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Rural Finance in Indian Economy

Rural Finance in Indian Economy

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○ To revise the financial capability of the lending agencies in rural ares to analysis the drawbacks & advantage of flow of credit

in rural areas. ○ The rural credit system should be strengthen ○ To study the role of rural finance in Indian Economy.

Assigned project task is completed by going through various books, committee reports regarding Indian agriculture & non-farming sector, also role of various financial institutions in this grassland.

The project report entitled here is purely study project and does not include any predictions or forecast regarding the future trends in the rural sector.

The project is based on various references taken from book & reports mentioned in the bibliography at the end of the assign project.

HTTP://PAKISTANMBA.JIMDO.COM FOR DOWNLOADING THIS REPORT AND FOR MORE PROJECTS, ASSIGNMENTS, REPORTS ON MARKETING, MANAGEMENT, ECONOMICS MARKETING MANAGEMENT, ACCOUNTING, HUMAN RESOURCE, ORGANIZATIONAL BEHAVIOR, FINANCIAL MANAGEMENT COST ACCOUNTING VISIT HTTP://PAKISTANMBA.JIMDO.COM

1.0 Meaning of an Underdeveloped Economy:

There is a big difference between underdeveloped and developed countries. The United Nations group of experts states, “We have had some difficulty in interpreting the term ‘underdeveloped countries’. We frankly consider that, per capita real income is low when

compared with the per capita real incomes of the United States of America, Canada, Australia & Western europe. Briefly a poor country. The term ‘underdeveloped countries’ is relative. In practical, those countries which have real per capita incomes less than a quarter of the per capita income of the United States, are underdeveloped countries. But recently UN publication prefer to describe them as ‘Developing economies’. The term ‘developing economies’ signifies that though still underdeveloped, the process of development has been initiated in these countries. Thus, we have two economies ‘developing economies’ & ‘developed economies’. The World Bank issued in its World Development Report (1991) classified the various countries on the basis of Gross National Product (GNP) per capita. Developing countries are divided into: (a) Low income countries with GNP per capita of $580 and below in 1989; and Middle income countries with GNP per capita ranging between $ 580 and $ 6,000. As against them, the High-income Countries which are mostly members of the Organisation for Economic Co-operation and development (OECD) and some others have GNP per capita of more than $ 6,000. The above data given in the table noted that in 1989 low income countries comprise nearly 57 percent of the world population (2,948 million), but account for only 5 percent of total world GNP. The middle income countries, which are less developed than the highly developed than the low income countries comprise about 21 percent of world population but account for 11 percent of world GNP. Taking these two groups which are popularly described as developing economies or ‘underdeveloped economies’, it may be stated that they comprise over threefourths of the world population but account for about one-sixth of the world GNP. Most countries of Asia, Africa, Latin America and some countries of Europe are included in them.

Distribution of World Population & World GNP among various groups of Countries in 1989

GNP (Billion 1. Low Income Economies US $) 981 (4.7)

Total (million) 2,948

GNP Per (US $) 330

Population Capita

(56.6) 2. Middle Income 2,253 (10.9) 15,230 (73,4) ___ 20,736 (100.0) 283 (1.4) 1,105 (21.2) 831 (16.0) 323 (6.2) 5,206 (100) 832 (15.9) 2,040 18,330 ___ 3,980 340 Economies 3. High Income Economies 4. Other Economies World India

Indiawith its population of 832 million in 1989 and with its per capita income of $340 is among poorest of the economies of the world. It had a share of 15.9 per cent in world population, but a little more than 1 percent of world GNP. Three observationmade here regarding the U.N. classification of developed and developing countries on the basis of per capita income. First, there is gross inequality of incomes between the rich and the poor countries. Second, the gap in per capita income (and naturally in the level of living) between the rich and poor countries is even widening over the years—the annual rate of growth of per capita income of the rich countries was higher during 1965-89 as compared with the poor countries. More recently, the growth rate among low-income countries has also shown an increase and if this is sustained, the gap may show a decline over a period. Third, all the high income countries are not necessarily developed countries. For instance, the high income oil-exporting countries have high per capita income but this is mainly due to their exports of oil; really speaking, they are not developed economies. Recently, with a decline in world oil prices, the GNP per capita has started showing a decline in this group.

