VYDEHI SCHOOL OF EXCELLENCE

STUDY MATERIAL
SUBJECT: ECONOMICS
CLASS: XII

CHAPTER 6: RURAL DEVELOPMENT

Rural Development and Rural credit:

Rural development is a comprehensive term which essentially focuses on action for the
development of areas that are lagging behind in the overall development of the village
economy. It is a process whereby the standard of living of rural people, especially poor
people, rises continuously.
The basic objectives of rural development are

• Increasing the productivity of the agricultural sector, so that the income of the farmers
increases.
• Generating alternative means of livelihood in the rural areas, so that dependency on
agriculture sector is reduced.
• Promoting education and health facilities in the rural areas, so that human
development is also achieved.

Key Areas in Rural Development

Some of the areas which are challenging and need fresh initiatives for development in rural
India are as follows

• Development of the productive resources of each locality.

• Development of human resources including literacy (more specifically female
literacy) education and skill development.
• Development of human resources like health, addressing both sanitation and public
health.
• Honest implementation of land reforms.
• Infrastructure development like electricity, irrigation, credit, marketing, transport
facilities including construction of village roads and feeder roads to nearby highways,
facilities for agriculture research and extension and information dissemination.
• Special measures for alleviation of poverty and bringing about significant
improvement in the living conditions of the weaker sections of the populations
emphasising access to productive employment opportunities.

The share of agriculture sector’s contribution to GDP was on a decline, the population
dependent on this sector did not show any significant change. Further, after the initiation of
reforms, the growth rate of agriculture sector decelerated to 2.3% per annum during the
1990s, which was lower than the earlier years.

Rural Credit
Credit is the life line of the farming activity. Rural credit means providing credit for the
forming community. Farmers need credit because

• Most formers in India are small and marginal land holders who practice subsistence
farming. They have no surplus for further production.
 • The gestation period between sowing and harvesting is quite high. So, farmers have to
borrow to fulfil their various needs during this period.

Borrowings of a farmer can before the following purpose

• Productive Borrowings These borrowings include loans to buy seeds, fertilisers and
agricultural equipment and implements.
• Un-productive Borrowings These borrowings include loans for social purposes such
as marriage and festive occasions.

Types of Rural Credit

Credit needs of farmers may be classified as

• Long-term Credit These loans are required to acquire permanent assets like tractors,
land, costly equipment, tube-wells, etc. These loans are for a period of 5 to 20 years.
• Medium-term Credit These loans are required for purchasing machinery, constructing
fences and digging wells. Such loans are generally stretch over a period of 12 months
to 5 years.
• Short-term Credit These loans are required for buying seeds, tools, manure and
fertilisers, etc. This credit is given to the needy borrowers by cooperatives,
moneylenders and banks. These loans are for a period of 6 to 12 months.

Sources of Rural Credit

Credit in the rural sector is available from two sources
1. Non-institutional Sources of Rural Credit The major non-institutional sources of rural
credit are moneylenders, friends, relatives, landlords, shopkeepers and commission agents.
Moneylenders provided about 93.6% of total financial requirement rural areas in 1951-52 and
presently it is 30%. The short-term credit needs of the formers are met from commission
agents, friends and relatives which supply roughly 50% of total rural borrowings, Non-
institutional sources of credit are not encouraged by government because of the following
reasons

• They charge high rate of interest.

• They acquire land on failure to pay interest and loan.
• They manipulate accounts.

The Poor Women’s Bank Kudumbashree is women-oriented community-based poverty

reduction programme being implemented in Kerala. In 1995, a thrift and credit society were
started as a small savings for poor women with an objective to encourage savings. The thrift
and credit society mobilised Rs. 1 crore as thrift savings. These societies have been acclaimed
as largest informal banks in Asia in terms of participation and savings mobilised.

2. Institutional Sources of Rural Credit In regard to rural credit, major change occurred after
1969, when India adopted social banking and multi-agency approach to adequately meet the
needs of rural credit. Different institutions were formed to provide the rural credit.

The major institutional sources of rural credit are as follows

(I) National Bank for Agriculture and Rural Development (NABARD) It was set up in
1982 as an apex body to coordinate the activities of all institutions involved in the rural
financing system. It has an authorised share capital of Rs. 500 crores. The RBI has
contributed half of the share capital while the other half has been contributed by Government
of India.
The main functions of NABARD are

• To grant long-term loans to the State Government for subscribing to the share capital
of cooperative societies.
• To take the responsibility of inspecting cooperative banks, Regional Rural Banks
(RRBs) and primary cooperative societies.
• To promote research in agriculture and rural development.
• To serve as a refinancing agency for the institutions providing finance to rural and
agricultural development.
• To help tenant farmers and small farmers to consolidate their land holdings.

