurs because
managers either avoid the mental exercise needed to set objectives or fear the failure that might be
evidenced by an inability to reach them.

Management has multiple objectives which are inter-related. Objectives mean short term
goals in a business firm. Depending on the period of action objectives are classified as
(i) Short range objectives, which are to be fulfilled immediately with in a short period.
(ii) Long range objectives, which are also known as goals. They can be terminated at a certain
point in the long run or they can be continued depending up on the situation.

The objectives enable the managers to plan, organize, direct and control the business and
other resources in proper direction. They also help in efficient utilization of resources in a business.

Nothing is important to the long-range success of an agribusiness as written, well-thought-

out objectives. Quite simply, an organization that knows where it is going is much likely to get there
than one that depends on arriving by accident.

Well stated objectives should:

1. Record the direction the agribusiness should take.
2. Provide guides for the goals and results of each unit or person.
3. Allow appraisal of the results contributed by each unit or person.
4. Contribute to a successful overall organizational performance.
5. Indicate the philosophy and desired image of the organization.

Objectives should be broad, long-range, flexible, and not necessarily time-oriented. Most
agribusiness will have at least five objectives, and a few might have ten or more. An organization
with more than ten overall objectives is almost certainly mixing goals with its objectives.

Objectives are usually found on the following business areas:

1. Market standing (position compared with competitors)

2. Growth and development (how much and fast should growth be?)
3. Profitability (what kinds and amounts of profits are feasible?)
4. Employee relations and performance (What rewards and share of income should go to
employees, and what is expected of them?)
5. Investor relations and return (What portion of earnings should go to investors?)
6. Public responsibility and relationships (What kind of business citizen does the company want
to be?)
7. Physical resources (What plant equipment, tools, etc., are needed?)
8. Products and innovation (What emphasis will be placed on new products and research?)

Strategies:

Strategies denote a general programme of action and an implied deployment of emphasis

and resources to attain comprehensive objectives. According to Chandlar, the Strategy is “the
determination of the basic long-term goals and objectives of an enterprise, and the adoption of
courses of action and the allocation of resources necessary to carry out these goals”. Ex: Nano car
from TATA is a strategy to capture the market of adjacent countries as well as to pose competition
to the native manufacturers.
Policies:

Policies are used to guide one’s thinking process during the planning or decision-making
stage. The formulation of policies allows everyone to consistently make decisions that are in line
with organizational objectives. The policy sets boundaries within which an agribusiness employee
can exert individual creativity. For example, one business unit instituted a policy that the general
manager must approve all purchases compulsorily that totaled Rs. 500 or more. The purpose of such
a policy was to protect the business against unexpected large cash drain.

Policies are not the objectives, although they are closely tied to objectives. Because they
are not the objectives, policies should never be used to fence in managers as they make decisions
about long-range, complex problem situations.

Procedure:

A procedure is a step-by-step guide to a specific activity or function. In many cases, there is

a definite need to set out just such a precise course of action. A procedure should not, in most
cases, be applied to complex tasks of a long-range nature. If the business firm sought to implement
its new purchasing policy, the procedure involved called for an employee to fill out a requisition
form, submit it to the general manager for approval, then send it to the purchasing director.
Procedures work best when they are applied to routine and recurring tasks of a relatively simple
nature that require control.

Both policies and procedures are of tremendous value to the new employee who is learning
on the job, majorly to prevent unauthorized actions.

Practices:

Practices represent what is actually done in the agribusiness, and they may conflict with
policies and procedures. Managers have to be sure that policies make sense, are relevant, and are
enforced, in order for them to become widespread practices.

A course of action that is established on a recurring basis becomes a practice, often by

tradition or habit more than anything else. The status of practices can become as important as that
of either policies or procedures, and even more difficult to change, so the agribusiness manager
must see to it that practices coincide with policies and procedures. For instance some agribusiness
company is practice to give sweets on Dewali to their employees, some follow a policy of sharing a
portion of profits with their employees.

Rules:

Rules are frequently confused with the policies and procedures. A rule is that it reflects a
managerial decision that certain action be taken or not be taken. A rule requires that a specific and
definite action be taken or not taken with respect to a situation. As a matter of fact, a procedure
could be looked up on as a sequence of rules.
Programmes:

Programmes are a complex of goals, policies, rules, task assignments, steps to be taken,
resources to be employed, and other elements necessary to carry out a given course of action and
are ordinarily supported by the necessary capital and operating budgets. Designing programme
therefore truly requires the most rigorous application of systems thinking and action.

Budget:

It is a plan of statement of expected results expressed in numerical terms. It may be

referred as a “numberised programme”. The financial operating budget is called as a profit plan and
may be expressed in terms of labopur-hours, units of products, machine-hours,etc.,

It is a fundamental planning instrument in many companies because it forces a degree of

definiteness in planning.

*****
Lecture No. 5
Organising – Meaning – purpose – Staffing – Definition – Staffing Process.

ORGANISATION:

Meaning: In any business activity there is always a person who guides and controls its functions. He
also co-ordinates and regulates all the factors which are employed in the business activity. Apart
from monitoring it, he takes the responsibility of the outcome. We call such a person an
entrepreneur (organizer) and the business activity which he is doing is called an enterprise or
organization.

If management is seen as a body of knowledge, then the organization is skeleton or framework on

which the management is built.

Barnard referred to an organization as the activities of two or more persons were concisely
coordinated towards a given objective. An organization structure is effective if it facilitates the
contribution of individuals in the attainment of enterprise objectives.

Purpose:
The purpose of organization in an enterprise involves
1. The process of identification, classification and grouping up of required activities
2. Grouping of activities in light of resources and situations
3. Assigning these activities to positions
4. Delegation of the authority to different persons and
5. Horizontal and vertical co-ordination of the authority and information relationships to
enable them to carryout these activities very effectively and efficiently towards
achieving the objectives.

Organization brings co-operation, harmony and integrity among the people.

As a part of the organization function, the agribusiness manager must see that each
employee has a role that is clearly defined. The employees’ work goals, the decision to place some
one in charge, and the overall goals of the organization, coupled with the ways in which each person
and department relate to each other, comprise the organizational plan. Such a plan allows
management to establish accountability for the results achieved; it prevents buck passing and
confusion as to who is responsible; and it details the nature and degree of authority that is given to
each person as the activities of the firm are accomplished.

The process of organization starts with staffing and recruitment of persons.

Functions of organizer:

1. To determine the jobs to be done by the staff (job description, selecting, allocating
&training personnel)
2. Defining the line of activities of the staff.
 3. Establishment of relationship among the staff.
4. Selecting and training of personnel in organization.

Staffing: (Human Resource Management)

It is defined as the process of filling the positions in an organization structure through

identifying work-force requirements, inventorying the people available, recruitment, selection,
placement, promotion, appraisal, compensation and training of needed people to carry out the
business activities very effectively.

Staffing should be based on the need of the enterprise operation and day to day running of
the business with out any sort of hindrance. On the basis of the need, Managers should determine
the number and type of persons to be staffed in the enterprise.

The manager of the firm should develop a strategic staffing plan in such a way that the
working by all in a collective way without the feeling of overwork. The staffing plan with
specification of the positions / jobs should always thrive to fulfill the set objectives of the firm.

Once the staffing plan is prepared, the duty of the manager is to develop the job description
(i.e. the work should be performed by the specific position) in a constructive way so that the
qualified people should think that they should not leave the opportunity of working with that
enterprise.

Organization and staffing go side by side. Staffing starts with recruitment of personnel.
Recruitment starts with specification or qualifications of individual who will occupy important
positions to carry out the activities of organization.

There are different ways of recruiting the staff.

1. Advertising in news papers
2. Recruiting through persons who are already working in the organization
3. Recruiting through friends
4. Considering the persons who knock at the doors of organization, etc.