Definition: “A country which has good potential prospects for using more capital or more labour or more available natural resources, or all of these, to support its present population on a higher level of living or if its per capita income level is already fairly high, to support a large population on a not lower level of living.” As per this definitions the problem of development is mainly the

problem of development is mainly the problem of poverty and prosperity. The basic criterion then becomes whether the country has good potential prospects of raising per capita income, or of maintaining an existing high level of per capita income for an increased population.”

1.1 Basic Characteristics Of The Indian Economy As An Underdeveloped Economy: Indiais an underdeveloped economy. Its is a vast country having an area of 3.3 million sq. km. It has almost 5,76,000 villages. The population of Indiais widely scattered over villages and towns. Nearly 75% of the population lives in rural & semi urban areas, while the rest lives in towns. There is doubt that the bulk of its population lives in conditions of misery. Poverty is not only acute but is also a chronic malady in India. At the same time, there exist unutilized natural resources. It is, therefore, quite important to understand the basic characteristics of the Indian economy, treating it as one of the underdeveloped but developing economies of the world. 1. Low per capita income:- Underdeveloped economies are marked by the existence of low per capita income. The per capita income of an Indiais lowest in the world. The per capita income in Switzerland in 1989 was about 88 times, in West Germany about 60 times, in U.S.A. 61 times and in Japan 70 times of the per capita income in India. It is also important that developed economies are growing at a faster rate than the Indian economy and as a consequence, the disparity in the levels of income has become wider during period 1960-89.

2. Occupational pattern:- Primary producing. One of the basic characteristics of an underdeveloped economy is that it is primary producing. A very high proportion of working population is engaged in agriculture, which contributes a very large share in the national income. In India, in 1981, about 71 per cent of the working population was engaged in agriculture and its contribution to national income was 36 per cent. In Asia, Africa and Middle East countries countries from two-thirds to more than four-fifths of the population earn their livelihood from agriculture, and in most Latin American countries from two-thirds to three-fourths of population engaged in agriculture in developed countries is much less than the proportion of population engaged in agriculture in underdeveloped countries.

3. Heavy Population pressure:- The main problem in Indiais the high level of birth rates coupled with a falling level of death rates. The rate of growth of population which was about 1.31 per cent per annum during 1941-50 has risen to 2.11 per cent during 1981-91. The chief cause of this rapid spurt to population growth is the steep fall in death rate from 49 per thousand during 1911-20 to 9.6 per thousand in 1990; as compared to this, the birth rate has declined from about 49 per thousand during 1911-20 to 29.9 per thousand in 1990. The fast rate of growth of population necessitates a higher rate of economic growth in order to maintain the same standard of living of the population. To maintain a rapidly growing population, the requirements of food, clothing, shelter, medicine, schooling, etc. all rise. Thus, a rising population imposes greater economic burdens and, consequently, society has to make a much greater effort to initiate the process of growth.

4. Prevalence of chronic unemployment and underemployment: In India labouris an abundant factor and, consequently, it is very difficult to provide gainful employment to the entire working population. In developed countries, unemployment is of a cyclical nature and occurs due to lack of effective demand. In Indiaunemployment is structural and is the result of a deficiency of capital. The Indian economy does not find sufficient capital to expand its industries to such an capacity that the entire labour force is absorbed.

5. Low rate of capital formation:Another basic characteristic of the Indian economy is the existence of capital deficiency which is reflected in two ways— first, the amount of capital per head available is low; and secondly, the current rate of capital formation is also low. Following table reveals that gross capital formation in India is less than that of developed countries.

Gross Domestic Investment and Saving (As per cent of Gross Domestic Product)

Gross Domestic Investment 1965 Japan Australia Germany U.S.A. U.K. India 28 26 23 12 13 17 1989 33 26 22 15 21 24 1965 30 23 23 12 12 15

Gross Domestic Saving 1989 34 23 27 13 18 21

As per Colin Clark to maintain the same level of living a country requires an additional investment of 4 percent per annum if its population increases at the rate of 1 percent per annum. In a country like Indiawhere the rate of population growth is 2.11 percent (during 1981-91), about 8 percent investment is needed to offset the additional burdens imposed by a rising population. Thus, Indiarequired as high as 14 percent level of gross capital formation in order that it may cover depreciation and maintain same level of living. A still higher rate of gross capital formation alone can give a way for economic growth to improve living standard of the population.