The national agricultural credit fund has been transferred from RBI to NABARD to form a
part of its national rural credit fund.

(ii) Self Help Groups (SHGs) Formal credit system has proven inadequate. It has also not
been fully integrated into the overall rural, social and community development.
Due to the demand of some kind of collateral, vast proportion of poor rural households were
automatically out of the credit networks. Self Help Groups emerged to fill this gap, created
by formal credit system.

Self Help Groups (SHGs) promote thrift in small proportions by a minimum contribution
from each member. By March end 2003, more than Rs. 7 lakh SHGs had reportedly been
credit linked. Such credit provisions are generally referred to as micro-credit programmes.
SHGs have helped in the empowerment of women. However, borrowings from SHGs are
mainly confined to consumption purposes.

(iii) Regional Rural Banks (RRBs) As a supplement to commercial banks, the regional rural
banks have also been opened. These have been set up under the Regional Rural Banks Act-of
1976. Their banking services are meant for small and marginal formers and artisans, etc.
They cater exclusively to the needs of weaker section. Nearly 90% of the loan of RRBs were
provided to the weaker section.

Kisan Credit Card Scheme:

Kisan Credit Card scheme (KCCs) was introduced by the government in 1998-99. It
facilitates access to credit from commercial banks and regional rural banks. Under the
scheme, the eligible farmers are provided with a Kisan card and pass book from the relevant
bank. The farmers can make withdrawals and repayments of cash within the credit limit as –
specified in the Kisan Credit Card (KCC).

(iv) Commercial Banks: They were inducted into the field of agricultural credit under the
Banking Reforms Act, 1972. The share of commercial banks in the supply of agricultural
credit has considerably improved. It was 46.9% during the year 2006-07.
Commercial banks disburse agricultural credit for the purchase of inputs, cattle, tractors,
dairy farming, installation of tube-wells, etc.

(v) Cooperative Credit Societies: The cooperative credit societies are actively engaged in
addressing credit needs of the farmers, besides offering a host of related services. Notably
these societies provide guidance in diverse agricultural operations with a view to raise crop
productivity. Currently, cooperatives account for 16-17% of rural credit flow. The main focus
of cooperative credit society is to provide timely and increased flow of credit to the farmers.

Latest Status of Agricultural Credit

The following points reveal the latest status of agricultural credit

• The credit flow in this sector in 2011-12 is placed at Rs. 475000 crores.
• The agricultural debt waiver and debt relief scheme was announced in the union
budget 2008-09.
• Farmers have been receiving crop loans up to a principal amount of Rs.3 lakh at an
effective rate of 4% per annum.
• To provide adequate and timely credit support to the formers, the Kisan Credit Card
(KCC) scheme was
introduced in February, 1999. About 10.78 crore KCCs had been issued up to October
2011.
• Government is implementing a revival package for short-term rural cooperative credit
structure involving financial outlay of Rs. 13596 crores.

Rural Banking : A Critical Appraisal

After the nationalisation of commercial banks in 1969, the rapid expansion of the banking
system in rural areas has been witnessed. Rural banking has raised the level of rural farm and
non-farm output, income and employment especially after the green revolution.
Advantages of Rural Banking

• Raising farm and non-farm output by providing services and credit facilities to
farmers.
• Generating credit for self-employment schemes in rural areas.
• Achieving food security which is clear from the abundant buffer stocks of grains.

Limitations of Rural Banking

• Small and marginal formers receive only a very small portion of the institutional
credit.
• Rural banking is suffering from the problems of large number of over dues and
default rate.
• The sources of institutional finance are inadequate to meet the requirements of
agricultural credit.
• There exist regional inequalities in the distribution of institutional credit.

It is suggestible that more and more regional rural banks should be set up to need the credit
need of the rural and backward areas of India.

Agricultural Marketing, Diversification of Agricultural Activities

Agricultural Marketing Agricultural marketing is the process that involves functions of
assembling, storage, processing, packaging, transportation, grading and distribution of
agricultural commodities throughout the country.
In other words, agricultural marketing covers the services involved in moving an agricultural
product from the farm to the consumer.
Need of Agriculture Marketing
Need of agriculture marketing originates due to the problems faced by farmers.
Different types of problems faced by the farmers are
 • Farmers while selling their produce to traders suffered from faulty weighing and
manipulation of accounts.
• Due to lack of knowledge about the prices prevailing in the markets, farmers are often
forced to sell their produce at low prices.
• Farmers did not have proper storage facilities to keep back their produce for selling
later at better price.
Approximately 10% of goods produced in farms is wasted due to lack of storage.