Selection Process:
1. The performance of choosen person on the job is the best criterion.
2. The application of the firm is usually carries information pertaining to personal data of
applicant and his educational background, training he has undergone, work experience if
any, salary history, special interest of individual if any etc,.
3. An interview will be conducted through which mental alertness, sense of values, quickness
of judging, general orientation, communication skills, degree of professionalism etc., of the
applicant will be studied. Besides such mental ability of the individual, language efficiency
of persons is also studied.
4. The applicant’s academic record usually serves a major indicator for selection process.
5. In highly specialized jobs, the academic record is the best criteria.
6. In the case of managerial positions along with academic record and leadership qualities
communication skills assume greater significance.
7. The reference letters submitted by the applicant are of some use, but some managers do not
give much importance to such reference letters because applicant submits such letters
which are with favourable comment from previous organization.
8. Examination of physical fitness of individual is most common in any organization because no
organization will ready to recruit a sick person.
9. Good organizer selects the person with fairly above average academic record with
extracurricular activities which give rise to a good leadership.
Lecture No. 6 & 7
Directing – Motivation – Ordering – Leading – Supervision – Communication and
control – Meaning and definitions.

DIRECTION:

Direction is nothing but motivating, ordering, guiding, leading, executing and supervising the
organization. It is an important management function making the people engaged in various
positions to move towards the achievement of goals and objectives.

Managers as directors know that the successful measure of the output / profits is due to sum
of the performance or work output of all those who work under their control in the firm. Such
mangers recognize that no one or some one in the firm is completely satisfied. It is also true that all
employers can not be happy all the time. The good manager would always have good qualities of
directing and building leadership that could help his staff to succeed in their work and derive job
satisfaction in their work. Good directors always change their styles to bring about the desired
changes.

He identifies the skills of the workers in the firm and assigns such job to execute.

The function of directing is compared to HEART of body of management.

The direction function of management has the following works:

1. Assigning duties and responsibilities to personnel.
2. Establishing the results to be achieved.
3. Delegating the necessary authority
4. Creating a desire for success.
5. Supervising that the job is done properly by workers.

Orders:

Orders or instructions are the vehicles for messages with proper direction from top to bottom of an
organization.

Features of orders:
1. Orders should be very clear and understandable
2. Generally orders are unidirectional and moves from top to bottom operating units
3. The timing of orders is crucial i.e. they must be issued when needed and should reach the
gross root level workers in time.
4. To have a check whether the orders are converted into action, a feed back report should be
the source of orders
5. Orders vary in form and details depending up on the degree of delegation practiced in the
organization. Some of them are negative, which prohibit certain actions, whereas some
orders are positive, prescribing the course of action towards the attainment of objectives.
A firm should be conditioned for effective direction. The manner in which it is organized could
facilitate conditioning. Often, it is necessary to keep persons in the organization, both as individuals
and as groups motivated for proper direction. The workers must also find meaning and purpose in
the orders and in implementing the orders.

Motivation:

The goal seeking behavior or goal directing behavior of individual is called as motivation.

All the personnel in the organization should be reoriented towards achieving the objectives.
But this is not an easy task.

Certain motivational devices are usually followed to make the direction effective such as
rewards for better work, time bound promotions and better working conditions. Any way these are
not the standard devices and vary from situation to situation.

The organizer in firm has to motivate his staff towards better utilization of resources and
move the things in right direction towards accomplishment of goals and objectives.

Leadership:

The function of direction may also be described in broader terms as the task of making the
organization take on life, of creating the conditions that make for interest in the the job, vigour of
action, imaginative thinking and continuous team work. This goal is one that cannot be reached by
magic formulae. Its achievement rests in large measure, up on the qualities of leadership exhibited
by the manager.

Leadership is helping individuals or groups to accomplish organizational goals. It is also,

perhaps paradoxically, the process by which the manger attempts to unleash each persons individual
potential, once again, as a contribution towards organizational success. Leaders recognize the result
of a person’s activities counts for more than the activities themselves.

Successful managers must have a leadership style and capability that allows them to modify
their management patterns to fit the changing times.

The changes in the management pattern are observed as below in the recent times
according to the dynamic working conditions in the business.

YEASTERDAY TODAY
Strong leadership Group leadership
Arbitrary rewards Planned rewards
No participation Meaningful participation
Absolute power Diluted power
Rigid organization Flexible organization
Thing oriented People oriented
 A good manager today must help subordinates to find satisfaction and to identify themselves
with their jobs and with the organization. At the same time, a sense of balance is required.
Managers must recognize the usefulness of human behavioral principles; but they must also
recognize that there are other objectives in running a business besides having happy, satisfied
employees.

Successful agribusiness managers know that the output is some total of the outputs of all
those who work for them. Such managers recognize that no one is ever completely satisfied with any
organization, and probably some will never be satisfied at all. What satisfies one person will not
satisfy other. But the manager as a director will see that most of the people should be happy most
of the time with satisfactions that they derive from their work. The good agribusiness manger will
develop those qualities of direction and leadership that will help subordinates to succeed and to
derive satisfaction from their work.

CO-ORDINATION:

Co-ordination is unifying and synchronizing action of group of people in the firm.

It is considered as the BRAIN in the body of management skills.

Sound, good and command of management skills will keep the need for coordinating function
at a minimum level. The good manager would always strive to co-ordinate operations, departments
and individuals under their control and properly work for their integration to achieve the desired
results.

In general coordination means working together by

1. Interpreting the programmes, plans, policies, proceeds and practices.

2. Providing for growth and development of employees.
3. Keeping in touch with the employees.
4. Conditioning the firm for its success.
5. Providing the free flow of information.

The manager must work hard for welfare of the employees. Efficient workers must be
rewarded & promotion policies should be designed. Bonus distribution should be timely and
adequate. Accommodation, transport, medical and education allowances, training facilities should
be provided.

The good manger should identify the hidden talents of personnel by stimulating them through
varied assignments that offer continuously increasing challenges and opportunities. He should have
regular schedule of contacts with his staff. He should set himself as a good example to others.

A good coordinator continuously and carefully seeks the participation of workers. His actions
should always be result oriented. He should inspire confidence and motivate the staff with his skills.

Work climate: With out a proper working climate, none of the skills and principles of management
can flower and bear fruits
 Six Principles of creating the climate:
1. Set a good example himself by the manager
2. Conscientiously seek participation
3. Be goals-and results- oriented
4. Give credit (in public) and blame (in private) as needed
5. Be fair, consistent and honest
6. Inspire confidence and lend encouragement.
Good managers know how to use these principles to create a productive working climate.

Communication:

The key to the success of any of the management functions is the free flow of
communication. The agribusiness manager is responsible for designing and implementing the
communications process.

Free flow of information means that communications must flow not only downward (from
management to subordinates), but upward (from subordinates to managers) and laterally (at the
same level) to be effective. Too often managers depend almost exclusively on downward
communications and then wonder why policies, procedures, and goals are misunderstood. Successful
communications require feed back. Feed back allows the managers to see whether understanding
has indeed occurred. It also allows the good ideas and potential contributions of each employee to
be part of the success mix of collective wisdom and knowledge found in the organization. The
manager must provide the opportunity for this feed back and involvement through a carefully
designed communication process involving comities, meetings, memos and individual contacts.

No matter how well thought out the organizational structure is, there will be times when it
breaks down. In such a situation the complex operations that do not always work way that they are
laid out on the paper. People have emotions, misunderstandings and ego needs that sometimes get
in the way, especially during seasonal peaks of hectic activity, when they get physically and
emotionally tired. Effective management recognizes the need for interpreting the formal structure
in terms of the human element, by adjusting and working through misunderstandings when they
occur. No organizational structure can be successful without a constant concern about honest but
tactful communication at all levels.
CONTROL:

Control function is complementary to other management functions and considered as

NERVOUS SYSTEM of body of knowledge that reports the function of the parts of the body to the
whole system. It measures the deviations from the desired course of action and thereby suggests for
desired direction.

Definition: Controlling is the process of influencing the performance or executing the supervision, so
that the results of organizational efforts will reach the expectations.

Massie stated four essential elements of control as follows:

 A pre-determined criterion / goal / benchmark.
 A means of measuring current activity quantitatively, if possible.
 A means of comparing current activity with a prefixed criterion.
  Some means or measures of correcting current activity to achieve desired criterion / goal.

Control does not mean restriction of power over subordinates. Control system sounds a
warning when necessary for taking up remedies for problems. Workers in general make mistakes, so
the plans finally could not be executed according to schedule. Then there will be great need for
having control system to set right the things. Through proper controlling, managers would become
aware of weak spots in organizational, directional and co-ordinating efforts and operations of the
business.