2.0 History Of The Rural Economic Structure Of India 2.1 Indian Economy in the Pre-British period:The Indian economy in the pre-British period consisted of isolated and self-sustaining villages on the one hand, and towns, which were the seats of administration, pilgrimage, commerce and handicrafts, on the other. Means transport & communication were highly underdeveloped and so the size of the market was very small.. a. The structure and organization of villages: The village community was based on a simple division of labour. The farmers cultivated the soil and tended cattle. Similarly, there existed classespeople called weavers, goldsmiths, carpenters, potters, oil pressers, washer men, cobblers, barber-surgeons, etc. All these occupations were hereditary and passed by

tradition from father to son. Most of the food produced in the village was consumed by the village population itself. The raw materials produced from primary industries were the feed for the handicrafts. Thus interdependence of agriculture and hand industry provided the basis of the small village republics to function independently. The villages of Indiawere isolated and self-sufficient units which formed an enduring organization. But this should not lead us to the conclusion that they were unaffected by wars or political decisions. They did suffer the aggressors and were forced to submit to exactions, plunder and extortion, but the absence of the means of transport and communications and a centralized government helped their survival.

b. Classes of Village India: There were three distinct classes in village India: (i) the agriculturists, (ii) the village artisans and menials, and (iii) the village officials. The agriculturists could be further divided into the land-owning and the tenants. Labourand capital needed was either supplied by the producers themselves out of their supplied by the producers themselves out of their savings or by the village moneylender. These credit agencies supplied finance at exorbitant rates of interest but since the moneylender and the landlord were the only sources of credit, the peasants and even the artisans were forced to depend on them. The village artisans and menials were the servants of the village. Most of the villages had their panchayatsor bodies of village elders to settle local disputes. The panchayats were the court of justice.

2.2 Industries & handicrafts in Pre-British India: The popular belief that India had never been an industrial country,is incorrect. It was true that agriculture was the dominant occupation of its people but the products of Indian industries enjoyed a worldwide reputation. The muslim of Dacca, the calicos of Bengal, the sarees of Banaras and other cotton fabrics were known to the foreigners. The chief industry spread over the whole country was textile handicrafts. The textile handicrafts includes chintzes of Lucknow, dhotis and dopattas of Ahmedabad, silk, bordered cloth of Nagpur and Murshidabad. In addition to cotton fabrics, the shawls of Kashmir, Amritsar and Ludhiana were very famous. India was also quite well-known for her artistic industries like marble-work, stone-carving, jewellery, brass, copper and bell-metal wares, wood-carving, etc. The cast-iron pillar near Delhi is a

testament to the high level of metallurgy that existed in India. In this way Indian industries, “Not only supplied all local wants but also enabled India to export its finished products to foreign countries”.

Decline Of Indian Handicrafts And Progressive Ruralisation Of The Indian Economy: Before the beginning of Industrial Revolution in England, the East India Company concentrated on the export of Indian manufactured goods, textiles, spices, etc., to Europewhere these articles were in great demand. But the Industrial Revolution reversed the face of Indian’s foreign trade. Tremendous expansion of productive capacity of manufactures resulted in increased demand of raw materials for British industry and the need to capture foreign markets. Following principal causes that led to the decay of handicrafts were as follows:a. Disappearance of Princely courts: The growth of industries is only possible due to patronage of nawabs, princes, rajas & emperors who ruled in India. The British rule meant the disappearance of this patronage enjoyed by the handicrafts. Cotton and silk manufactures suffered especially. b. Competition of machine-made goods: The large-scale production that grew as a result of Industrial Revolution meant a heavy reduction in costs. It also created a gigantic industrial organization and, consequently, the machine-made goods began to compete with the products of Indian industries nadhandicrafts. This led to the decline of textile handicrafts. Whereas the British emphasized the free import of machine-made manufactured goods they did not allow the import of machinery as such. The decline of Indian handicrafts created a vaccum which could be filled by the import of British manufactures only. c. The development of new forms and patterns of demand as a result of foreign influence: With the spread of education, a new classs grew in Indiawhich was keen to imitate western dress, manners, fashions and customs so as to identify itself with the British officials. This led to a change in the pattern of demand. Indigenous goods went out of fashion and the demand for European commodities got a fillip. Besides, there was a loss of demand resulting from the disappearance of princely courts and nobility. Thus, the

British rule, silently but surely, alienated the Indians not only from Indian culture but also diverted in its favour their form and pattern of demand for goods.