Distress Sale Lack of agricultural marketing infrastructure often forces the farmers to sell
their produce at low prices for fear of spoilage or to pay off an imminent debt. This is termed
as distress sale. Farmers tend to suffer highly on account of these sales, because they not only
get a low price for their produce, but are also cheated by use of false weights and are charged
a high commission.

Measures by Government to Improve Agriculture Marketing:

Four measures which were initiated to improve the agriculture marketing aspect are discussed
below
1. Regulation of Markets: The first measure to improve agriculture marketing aspect is
regulation of markets to create orderly and transparent marketing conditions. Regulated
markets have been established where sale and purchase of the produce is monitored by the
Market Committee consisting of representatives of government, farmers and the traders.

Market committee ensure that the farmers get appropriate price of their produce. By and
large, this policy benefited farmers as well as consumers. However, there is still need to
develop about 27000 rural periodic markets as regulated market places to realize the full
potential of rural markets.

2. Improvement in Physical Infrastructure It is the second measure to improve the agriculture

marketing aspect. The current infrastructure facilities like; roads, railways, warehouses,
godowns, cold storages and processing units etc are inadequate to meet the growing demand.
Through this measure government ensures the improvement in physical infrastructure.

3. Cooperative Marketing It is the third measure taken by government in realising the fair
prices for farmers products. As members of these societies, farmers find themselves better
bargainers in the market and get better prices of their produce through collective sale. The
success of milk cooperatives in Gujarat and some other parts of the country are the brilliant
examples of cooperative marketing.
Different problems faced by cooperative during the recent past are

• Inadequate coverage of former members.

• Lack of appropriate link between marketing and processing cooperatives.
• Inefficient financial management.

4. Supporting Policies
It is the fourth measure taken by government to improve agriculture marketing system.
Different supportive policies applied in this regard are

• Minimum Support Price (MSP) It is an important step to improve agriculture market

system. MSP is an assurance to the farmers that a minimum price will be fixed by the
government to formers’ produce, no purchasing can be done below this price,
however farmers can sell their produce in open market above MSP. This policy
assured a minimum income to the farmers.
 • Maintenance of Buffer Stocks of Wheat and Rice Purchases from the farmers are kept
by Food Corporation of India as buffer stocks.
• Distribution of Food grains and Sugars Through Stocks purchased by government at
MSP are used primarily for Public Distribution System (PDS). Distribution of food
grains and other necessary items like kerosene oil at subsidised price to the poor takes
place through fair price shops.
• Emerging Alternative Marketing Channels in India, alternative marketing channels
are emerging. Through these channels, farmers directly sell their products to the
consumers. This system increases farmers’ share in the prices paid by the consumers.

Important examples of such channels are

• Apni mandi (Punjab, Haryana and Rajasthan).

• Hadaspar mandi (Pune); Rythu Bazars (Vegetables and fruit market in Andhra
Pradesh).
• Uzhavar sandies (Farmers’ Markets in Tamil Nadu).
• Several national and international fast food chains and hotels are also entering into
contracts with the farmers to supply them farm products (fresh vegetables and fruits)
of the desired quality.

Diversification into Productive Activities

Diversification means a major proportion of the increasing labour force in the agricultural
sector needs to find alternate employment opportunities in other non-farm sectors.
Diversification is an emerging challenge in the context of rural development. It has two
aspects

• Diversification of crop production

• Diversification of productive activity

Diversification of Crops
This implies a shift from single cropping system to multi-cropping system. In India, where
subsistence farming is still dominant, it may also mean a shift from subsistence farming to
commercial farming.
Significance of Diversification of Crops Diversification of crops is important because it will

• Minimise the risk occurring. due to failure of monsoon.

• Minimise the market risk arising due to price fluctuations.

Need of Diversification into Productive Activities

Agriculture sector is a seasonal based activity, most of agriculture employment activities are
concentrated in Kharif season. But during Rabi season, in the areas where irrigation facilities
are inadequate, it becomes difficult to find gainful employment.

So, there is a need to focus on allied activities, non-farm employment and other emerging
alternatives of livelihood. Also, agriculture sector is already overcrowded, a major proportion
of the increasing labour force needs to find alternate employment opportunities in other non-
farm sectors.

Some non-farm activities are discussed below

1. Animal Husbandry
In India, the forming community uses the mixed crop-livestock forming system. Cattle, goats,
fowl are the widely domesticated species. Livestock production provides increased stability
in income, food security, transport, fuel and nutrition for the family without disrupting other
food producing activities.
Today, livestock sector alone provides alternate livelihood options to over 70 million small
and marginal farmers including landless labourers.