Another important purpose is to evaluate the progress being made towards organizational
goals. In the absence of control system employees can not respect the programmes, disregard and
in-accuracy are likely to result.The control programmes should be checked periodically and reviewed
so that the irrelevant control programmes can be dropped.

To be successful, the agribusiness manager must apply this functional knowledge and ability to
each of four basic areas of agribusiness viz., financial management and planning, marketing
and selling, production and operations, and personal and human dimension.

******
Lecture No. 8
Capital – Meaning – Working capital – Gross working capital – Net working capital – Permanent working
capital- Temporary working capital- Balance sheet working capital – Cash working capital.

CAPITAL MANAGEMENT IN AGRI-BUSSINESS:

Capital is not an original factor like land, but it is the result of man-made efforts.

Man makes the capital goods to produce other goods and services, which provides income.
Ex: Machinery, raw material, transport equipment, dams etc.,
 „Capital is produced means of production‟
 Karl Marx in his book “Das Kapital” defined “capital is crystallized labour”.

All capital is necessarily wealth, but all wealth is not necessarily capital.
Money if used for the purchase of capital goods, then only it becomes capital.

Ex: Residential buildings are the wealth of the individuals, but these are not considered as capital.
But earning the rent from that building is capital.

Characteristics of Capital:

1. Capital is not a free gift of nature. It is the resultant of the man-made efforts.
2. Capital is productive, as it helps in enhancing the over all productivity of all the resources
employed in the production process. Invested capital provides interest for its productive capacity.
Farm machinery, when used with skilled labourers enhances the productivity of land. Irrigation dam,
by providing water can bring out complementary effect on the productivity of other resources like
fertilizers, seeds etc.,
3. Capital is prospective, as its accumulation reward income in future.
Ex: Savings and investment in the economy leads to growth and development of the
economy due to accumulation of capital over time.
4. Capital is highly mobile among factors of production.
Ex: Tractor
5. Capital is supply elastic, as its supply can be altered according to the need. Based on demand,
supply of the capital goods can be changed.

Economists speak of capital as wealth which is used in the production of additional wealth.
Business men frequently use the word capital in the sense of the total assets employed in a business.
In law, capital usually means capital stock. A financial manager determines the proper capital
structure for his firm. He determines the mix of debt and equity stock. The balancing of the capital
expenditures against estimated savings in future requires careful analysis while dealing with the
financial aspects of the company’s operations. A careful balancing of facilities at each stage of the
productive process is necessary to avoid higher operating costs and delay caused by facility
bottlenecks and the freezing of capital in idle equipment.
Long range planning for the capital management / expenditures is essential due to the following
reasons:
1. It helps in fitting yearly corporate expansion on orderly plan of growth by adopting capital
expenditures to anticipated sales requirements.
2. It assists in testing the profitability of capital expenditure over a period of time as against in the
next following year.
3. It facilitates in contracting for plant sites, construction, water or power requirements etc., in
advance.
4. Aids to asses the necessary funds provided by internal or external sources.
5. Assist in examining the impact of capital expenditures on depreciation, insurance expenses and
other fixed expenses in advance in order to make the necessary allowance for them.

Working capital:

It is regarded as the life blood of a business, because its efficient management will lead to
success of business and its inefficient management will lead to failure of the business.

Definitions:
 Working capital can be defined as that portion of the assets in a business which are used to meet
the day to day / current operations of the business.
 The assets formed due to the working capital are relatively temporary in nature.
 In accounting, working capital is defined as difference between inflow and out flow of funds. It
is otherwise called as net cash flow per year.
Net cash flow / Yr = Cash in-flow – Cash out-flow.
 Working capital is the excess of current assets over current liabilities of a business. It is
otherwise called as net current assets or net working capital / year.
Net working capital per year = Current assets – Current liabilities
 Working capital may also be defined as total current assets employed before operating the
business. It is also called gross working capital.
 Working capital is also called as circulating capital. At the beginning cash is provided by owners
and lenders. A part of capital is invested on the fixed assets and the remaining cash is used to
meet the current requirements like purchase of services, raw material or merchandise. By
selling the products from the enterprise, cash will be received, which is used for the expansion
of the business. This process indicates the circular flow of working capital, so named as
circulating capital.

Types of working capital:

1. Net working capital: Net working capital is the difference between the current assets and current
liabilities of a business. This concept enables a firm to determine how much is left for operational
requirements.
Net working capital per year = Current assets – Current liabilities
2. Gross working capital: It is the total amount of the funds invested in the business or the total
current assets employed in the business. It helps to plan and control the funds usage in the business
and also helps in identifying the prioritized areas of investment.

3. Permanent working capital: This is the minimum amount of current assets which is needed to
conduct a business even during the dull / slack season of the year. It is the amount of the funds
required to produce the goods and services which are necessary to satisfy demand at a particular
point. It represents the current assets which are required on a continuous basis over the entire year.
It is maintained as the medium to carry on operations at any time.

4. Temporary working capital: It represents the additional assets which are required at different
times during the operating year like additional inventory, extra cash etc.,

5. Balance sheet working capital: The working capital that is calculated from the items appear in the
balance sheet is called balance sheet working capital. Ex: Gross working capital and Net working
capital.
6. Cash working capital: This will be calculated from the items appear in profit & loss account. It
will show the real flow of money at a particular point of time and hence it is considered as most
realistic approach in working capital management. It forms the basis for operational cycle
concept and gained more important in the financial management. The major reason is that cash
working capital indicates the adequacy of the cash flow in the business, hence considered as
prerequisite of the business.

7. Negative working capital: It arises when current liabilities are more than current assets. Such
situation arises when firm is nearing a crisis of some magnitude.

Tests of working capital policy:

There are four tests of working capital policy.

1. Level of working capital: It is the test to be done in a careful manner by observing the
movements of working capital in a firm in successive periods of production activity. If a
management can develop a pattern of flow of working capital in these movements, this
pattern would serve as a guide to its changing requirements in relation to certain decisions
which are made from time to time.
2. Structural Health: The relative health of the various components of the working capital
should be considered from the point of view of liquidity. It is necessary to draw structural
relationships in respect of each component constituting the current assets.
3. Circulation: This is one of the important features of the liquid position and involves the
natural activity cycle of an enterprise. Ratios may be calculated to show the average period
required for the conversion of raw materials into finished goods into sales, and sales into
cash.
4. Liquidity: A more comprehensive test to measure liquidity may be adopted by using the
following ratios by expressing them in the percentages of
a. Working capital to current assets.
b. Stocks to current assets.
c. Liquid resources to current assets.

*******
Lecture No.9
Financial management-importance of financial statements-balance sheet-profit and loss
statement

Financial analysis is one of the roots of management used to carry out its controlling function.
Proper interpretation of data presented by the financial statement helps in judging the
profitability of operations during given time periods, in determining the soundness of financial
condition at a specific date, in determining future potential to meet existing or anticipated
credit obligations and in developing performance trends to be used as a basis for future
decision making.

At regular period public companies must prepare documents called financial statements.
Financial statements show the financial performance of a company. They are used for both
internal and external purposes. When they are used internally, the management and sometimes
the employees use it for their own information. Managers use it to plan ahead and set goals for
upcoming periods. When they use the financial statements that were published, the
management can compare them with their internally used financial statements. They can also
use their own and other enterprises‟ financial statements for comparison with
macroeconomical data and forecasts, as well as to the market and industry in which they
operate in.

The term financial statement refers to two basic statements that an accountant prepares at the
end of a specified period of time for a business enterprise.

1. Balance sheet: It is a statement of financial position of a firm at a particular point of

time.
2. Income statement: It is also called profit-loss statement. It shows firm‟s earnings for
the period covered, usually half yearly or yearly.

Balance Sheet

From an analyst point of view, it is a written representation of resources and liabilities of the
business firm. It shows the financial condition of the business firm at a given date (particular
point of time). The balance sheet contains information on assets, liabilities and net worth of a
firm. Assets must always equal the sum of liabilities and net worth. What is owned by or owed
to firm (assets) must equal what the firm owes to its creditors plus what is owed to its owners
(net worth). Balance sheet indicates the sources from which business obtained capital for its
operations and the form in which that capital is invested on a specific date. Net worth
represents owner‟s equity in the business.