2.3 Indian Population an Overview:India is one of the most populated countries in the world, next only to China. Although India occupies only 2.4% of the total area of the world it supports over 15% of the world population, as revealed by statistics. India is land of diversity, spread across its cultures, landscape, languages and religion. India has been invaded from the Iranian plateau, Central Asia, Arabia, Afghanistan, and the West. The Indian people have absorbed these influences producing a remarkable racial and cultural synthesis. Religion, caste, and language are major determinants of social and political organization in India today. The government has recognized 16 languages as official; Hindi is the most widely spoken. Although Hinduism is the popular religion, comprising 83% of the population, India is also home to one of the largest population of Muslims in the world--- more than 120 million. The population also includes Christians, Sikhs, Jains, Buddhists, and Parsis. The caste system reflects Indian historical occupation and religiously defined hierarchies. Traditionally, there are four castes identified, plus a category of outcastes, earlier called "untouchables" but now commonly referred to as "dalits," the oppressed. In reality, however, there are thousands of sub-castes and it is with these sub-castes that the majority of Hindus identify. Despite economic modernization and laws countering discrimination against the lower end of the class structure, the caste system remains an important factor in Indian society. Poverty is one of the major problems facing India. An estimated 30-40 percent of the population lives in poverty. Four out of five of India's poor live in rural areas. About 70% of the people live in more than 550,000 villages, and the remainder in more than 200 towns and cities.

Statistics Population: 966,783,171 (July 1997 est.) Age structure: 0-14 years: 35% (male 173,420,822; female 163,433,648) 15-64 years: 61% (male 304,048,569; female 281,625,342) 65 years and over: 4% (male 22,536,104; female 21,718,686) (July 1997est.) Population growth rate: 1.72% (1997 est.)

Birth rate: 26.19 births/1,000 population (1997 est.) Death rate: 8.87 deaths/1,000 population (1997 est.) Net migration rate: -0.08 migrant(s)/1,000 population (1997 est.) Sex ratio: at birth: 1.05 male(s)/female under 15 years: 1.06 male(s)/female 15-64 years: 1.08 male(s)/female 65 years and over: 1.04 male(s)/female total population : 1.07 male(s)/female (1997 est.) Infant mortality rate: 65.5 deaths/1,000 live births (1997 est.) Life expectancy at birth: total population: 62.41 years male: 61.68 years female: 63.18 years (1997 est.) Total fertility rate: 3.29 children born/woman (1997 est.)

3.0 Natural Resources In Process Of Economic Development In Rural India: To ahieve the development in national output, it is essential to combine natural resources, human resources & capital. The existence or the absence of favourable natural resources can facilitate or retard the process of economic development. Natural resources include land, water resources, fisheries, mineral resources, forests, marine resources, climate, rainfall and topography. 1. Land Resources: The total geographical area of India is about 329 million hectares, but statistical information regarding land classification is available for only about 305 million

hectares; this information is based partly on village papers and partly on estimates. We can explain land utilization pattern from the following table:Land utilization pattern, 1986-87 (million hectares)

Particulars 1. Total geographical area 2. Total reporting area 3. Barren land not available for cultivation 4. Area under forests 5. Permanent pastures and grazing land 6. Culturable waste lands, etc. 7. Fallow lands 8. Net area sown 9. Area sown more than once 10. Total cropped area (8+9)

Area 329 305 41 67 12 19 26 140 37 177

Percent -100 13 22 4 6 9 46 12 58

2.

Forest Resources: Forest are an important natural resource of India. They have a moderating influence against floods and thus they protect the soil against erosion. They provide raw materials to a number of important industries, namely, furniture, matches, paper, rayon, construction, tanning, etc. The total area under forests was 67 million hectares in 1986-87 which was about 22 percent of the total geographical area,a recent estimate has put it at 75 million hectares or 23 percent of the total geographical area. Forests in India are mostly owned by states (95%); a small portion is under the ownership of corporate bodies and private individuals.

3. Water Resources: India is one of the wettest countries in the world, with average annual rainfall of 1100 m.m. India’s water policy, since Independence, has mainly concentrated on highly visible large dams, reservoirs and canal systems, but has ignored minor water works such as tanks, dugwells and tubewells.