Poultry accounts for the largest share with 55% followed by others. India has about 304
million cattle, including 105 million buffaloes.

A significant number of women also find employment in the livestock sector.

Milk production in the country has increased by more than five times between 1960-2009.
This can be attributed mainly to the successful implementation of ‘operation flood’.

Meat, eggs, wool and other by-products are also emerging as important productive sectors for
diversification.
In numbers, our livestock population is quite impressive but its productivity is quite low as
compared to other countries. It requires improved technology and promotion of good breeds
of animals to enhance productivity. Improved veterinary care and credit facilities to small and
marginal formers and landless labourers would enhance sustainable livelihood options
through livestock production.

Operation Flood
It is a system whereby all the farmers can pool their milk produced according to different
grading (based on quality) and the same Is processed and marketed to urban centres through
cooperatives.
In this system farmers are assured of fair price and Income from the supply of the milk to
urban markets. Gujarat state is held as a success story in the efficient implementation of milk
cooperatives which has been emulated by many states.

Fisheries
The socio-economic status of fishermen is comparatively lower because of

• rampant underemployment
• low per capital earnings
• absence of mobility of labour to other sectors
• high rate of illiteracy
• indebtedness

Horticulture
Due to varying climate and soil conditions, India has adopted growing of diverse horticultural
crops such as fruits, vegetables, tuber crops, flowers, medicinal and aromatic plants, spices
and plantation crops. These crops play an important role in providing food, nutrition and
employment.

The period between 1991-2003 is called ‘golden revolution’ because during this period, the
planned investment in horticulture became highly productive and the sector emerged as a
sustainable livelihood option.

India has emerged as a world leader in producing a variety of fruits, like mangoes, bananas,
coconuts, cashew, nuts and a number of species and is the second largest producer of fruits
and vegetables.
Economic conditions of many formers engaged in horticulture has improved and has become
a means of improving livelihood for many unprivileged classes.

Flower harvesting, nursery maintance, hybrid seed production and tissue culture, propagation
of fruits and flowers and food processing are highly profitable employment opportunities for
rural women. It has been estimated that this sector provides employment to around 19% of
the total labour force.

Other Alternate Livelihood Options

The Information Technology (IT) has revolutionised many sectors in the Indian economy.
It plays a very significant role in achieving sustainable development and food security in the
following ways

• It can act as a tool for releasing the creative potential and knowledge embedded in our
people.
• Issues like weather forecast, crop treatment, fertilisers, pesticides storage conditions,
etc can be well administered, if expert opinion is made available to the farmers.
• The quality and quantity of crops can be increased manifold, if the farmers are made
aware of the latest equipment, technologies and resources.
• It has ushered in a knowledge economy.
• It has potential of employment generation in rural areas.

Every Village A Knowledge Centre

MS Swaminathan Research Foundation, an institution located in Chennai, Tamil Nadu, with
support from Sir Ratan Tata Trust, Mumbai, has established the Jamshedji Tata National
Virtual Academy for Rural Prosperity. The academy envisaged to identify a million grass
root knowledge workers who will be% enlisted as fellows of the academy.

The programme provides an info-kiosk (PC with internet and video conferencing facility,
scanner, photocopier, etc) at a low cost and trains kiosk owner; the owner then provides
different services and tries to earn a reasonable income. The Government of India has
decided to join the alliance by providing financial support of Rs. 100 crores.

Sustainable Development and Organic Farming

Conventional agriculture uses chemical fertilisers and toxic pesticides, etc which enter the
food supply, penetrate the water resources, harm the livestock, deplete the soil and devastate
natural eco-system. Due to these problems, an eco-friendly technology is required.
Organic farming is such technology which restores, maintains and enhances the ecological
balance. There is an increasing demand for organically grown food to enhance food safety
throughout the world.
Benefits of Organic Farming

• Organic forming substitutes costlier agriculture inputs like HYV seeds, chemical
fertilizers, pesticides, etc with locally produced organic inputs that are cheaper and
thereby generate good returns on investment.
• Organic forming also generates income through exports.
• Organically grown food has more nutritional value than chemical forming, thus
providing us with healthy foods. Produce pesticide free and produced in an
environment sustainable way.
• Due to more labour requirement in organic farming, it is an attractive proposition for
India.
Limitations of Organic Farming

• Yields from organic forming are less than modern agricultural forming in the initial
years. Therefore, small and marginal formers may find it difficult to adapt to large
scale production.
• Organic produce has shorter shelf life than sprayed produce.
• Choice in production of off-season crops in quite limited in organic forming.