Assets: Assets include anything that the company actually owns and has disposal over.
Examples of the assets of a company are its cash, lands, buildings, and real estates, equipment,
machinery, furniture, patents and trademarks, and money owed by certain individuals or/and
other businesses to the particular company. Assets that are owed to the company are referred
to as accounts-, or notes receivables.
 1. Current Assets include anything that companies can quickly monetize. Such current
assets include cash, government securities, marketable securities, accounts receivable,
notes receivable, inventories, prepaid expenses, and any other item that could be
converted into cash with in one year in the normal course of business.

2. Fixed Assets are long-term investments of the company, such as land, plant,
equipment, machinery, leasehold improvements, furniture, fixtures, and any other
items with an expected useful business life usually measured in a number of years or
decades. Fixed assets are usually accounted as expensed up on their purchase. They are
normally not for resale and are recorded in the Balance Sheet at their net cost less
accumulated depreciation.

3. Other Assets include any intangible assets, such as patents, copyrights, other
intellectual property, royalties, exclusive contracts, and notes receivable from officers
and employees.

Liabilities: Liabilities are money or goods acquired from individuals, and/or other corporate
entities. Some examples of liabilities would be loans, sale of property, or services to the
company on credit. Creditors (those that loan to the company) do not receive ownership in the
business, only a (usually written) promise that their loans will be paid back according to the
term agreed up on.
1. Current Liabilities are accounts, and notes, taxes payable to financial
institutions, accrued expenses (eg.: wages, salaries), current payment (due within
one year) of long-term debts, and other obligations to creditors due within one
year.

2. Long-Term Liabilities are mortgages, intermediate and long-term loans,

equipment loans, and other payment obligation due to a creditor of the company.
Long-term liabilities are due to be paid in more than one year.

Shareholder’s equity (or net worth, or capital)

The shareholder‟s equity is money or other forms of assets invested into the business by the
owner, or owners, to acquire assets and to start the business. Any net profits that are not paid
out in the form of dividends to the owner, or owners, are also added to the shareholder‟s
equity. Losses during the operation of the business are subtracted from the shareholder‟s
equity.
Assets are calculated the following way:
Assets = Liabilities + Net worth
All balance sheets contain the same categories of assets, liabilities and net worth figures.
Assets are arranged in decreasing order of their liquidity. Liabilities are listed in the order of
how soon they must be repaid, followed by retained earnings (net worth of owner‟s equity).
The categories and formats of balance sheets are established by a system known as Generally
Accepted Accounting Principles (GAAP).
Limitation: It is an interim statement between two operating periods. It summarizes solvency
of business at a given time rather than financial transactions occurred in business during an
accounting period.

Example: Balance sheet of Mango pulp industry Entrepreneur as on 1.1.2010

Assets Liabilities
Current assets Rs. Current liabilities Rs.
Cash in the bank 50000 Accounts payable 150000
Cash in the hand 10000 Promissory notes payable 30000
Prepaid expenses 70000 Taxes payable 25000
Inventory 300000 Wages payable 100000
Others 75000 Interest payable 50000
Dividends payable 25000
Total current assets 505000 Total current assets 380000
Long term assets Long term liabilities
Land 1500000 Mortgage loan 300000
Buildings 800000 Other loans 2000000
Less depreciation @ 5% -40000 Total long term liabilities 2300000
Equipments 1000000
Less depreciation @ 5% -50000 Total liabilities 2680000
Other assets 300000
Less depreciation @ 5% -15000 Networth 1320000
Total long term assets 3495000
Total assets 4000000 Total liabilities and 4000000
networth

Income Statement

It is also called profit and loss statement. It states the source of firm‟s incomes, describes the
nature of the expenses, and shows the net profit earned (or net loss incurred) during an
accounting period. It is supporting evidence to balance sheet, in the sense, that it explains the
change in retained earnings on the balance sheet.

Income statements show the results of operating during those accounting periods. They are
also prepared using the Generally Accepted Accounting Principles (GAAP) and contain
specific revenue and expense categories regardless of the nature of the company.

The format of a profit & loss statement varies from business to business but such statement
generally begins with sales and subtracts the appropriate expenses with profit showing as a
remainder.

Sales: It represents the monetary value of all products and services that have been sold during
a specified period.
 Cost of goods sold: We can define cost of goods sold as the cost of opening stock of goods
plus cost of purchases minus cost of clustering stock.

In the case of manufacturing firm, cost of goods sold will include manufacturing costs such as
raw material consumed, wages & salaries, power & fuel, repairs & maintenance, consumables,
etc.

Operating expenses: Expenses relating to the main operation / business of the firm are called
operating expenses.

Examples include manufacturing expenses such as raw material, wages and salaries, power
and fuel, depreciation, director‟s fees, management salary, office expenses, travel expenses,
selling and distribution expenses such as wages, salaries, commission, transportation,
advertising and promotion.

Non-operating expenses: Expenses which are incidental / indirect for main operations of
finance called non-operating expenses. Expenses incurred in generating non-operating
revenues are classified in this category.

Operating revenue: Revenue arising from the main operations or business of the firm are
called operating revenue. Ex: Gross proceeds from the sale of products, manufactured by a
firm are operating revenue.

Non-operating revenue: Revenues which are incidental or indirect to main operations of firms
are non-operating revenue. Ex: Gross proceeds from sale of an old equipment, dividends,
interest, income from temporary investment, etc.

Concept of profit: The difference between revenue (sales) and cost of goods sold is called
gross profit. When we deduct all other expenses including interest and taxes from gross profit
we obtain profit after taxes and net profit.

Uses of Income Statement

1. Can determine what profit is earned by the business.

2. Can find particular causes of low profit or operating losses.
3. Management can take action to prevent the occurrences of future losses or to prevent
further decline in profits.

Example: Profit and loss statement of a hypothetical fertilizer company year ending Dec 31,
2009
(Rs. in lakhs)

I. Sales 90
II. Cost of goods sold 40
 III. Gross margin (I-II) 50

IV. Operating expenses

1. Salaries and wages 5
2. Local taxes, licenses 3

3. Insurance 1
4. Depreciation 7

5. Rent and lease 2

6. Advertising and sales promotion 3
7. Office expenses 1
8. Maintenance and repairs 0.5
Total operating expenses (1+2+3+4+5+6+7+8) 22.5
V. Net operating profit (III-IV) 27.5
VI. Interest expenses 2.75
VII. Other non-operating income 5
VIII. Net profit before taxes (V-VI+VII) 29.75

IX. Profit taxes @ 30% 8.93

X. Net profit after taxes (VIII-IX) 20.82
Lecture No. 10 & 11
Analysis of financial statements-liquidity ratios-leverage ratios-Coverage ratios-turnover
ratios-profitability ratios

Ratio analysis is a powerful tool of financial analysis. A ratio is defined as the indicated
quotient of two mathematical expressions and as the relationship between two or more things.

In financial analysis, a ratio is used as bench mark for evaluating the financial position and
performance of a firm. Ratio analysis will explain what strength, weakness, pressures and
forces are currently at work in your business operation. Farm business managers will need a
full time job accountant for the change accruing in his capital structure and net worth as
revealed in his balance sheet.

Ratio analysis of properly calculated rates can be readily compared with

1. firm‟s past ratio in order to show trends
2. ratio of other firms of similar size, large size or of smaller size with which the manager
is familiar
3. industrial standards
4. projected goals as reflected in plans for the future.

Fundamental difference between ratio analysis and trend is that the ratio analysis measures the
movement in absolute terms whereas the trend indicates the relationship. The marginal
analysis is used in determining the most profitable combination of resources and products. It is
concerned with last added or marginal unit of input and product.

Ratio analysis has the following advantages

1. Has no units
2. Compares numerator with respect to denominator
3. Relative and comparable

The following are the five important categories of ratios.

1. Liquidity ratios
2. Leverage ratios
3. Coverage ratios
4. Turnover ratios and
5. Profitability ratios
Liquidity ratios
Liquidity ratios measure the ability of the firm to meet its current obligations.
1. Current Ratio (CR): It is calculated by dividing current assets by current liabilities.