4. Fisheries: Broadly speaking, fishery resources of Indiaare either inland or marine. The principal rivers and their tributaries, canals, ponds, lakes, reservoirs comprise the inland fisheries. The rivers extend over about 17,000 miles, and other subsidiary water channels comprise 70,000 miles. The marine resources comprise the two wide arms of the Indian Oceanand a large number of gulf and bays along the coast. About 1.8 million fishermen draw their livelihood from fisheries, though they generally live on the verge of extreme poverty. Out of a total catch of 3 million tones of fish in 1988-89, over 1 million tones came from inland fisheries and nearly 2 million tones from marine sources. India is the seventh largest producer of fish in the world and is second in inland fish production, which contributes 45 per cent of total production in the country. Fish production reached the level of 5.4 million tonnes in 1997-98, comprising 3.0 million tonnes of marine fishery and 2.4 million tonnes of inland fishery and is expected to reach 5.6 million tonnes in 1998-99 with 3.0 million tonnes of marine fishery and 2.6 million tonnes of inland fishery, respectively. During 1998-99, the export of marine products came down to US$ 1,038 million from US$ 1,208 million during 1997-98

3.1 Infrastructure In Process Of Economic Development In Rural India: The prosperity of a Rural India depends directly upon the development of agriculture and industry. Agricultural production, however, requires power, credit, transport facilities, etc. Industrial production requires not only machinery & equipment but also skilled man-power, management, energy, banking facilities, marketing facilities, transport services which include railways, roads, shipping, communication facilities, etc. All these facilities and services constitute collectively the infrastructure of an economy and the development and expansion of

these facilities are an essential pre-condition for increasing agricultural & industrial production in a rural area.

Types of Infrastructural facilities—often referred towards economic and social development of rural India: 1. Energy: The most important single factor which can act constraint on economic growth of a country is the availability of energy. There is a direct correlation between the degree of economic growth, the size of per capita income and per capita consumption of energy. Since energy is an essential input of all productive economic activity, the process of economic development inevitably demands increasing higher levels of energy consumption. There are broadly two sources of energy commercial energy & noncommercial energy. Following are the various commercial energy:-coal & lignite, Oil & gas, Hydro-electric resource, Uranium. Agricultural wastes, Animal dung. & non-commercial energy are Fuelwood,

2.

Power: Electric power, which is one form of energy, is an essential ingredient of economic development and, it is required for commercial and non-commercial uses. Commercial uses of power refer to the use of electric power in industries, agriculture and transport. Non-commercial uses include electric power required for domestic lighting, cooking, use of mechanical gadgets like the refrigerators, air conditioners, etc. With the growth of population and with the increase in the use of modern gadgets in daily life, it is quite natural that the demand for electricity for domestic use should grow at a fast rate.

3. Transport: If agriculture and industry are regarded as the body and the bones of the economy, which help the circulation of men and materials. The transport system helps to broaden the market for goods and by doing so, it makes possible large-scale production through division of labour. It is also essential for the movement of raw materials, fuel, machinery etc., to the places of production. The more extensive and continuous the production in any branch of activity the greater will be the need for transport facilities. Transport development helps to open up remote regions and resources for production.

Regions may have abundant agricultural, forest and mineral resources but they cannot be developed if they continue to be remote and inaccessible.

Modes of transport & communication facilities: Indian Railways: The most important form of transport system in India is the Indian railways, which is also the country’s largest single undertaking with a capital investment of around Rs. 15,000 crores. In 1950-51, railway route length was 53,600 kms but by 1990-91 it had increased to nearly 62,400 kms-an increase at the rate of 0.4 percent per annum.

Roads & Road Transport: Road transport plays an important role in rural economy of country, since it is most suitable for short distances. It has also the advantage of door-todoor service, flexibility, speed and reliability. The utility of other modes of transport such as railways, internal waterways, ports, etc. increase when linked to the road transport system.Road construction and maintenance generate sizeable employment opportunities —factor of great importance in the context of growing population and growing unemployment in the country. The rural road network now connects about 70 percent of our villages.