Current ratio = Current assets ÷ Current liabilities

Current assets include cash, marketable securities, debtors, inventories, prepaid expenses.
All those assets which can be converted into cash with in a year are included in current
assets.
Current liabilities include creditors, bills payable, accrued expenses, short term bank loans,
income tax liability, long term debt maturing in current year, etc. All obligations maturing
with in a year are included in current liabilities.
Current ratio is a measure of the firm‟s short term solvency. It indicates the availability of
current assets in rupees for every one rupee of current liability. A ratio of greater than one
indicates that the firm has more current assets than current claims against them.
2. Quick ratio: The ratio establishes a relationship between quick or liquid assets and current
liabilities.

Quick ratio = (Current assets – inventories) ÷ current liabilities

(or)
Acid or quick ratio = (Cash + marketable securities + accounts receivable) ÷
current liabilities
3. Cash ratio: Since the cash is the most liquid asset, a financial analyst may examine the
ratio of cash and is equivalent to current liabilities. Marketable securities are equivalent
cash.

Cash ratio = (Cash + marketable securities) ÷ current liabilities

4. Net working capital ratio: The difference between current assets and current liabilities
excluding short term borrowings is called net working capital (NWC) or net current assets.

NWC ratio = Net working capital ÷ Net assets

Leverage Ratios

These ratios may be calculated from the balance sheet items to determine the proportion of
debt in total financing.
1. Debt-equity ratio: The relationship describing the lender‟s contribution for each rupee of
the owner‟s contribution is called debt-equity ratio.

Debt-equity ratio = Total debts ÷ Net worth

2. Total debt ratio: In order to know the proportion of the interest-bearing debt (also called
funded debt) in the capital structure, debt ratio is computed
 Debt ratio = Total debts ÷ (Total debt + Net worth)

Total debt will include short and long term borrowings from financial institutions,
debentures / bonds, deferred payment arrangements for buying capital equipment and bank
borrowing, public deposits and any other interest bearing loan. Capital employed will
include total debt and net worth.

Coverage ratios

The interest coverage ratio is one of the most conventional coverage ratio used to test the
firm‟s debt servicing capacity.

Interest coverage ratio = Earnings before interest and taxes (EBIT) ÷ Interest

The interest coverage ratio shows the number of times the interest charges are covered by
funds that are available for their payment. Since taxes are computed after interest, interest
coverage is calculated in relation to before tax earnings. Depreciation is a non cash item.
Therefore, funds equal to depreciation are also available to pay interest charges. We can
calculate the interest coverage ratio as earnings before depreciation, interest and taxes
(EBDIT) divided by interest.

Interest coverage ratio = EBDIT ÷ Interest

Activity ratios (or) Turnover ratios

These ratios are employed to evaluate the efficiency with which the firm manages and utilizes
the assets. They also indicate the speed with which assets are being converted or turned over
into sales. Thus activity ratios involve a relationship between sales and assets.

1. Inventory turnover: The ratio indicates the efficiency of the firm in selling its product.

Inventory turnover = Cost of goods sold ÷ Average inventory

The average inventory is the average of opening and closing balance of inventory. In
manufacturing company inventory of finished goods is used to calculate inventory
turnover.

Inventory turnover can also be calculated by dividing sales with inventory.

The inventory turnover shows how rapidly the inventory is turning into receivable through
sales. High inventory turnover is indicative of good inventory management. A low
 inventory turnover implies excessive inventory levels than warranted by production and
sales activities or slow moving inventory.

2. Debtors turnover: A firm sells goods for credit or cash. Credit is used as a marketing
tool. When the firm extends credit to its customers, book debts (debtors or receivable) are
created in the firm‟s records. Book debts are expected to be converted into cash over a
short period and therefore included in current assets.

Debtors turnover = Sales ÷ Debtors

Profitability ratios

Profit is the difference between revenue and expenses over a period of time. Profit is the
ultimate output of a company and it will have no future if it fails to make sufficient profit. The
profitability ratios are calculated to measure the operating efficiency of the company.

1. Gross profit margin: The gross profit margin reflects the efficiency with which
management produces each unit of product. A high gross profit margin is a sign of good
management. A low ratio reflect higher cost of goods sold due to firm‟s inability to
purchase raw materials at favourable terms, inefficient use of fixed and variable resources.

Gross profit margin = (Sales – cost of goods sold) ÷ Sales

= Gross profit ÷ Sales

2. Net profit margin: Net profit margin is obtained when operating expenses, interest and
taxes are subtracted from the gross profit. The net profit margin indicates management‟s
efficiency in manufacturing, administering and selling the products. This ratio is the
overall measure of the firm‟s ability to turn each rupee sales into profit. It also indicates
the firm‟s capacity to withstand adverse economic conditions.

Net profit margin = Profit after tax ÷ Sales

3. Operating expense ratio (OER): It explains the changes in the profit margin (EBIT to
sales) ratio. The ratio is computed by dividing operating expenses viz., cost of goods sold
plus selling expenses and general administrative expenses (excluding interest) by sales.

Operating expenses ratio = Operating expenses ÷ Sales

A higher operating expenses ratio is unfavourable since it will leave small amount of
operating income to meet interest, dividends, etc.
4. Return on investment (ROI): The term investment may refer to total assets or net assets.
The funds employed in net assets are known as capital employed. Net assets equal fixed
assets plus current assets minus current liabilities excluding bank loans. Alternatively
capital employed is equal to networth plus total debt.

Return on investment (ROI) = Return on total assets (ROTA) = EBIT(IT) ÷ Total assets

Return on investment (ROI) = Return on net assets (RONA) = EBIT(IT) ÷ Net assets

5. Return on equity (ROE): This ratio indicates how well the firm has used the resources of
owners. It reflects the extent to which the objective of earning a satisfactory return has
been accomplished.

Return on equity = Profit after tax ÷ Net worth

 Lecture no.12 &13
Agro-based industries-importance-need-institutional arrangements for the
promotion of agro-based industries-Procedure to be followed to set up agro-based
industries –constraints in establishing agro-based industries

Importance
 Establishment of agro-based industries is based on the availability of raw material.
 Agro-based industries have to set up at rural areas where raw material may be available
in plenty – helps in the upliftment of the rural economy.
 Provide rural population an opportunity for employment.
 Generate income and thereby improve economic condition of people – which in turn
creates potential for demand based industries.
 Provide an opportunity for the dispersal of industries instead of concentrating at a
particular place.
 Solve the problem of exploitation of farming community by traders and middlemen.
 Farmers could be assured of better price for their produce.
 Encourage to bring more and more areas under various crops – increase agricultural
production and improve nation‟s economy.
 Transportation cost of agricultural products can be minimized – thereby help to
minimize cost of finished goods.
 Avoid wastage of perishable agricultural products.
 Help to develop backward areas based on their suitability for setting up agro-
industries.
 Prevent migration of people from rural to urban areas.

Industries are divided into four groups.

1. Resource based
2. Demand based
3. Skill based
4. Ancillary

Again the resource based industries are divided into agro-based, forest based, animal
husbandry and poultry based, mineral based, marine based, etc.
Agro-based industries are those industries which have either direct / indirect link with
agriculture. Industries which are based on agricultural produce and industries which support
agriculture come under agro-based industries.
Types of Agro-based industries
There are four types of agro-based industries.
1. Agro-produce processing units

They merely process the raw material so that it can be preserved and transported at cheaper
cost. No new product is manufactured. Ex: Rice mills, Dal mills, etc.
2. Agro-produce manufacturing units

Manufacture entirely new products. Finished goods will be entirely different from its original
raw material. Ex: Sugar factories, bakery, solvent extraction units, textile mills, etc.
3. Agro-inputs manufacturing units

Industrial units which produce goods either for mechanization of agriculture or for increasing
productivity come under this type. Ex: Agricultural implements, seed industries, pumpset,
fertilizer and pesticide units, etc.
4. Agro service centres

Agro service centres are workshops and service centres which are engaged in repairing and
servicing of pumpsets, diesel engines, tractors and all types of farm equipment.

Need for Agro-based industries

 Suitable to rural areas as they are raw material oriented.
 For upliftment of rural economy.
 To solve the problem of unemployment.
 To generate income and increase standard of living.
 For decentralization and dispersal of industries.
 To reduce disparity between rural and urban areas.
 To encourage balanced growth between agriculture and industry.
 To solve the problem of exploitation of farming community.
 To reduce transportation costs.
 To give big push to agriculture and act as a source of demand and supply.
 To avoid wastage of perishable agricultural products.
 To prevent migration of rural people.
 To develop suitable backward areas.
 To improve infrastructural facilities.

Institutional Arrangements for Promotion of Agro based Industries

Following Ministries & Departments at the Centre and State level are at present
looking after development of agro based industries.
1. Ministry of Agriculture

Deals with rice mills, oil mills, sugar mills, bakeries, cold storage, etc.
2. Khadi and village industries board
Covers traditional agro based industries like „gur‟, handicrafts, khandasari, etc.
3. Director General of Trade and Development

Looks after the industries engaged in the manufacture of tractors, power tillers, diesel engines,
pump sets, etc.
4. Agro-industries Development Corporation

In each state mainly supply agricultural machinery, inputs and agricultural advisory services to
farmers. Some corporations have also undertaken certain manufacturing activities in agro-
industries sector.
5. Small Industry Development Organization

Deals with small agro-industries like hosiery, processing of food products, beverages, food
and fruit preservation, agricultural implements, pesticide formulations, etc.
Procedure to be followed to set up agro based industries
1. Assessment of agricultural resource potential in the desired areas.
2. Qualification of agriculture output and inputs.
3. Present utilization of resources in existing units
4. Surplus produce left out.
5. Agricultural produce preserving requirements. Even for local consumption of food grains,
processing is necessary.
6. Selection of certain items of considerable importance.
7. Follow certain approach for actual location of the units to avoid wastage of resources and
maximize utilisation of existing infrastructure.
8. Preparation of industrial profitable and feasibility studies
9. Identification of entrepreneurs.
10. Suggesting appropriate technology and imparting suitable training.
11. Finance and other problems.
12. Marketing assistance.

Constraints in establishing agro based industries

1. Proper guidance is not available to entrepreneurs.
2. It involves some element of risk taking
3. Change in crops / cropping pattern
4. Change in variety of crop due to technological improvement
5. Failure of monsoon may hit the raw material supply.
6. Proper guidance, training for modern and sophisticated agro-industries are not available.
7. As modern small industries are capital intensive, supply of finance will be a considerable
problem.
8. Promotional activities such as conducting, intensive campaigns, identifying candidate
industries and explaining to entrepreneurs about prospects are inadequate.
9. Uncertainty about future market demands.
10. Absence of information about quantity and quality of market.
11. Multiplicity of agricultural produce and absence of suitable methodology to select best
suited industries to a given region.
12. Seasonal supply of agricultural produce may result in under utilization of capacity of the
units as the unit will not be working throughout the year. Ex: Sugarcane
13. Industries based on fruits and vegetables may not get the same variety throughout the year,
but they may get some other variety.
14. Absence of proper integration among the various agencies of development in the district.
Lecture No. 14
Project- meaning-definition-project cycle-identification-formulation-appraisal-
monitoring- evaluation
Meaning and Definition

 Projects are the building blocks of investment plan.

 The whole complex of activities in the undertaking that uses resources to gain benefits
constitutes the agricultural project.
 An agricultural project is an investment activity in which financial resources are expended
to create capital assets that produce benefits over an extended period of time.
 Project is an activity on which money is spent in expectation of returns and which
logically seems to lend itself to planning, financing and implementation as a unit.
 Project is a specific activity with a specific starting point and a specific ending point
intended to accomplish a specific objective. It is something which is measurable both in its
major costs and returns. It will have some geographic location or at least a rather clearly
understood area of geographic concentration. It will have a specific clientele group which
it is intended to reach. It will have a relatively well defined time sequence of investment
and production activities.

Projects are cutting edge of development. Therefore, we need to identify national

agricultural development objectives for selection of priority areas for investment. Sound
developmental plans require good projects and good projects require sound planning. Both are
interdependent. Project planning seeks to ensure optimization of scarce resources for balanced
growth of economy. It should facilitate an analysis in planning, financing, implementation,
monitoring, controlling and evaluation.

Characteristics of Agricultural Projects

1. Project is made up of many sub-projects / investments. Ex: Sericulture, palm oil industry,
ice factories for fisheries project, construction of 500 dug wells (each well a sub-project).
2. Project increases capital intensity of farm enterprise
3. Investment costs vary according to natural conditions, market conditions and processing
conditions
4. The quantum of incremental benefits (income) depends on benefitting area and the level of
benefits depends on stage of development farms
5. The level of benefits may, however fluctuate from year to year due to weather conditions.
Types of Agricultural Projects
1. Water Resource Development Projects

These projects include irrigation projects, ground water projects, projects for land reclamation,
drainage projects, salinity prevention and flood control.

2. Agricultural Credit Projects

These are called “on-lending projects”. These projects provide credit to the farmers for farm
investment for increasing agricultural production, raising their standard of living and the
economy as a whole.

3. Agricultural Development Projects

These are the projects aimed at improving farm economy of individuals and regional
development.

4. Agro-industries and Commercial Development Projects

Projects of input, services to farming, projects concerned with processing, storage, market
development, projects for fisheries development.

PROJECT CYCLE
There tends to be a natural sequence in the way projects are planned and carried out, and this
sequence is often called the "project cycle."
The important phases in project cycle are
(1) Conception or Identification
(2) Formulation or preparation of the project
(3) Appraisal or Analysis
(4) Implementation
(5) Monitoring
(6) Evaluation

1. Conception or identification of the project

The first stage in the cycle is to find potential projects. In agricultural projects, costs are easier
to identify than benefits because the expenditure pattern is easily visualized.
The various types of costs involved in the project are:
 Project costs: These include the value of the resources in maintaining and operating the
projects
 Associated costs: Costs that are incurred to produce immediate products and services of
the projects for use or sale
 Primary costs or Direct costs: These include costs incurred in construction, maintenance
and execution of the projects
 Indirect costs or Secondary costs: Value of goods and services incurred in providing
indirect benefits from the projects such as houses, schools, hospitals, etc
 Real costs and nominal costs: Costs at current market prices are nominal costs, whereas if
costs are deflated by general price index, these are termed as real costs
 Social costs: These are technological externalities and technological spill-over accrued to
the society due to presence of projects, i.e., pollution problems, health hazards, salinity
conditions, etc.

Next to identifying the costs, the estimation of benefits is imperative to ascertain the impact
the projects. This is generally done by taking into account two situations, i.e., „with‟ and
„without‟ the projects. The difference is the net additional benefit arising out of the project.
Benefits are split into two: tangible and intangible benefits.
 Tangible benefits: Incremental income due to the existence of projects is obtained either
from an increased value of production or from reduced costs.
 Intangible benefits: These include better income distribution, national integration, better
standard of living, etc.

In identification phase, it is also important to see whether the project is implemented in high
priority areas and whether on primafacie grounds the project is economically feasible.
It is also imperative to identify problems and objectives of the projects and whether the
Government gives sanction for the project implementation or not.
The important stages in the process of identification are:
1. Preliminary study
2. Pre-feasibility study
3. Project report

In these stages we assess whether the project proposed on the grounds of prima-facie is
feasible and the objectives of the project achieved.
On this ground, the preliminary study should embody the investment proposals, benefits
extended from the projects and method of implementation.
Assessment of the demand for the project‟s products, technical feasibility of the project,
import and export requirements, marketing aspects, investment prospects, etc., should be
exhaustively covered by the feasibility studies, including the analysis of sensitivity.
Some of the sources through which the projects identified are:
1. Agricultural and allied programmes proposed in the plans of the country as well as
states.
2. Areas identified as potential for further development through Governmental surveys
3. Special developmental programmes like IRDP
4. Irrigation projects which offer scope for development through forward and backward
linkages.
5. New projects emerging out of existing projects, etc.
2. Formulation or Preparation of the Project:

The following points are considered while formulating the projects.

 The location of the project site must be based on technical analysis and technical
feasibility of the projects.
 The location of the project depends up on available physical resources, market conditions,
marketing facilities, alternative investment prospects, administrative experience, farmers‟
objective, technical skill, motivations, demand for products, etc.
 Technical analysis must make into consideration all aspects of technology to be used in the
project and account for all inputs of goods and services.
 Assessment of suitability and adequacy of natural resources in advance based on the
scientific investigations
 Due consideration to be given to all the organizational, social, economic aspects, etc.
 Technical aspects: The issues which need technical examination are thoroughly analysed
here.
 Financial aspects: The implementing agency should be in a position to estimate financial
requirements and anticipated returns, through farm planning and budgeting. Once the
incremental income is arrived at, the repayment capacity duly giving allowance for risk
and uncertainty can be worked out. Cash flow chart can be profitably used here.
 Commercial aspects: The aspects focus on the estimation of effective demand, availability
of input supplies and arrangements for the output marketing. Market potentiality for the
products needs a careful scrutiny.
 Managerial aspects: If we want successful implementation of the project, effective
managerial issues are very crucial. The managerial skills can be sharpened.
 Organisational aspects: Organisation refers to the process of putting the priorities in an
orderly form. For proper administration of the projects, efficient personnel and other
requirements are indispensable.
 Social aspects: Here customs, culture, traditions and habits etc., of the beneficiaries are
considered. The relevant implications like the probable changes in the living standards,
material welfare, consumption habits, income distribution effects, etc., fall under this
coverage.
 Economic aspects: Here we have to examine the benefits, which the project is going to
contribute in terms of the utilization of scarce resources of the nation. The indirect effect
like, the income distribution, needs to be assessed.

3. Appraisal or Analysis

Appraisal should take place before the implementation of the project. It is done independently
by specialists.
In the appraisal stage it is important to know whether the project is technically feasible
according to the data available. The technical data for assessing the feasibility of the project
should be consistent with the information available in the office of the sanctioning authority of
elsewhere.
Managerial aspects play a key role in the project appraisal. Projects become abortive due to
the failure to consider managerial aspects, i.e., such as new skills and information gained by
the farmers in the project area, including adoption of new technology. The managerial
capabilities and capacity of administrative personnel must also be assessed in project
appraisal.
4. Implementation

This is the most crucial phase of the project cycle. The secret of successful implementation
depends up on the extent of realism put into the plans drawn beforehand. It is often not
uncommon, to notice our plans getting deviated from the reality. Here the role of prudent
decisions by the personnel incharge of implementation to take the situation comes into play.
Project implementation can be divided into three different periods, viz., investment period,
development period, and full-production period. Investment period may range from few
months to few years depending up on the nature of assets to be acquired. Assets proposed
should be of superior quality.
Development period too consumes time. Implementing agency should make all efforts to
reduce the gestation period as per the plan envisaged in the beginning. Full production period
is the time during which the beneficiaries start reaping the benefits of the project.
5. Monitoring

Monitoring is the timely collection and analysis of data on the progress of a project, with the
objective of identifying constraints which impede successful implementation. This is highly
desirable, particularly when projects fail, to be completed as per time schedule or in the
process of attaining the set goals.
It is imperative to get the feedback on the problems faced so that effective measures can be
taken up to plug the deficiencies, which hamper the speedy implementation. Monitoring has to
be done continuously to offset various shortcomings that crop up from time to time with
regard to various aspects of implementation.
6. Evaluation

This is the last phase of the project cycle. Evaluation can be done several times during the life
of a project. In the evaluation process, it is important to see, how far the objectives set out in
the project are achieved. Deficiencies, snags or failures to achieve the objectives may be
analysed and appropriate solutions to such failures answered.
Evaluation process is to be completed in three phases. They are pre-project evaluation,
concurrent evaluation and ex-post evaluation.
In the first phase, evaluation is attempted before any change occurs in the existing situation.
This is primarily meant to assess economic feasibility of the projects, since it is done at the
very beginning. This type of analysis is otherwise called pre-project evaluation.
Sometimes it is also important to take up evaluation when the project is in execution, and such
evaluation is called concurrent evaluation. This type of evaluation is basically meant for
identifying and analyzing the pitfalls in the execution of the project.
Evaluation is also resorted to particularly when the project is completed in all its phases, in
order to assess the achievement of ends or objectives set out by the projects. Such evaluation
is called ex-post evaluation or end-evaluation.
Lecture No. 15 & 16
Project appraisal and evaluation techniques-undiscounted measures-pay back period-
proceeds per rupee of outlay-Discounted measures-Net Present Value (NPV)-Benefit
Cost Ratio (BCR)-Internal Rate of Return (IRR)-Net Nene fit Investment ratio (N/K
ratio)-sensitivity analysis

When costs and benefits have been identified, priced, and valued, the analyst is ready to
determine which among various projects one is to accept and which to reject. There is no one
best technique for estimating project worth (although some are better than others, and some
are especially deficient).
The techniques of project appraisal can be discussed under two heads viz., (i) Undiscounted
and (ii) Discounted.
(i) Undiscounted techniques: Include (a) Payback period, (b) Value-added, (c) Capital-
Output Ratio, (d) Proceeds per unit of outlay, and (e) Average annual proceeds per
unit of outlay.
(ii) Discounted measures: Under this Net Present Worth (NPW), Benefit-Cost Ratio
(BCR), Internal Rate of Return (IRR), N/K Ratio and Sensitivity analysis are
prominent.

UNDISCOUNTED TECHNIQUES
Pay Back Period
The payback period refers to the length of time required to recover the capital cost of the
project. In other words, it is the length of time from the beginning of the project until the net
value of the incremental production stream reaches the total amount of capital investment (Net
value of incremental production = value of incremental production less O&M, production
cost).
The formula used to workout the pay back period is
P=I÷E
P = Payback period of the project in years
I = Investment of the project in rupees
E = Annual net cash revenue in rupees

According to this criterion, the shorter the period for recovery the more profitable is the
project. This criterion has two important weaknesses viz.,
a) It fails to consider earnings after the payback period and
b) It does not adequately take into consideration the timing of proceeds.

Value-Added
It is the amount of economic value generated by the activity carried out within each
production unit in the economy. In any production unit, value-added is measured by the
difference between the value of the output of the firm and the value of all inputs purchased
from outside the firm. The capital and labour attached to each firm are considered internal
inputs. Thus, value-added is the value that has been added by the labour and capital of the
enterprise to the economy. Gross value-added includes payment for taxes, interest, rent,
profits, and reserves for depreciation. Deducting depreciation gives the net value-added. The
sum of all the net value-added is referred to as net domestic product. So the more the value
added by the project, the more it will be justified economically.
Capital-Output Ratio
The capital-output ratio is defined as the average value-added produced per unit of capital
expenditure. Projects with low capital-output ratio are favoured.
Proceeds Per Unit of Outlay
It is calculated by dividing total net value of incremental production by the total amount of
investment. So the higher the proceeds per unit of the outlay, the higher the economic viability
of the project. This criterion does not take into consideration the time value of money.
Average Annual Proceeds Per Unit Outlay
To calculate this measure, the total of the net value of incremental production is first divided
by the number of years during which it will be realized and then this average of annual
proceeds is divided by the total capital cost. So if average annual proceeds per unit of outlay
are high, the project will be economically justified for implementation.
DISCOUNTING TECHNIQUES
Discounting techniques take into account the time-value of money. Discounting is essentially
a technique by which one can "reduce" the future benefit and cost streams to their present
worth.
The technique of discounting permits us to determine whether to accept or reject the projects
for implementation that have obviously shaped time-stream that is, patterns of when costs and
benefits fall during the life of the project, when they differ from one another and are of
different durations.
The most common means of doing this is to subtract year by year the costs from the benefits to
arrive at the incremental net benefit-stream, the so-called cash flow and then to discount that.
Then we may consider the differences between these present worth and determine what
discount rate would be necessary to make the net present worth equal to zero (IRR), derive a
ratio of present worth of benefit and cost streams (BCR) and internal rate of return.
Net Present Worth (NPW)
It is simply the present worth of the incremental net benefit or incremental cash flow. It is the
difference between discounted benefits and discounted costs of a project.
T bt − ct
NPV = Σ ---------------- − K
t =0 (1 + r )t

where NPV = net present value from project

bt = benefits ($) received from project in year t
ct = costs ($) of project in year t
1
----------- = discount factor at interest rate r p.a.
1 + r (t )

T = lifetime of project
K = initial (capital) outlay at t = 0
NPW criterion suggests to us to accept all independent projects with a zero or greater net
present worth when discounted at opportunity cost. No ranking of acceptable, alternative
independent project is possible with the present worth criterion because it is an absolute and
not relative measure. A small, highly attractive project may have a smaller net present worth
than a larger marginally acceptable project. If both have positive NPW then both projects
should be undertaken. It is because of lack of funds we cannot undertake both; the
complication is that the opportunity cost of capital has been estimated to be too low. Then the
correct response is to raise the estimate of opportunity cost until we have only the selection of
projects with NPW that are zero or positive and for which, in fact, there will be just sufficient
investment funds.
Example: Estimation of NPW for Two Projects (Hypothetical)
Sericulture (one ha) Mango orchard (one ha)
Year Costs Returns Net Discount NPW (in At Costs Returns Net Discount NPW
(in (in Rs) income factor at Rs) the (in (in Rs) income factor at (in Rs)
Rs) (in Rs) 12% end Rs) (in Rs) 12%
of
Year
1 38900 - -38900 0.8929 - 6th 25000 - -25000 0.507 -12675
34733.81 year
2 9239 28475 19236 0.7972 15334.94 7th 4250 10260 6010 0.452 2716.52
year
3 10575 32550 21975 0.7118 15641.81 8th 4792 12550 7758 0.404 3134.23
year
4 11952 35610 23658 0.6355 15034.66 9th 5368 14530 9162 0.361 3307.48
year
5 12858 39802 26944 0.5674 15288.03 10th 5975 16275 10300 0.322 3316.60
year
NPW 26565.63 11th 6456 19396 12940 0.287 3713.78
year
12th 7187 21470 14283 0.257 3670.73
year
NPW 7184.34
Benefit-Cost Ratio (BCR)
This ratio is obtained when the present worth of the benefit-stream is divided by the present
worth of the cost-stream. Note that the absolute value of BCR will vary depending on the
interest rate chosen. The higher the interest rate, the smaller the resultant benefit-cost ratio
and, if a higher enough rate is chosen, the benefit-cost ratio will be driven down to less than 1.
The BCR criterion suggests to us to accept all independent projects with a benefit-cost ratio of
1 or greater, when the cost and benefit streams are discounted at the opportunity cost of
capital.
n b(t )
Σ ---------
t=1 (1 + r )t
BCR = ---------------------
n c(t )
Σ ---------
t=1 (1 + r )t
The benefit-cost ratio discriminates against projects with relatively high gross returns and
operating costs, even though these may be shown to have a greater wealth-generating capacity
than that of alternatives with a higher benefit-cost ratio.
Example: Estimation of Benefit-cost Ratio (BCR) for Two Projects (Hypothetical)
 Sericulture (one ha) Mango orchard (one ha)
Year Costs Gross Discoun Present Present Year Costs Returns Discoun Present Present
(in Returns t factor worth of worth of (in (in Rs) t factor worth of worth of
Rs) (in Rs) at 12% costs (in gross Rs) at 12% costs (in gross
Rs) returns Rs) returns
(in Rs) (in Rs)
1 38900 - 0.8929 34733.8 - 6th 25000 - 0.507 12675.0 -
1 year 0
2 9239 28475 0.7972 7365.33 22700.2 7th 4250 10260 0.452 1921.00 4637.52
7 year
3 10575 32550 0.7118 7527.29 23169.0 8th 4792 12550 0.404 1935.97 5070.20
9 year
4 11952 35610 0.6355 7595.50 22630.1 9th 5368 14530 0.361 1937.85 5245.33
6 year
5 12858 39802 0.5674 7295.63 22583.6 10th 5975 16275 0.322 1923.95 5240.55
5 year
64517.5 91083.1 11th 6456 19396 0.287 1852.87 5566.55
6 7 year
12th 7187 21470 0.257 1847.06 5517.79
year
24093.7 31278.0
0 4

91083.18 31278.04
Benefit-cost ratio = = 1.41 Benefit-cost ratio = = 1.30
64517.56 24093.70

Internal Rate of Return (IRR)

It is the discount rate that makes the NPW of the incremental net benefit-stream or incremental
cash flow equal to zero. It is the maximum interest that a project could pay for the resources
used if the project is to recover its investment and operating costs and still break even.
It is the rate of return on capital outstanding per period while it is invested in the project. IRR
criterion suggests to us to accept all independent projects having an internal rate of return
equal to or greater than the opportunity cost of capital. One cannot simply choose that discount
rate which will make the incremental net benefit-stream equal to zero.
There is no formula for finding the internal rate of return straightaway. We are forced to resort
to a systematic procedure of trial and error to find that discount rate which will make the net
present worth of incremental net benefit-stream equal to zero.
The most difficult aspect of the trial and error procedure is making the initial estimates. If the
estimate is too far from the final result, then several trials will have to be made to find two
rates close enough together to permit accurate interpolation (interpolation is the process of
finding a desired value between two other values).
The formula of interpolation is given below:
Lower Difference NPV at lower discount rate
IRR = discount + between two x -----------------------------------
rate discount rates Sum of NPVs at lower and higher
discount rates (signs ignored)

In practice, it is better not to interpolate between intervals greater than about five percent
because the wider intervals can easily introduce an interpolation error.
Example: Estimation of IRR for Sericulture (one ha) (Hypothetical)
Year Costs Gross Net Discount Net present Discount Net present
(in Rs) income income factor worth (in Rs) factor worth (in Rs)
(in Rs) (in Rs) (40%) (43%)
1 38900 - -38900 0.7143 -27786.27 0.6993 -27202.77
2 9239 28475 19236 0.5102 9814.21 0.4890 9406.4
3 10575 32550 21975 0.3644 8007.69 0.3419 7513.25
4 11952 35610 23658 0.2603 6158.17 0.2391 5656.62
5 12858 39802 26944 0.1859 5008.89 0.1672 45.5.04
52913 1202.69 -121.46

1202.69
IRR = 40 + 3 = 40 + 3(0.9083) = 40 + 2.7249 = 42.7249% = 42.7%
1202.69 + 121.46

Net Benefit-Investment Ratio (NBIR) (N/K Ratio)

NBIR is simply the present worth of net benefits divided by the present worth of investment.
To calculate this measure, simply divide the sum of the present worth after the incremental net
benefits-stream has turned positive by the sum of the present worth of the negative
incremental net benefits in the early years of the project.
The reason for calculating the net benefit-investment ratio in this manner is that we are
interested in an investment measure that selects projects on the basis of return to investment
during the initial phases of a project. If the net benefit - investment ratio is 1 or greater, when
we are discounting at the opportunity cost of capital, choose the project beginning with the
largest ratio value and proceed until available investment funds are exhausted. It may be used
to rank projects in those instances in which, for one reason or another, sufficient funds are not
available to implement all the projects. It, thus, satisfies a frequent request of the decision-
makers that projects be ranked in the order in which they should be undertaken. It is suitable
for use when there is incomplete knowledge of all the projects.
At any given discount rate we cannot, with confidence, use the net present worth, or the
internal rate of return, or the benefit-cost ratio as ranking measures; our criterion tells us only
to accept all projects which need the selection criterion for those three measures. The net
benefit-investment ratio is the only measure of the ones we have discussed that can be used
with confidence to rank directly.
Sensitivity Analysis (Treatment of Uncertainty)
Several times when the project is under execution, certain things go wrong with the project
with the result that the desired benefits cannot be achieved within the stipulated time frame.
For example, the actual execution of the project is delayed or the cost exceeds the original
estimated cost (cost over-run). In such cases, the results get fairly changed. Many times, the
IRR and NPW thus get reduced or the BCR becomes negative from positive. In order to take
care of this problem, while the projects are under preparation or under examination, certain
assumptions are applied for testing the viability of the project.
For example, it is at times assumed that there will be a cost over-run by, say, 25% or a
reduction in revenues, say, by 10% or a delay in getting the benefits, say, by three years and so
on. Keeping one or two or all such assumptions in view, the streams of costs and benefits are
re-drawn and the figures of costs and benefits are discounted and the NPW, BCR and IRR are
re-worked out. This gives a fairly good picture as to what will be the fate of the projects if
such problems occur. For the sensitivity analysis, it is very essential to carry out such an
exercise in projects where high financial stakes are involved.
 Reference

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