Inland water transport: Inland water transport is the cheapest mode of transport, for both long and short distances, so far as the points of origin and destination of traffic are concerned. It is cheap as energy consumption is low. India has over 14,500 kms. Of navigable inland waterways comprising a variety of river systems, canals, backwaters, creeks, etc.

4.

Communications: The communication system comprises posts and telegraphs, telecommunication system, broad casting, television and information services. By providing necessary information about the markets and also supplying necessary motivation, the communication system helps to bring buyers and sellers together effectively and helps to accelerate the growth of the economy.

4.0 Microfinance In An Indian Context:Microfinance institutions (MFIs), specialised financial institutions that serve the poor, derive from the success of some micro enterprise credit programmes performed mainly by practitioners in developing countries. microFinance (mF) is being practiced as a tool to attack poverty the world over. During the last two decades, substantial work has been done in developing and experimenting with different concepts and approaches to reach financial services to the poor, thanks mainly to the initiatives of the Non-Governmental Organisations (NGOs) and banks in various parts of the country. Despite having a wide network of rural bank branches in the country and implementation of many credit linked poverty alleviation programmes, a large number of the very poor continue to remain outside the fold of the formal banking system. Various studies suggested that the existing policies, systems and procedures and the savings and loan products often did not meet the needs of the hardcore and assetless poor. Experiences of many anti-poverty and other welfare programmes of the state as well as of international organisations have also shown that the key to success lies in the evolution and participation of community based organizations at the grassroots level. Micro-finance and Poverty Alleviation: Most poor people manage to mobilize resources to develop their enterprises and their dwellings slowly over time. Financial services could enable the poor to leverage their initiative, accelerating the process of building incomes, assets and economic security. However, conventional finance institutions seldom lend down-market to serve the needs of low-income families and women-headed households. They are very often denied access to credit for any purpose, making the discussion of the level of interest rate and other terms of finance irrelevant. Therefore the fundamental problem is not so much of unaffordable terms of loan as the lack of access to credit itself. The lack of access to credit for the poor is attributable to practical difficulties arising from the discrepancy between the mode of operation followed by financial institutions and the economic characteristics and financing needs of low-income households. For example, commercial lending institutions require that borrowers have a stable source of income out of which principal and interest can be paid back according to the agreed terms. However, the income of many self employed households is not stable, regardless of its size. A large number of

small loans are needed to serve the poor, but lenders prefer dealing with large loans in small numbers to minimize administration costs. They also look for collateral with a clear title - which many low-income households do not have. In addition bankers tend to consider low income households a bad risk imposing exceedingly high information monitoring costs on operation. In other words, although microfinance offers a promising institutional structure to provide access to credit to the poor, the scale problem needs to be resolved so that it can reach the vast majority of potential customers who demand access to credit at market rates. To be successful, financial intermediaries that provide services and generate domestic resources must have the capacity to meet high performance standards. They must achieve excellent repayments and provide access to clients. And they must build toward operating and financial selfsufficiency and expanding client reach. In order to do so, microfinance institutions need to find ways to cut down on their administrative costs and also to broaden their resource base. Cost reductions can be achieved through simplified and decentralized loan application, approval and collection processes, for instance, through group loans which give borrowers responsibilities for much of the loan application process, allow the loan officers to handle many more clients and hence reduce costs. Savings facilities make large scale lending operations possible. On the other hand, studies also show that the poor operating in the informal sector do save, although not in financial assets, and hence value access to client-friendly savings service at least as much access to credit. Savings mobilization also makes financial instituttions accontable to local shareholders. Therefore, adequate savings facilities both serve the demand for financial services by the customers and fulfill an important requirement of financial sustainability to the lenders. Microfinance institutions can either provide savings services directly through deposit taking or make arrangements with other financial institutions to provide savings facilities to tap small savings in a flexible manner. Convenience of location, positive real rate of return, liquidity, and security of savings are essential ingredients of successful savings mobilization. Once microfinance institutions are engaged in deposit taking in order to mobilize household savings, they become financial intermediaries. Consequently, prudential financial regulations become necessary to ensure the solvency and financial soundness of the institution and to protect the depositors.

Governments should provide an enabling legal and regulatory framework which encourages the development of a range of institutions and allows them to operate as recognized financial intermediaries subject to simple supervisory and reporting requirements. One way of expanding the successful operation of microfinance institutions in the informal sector is through strengthened linkages with their formal sector counterparts. A mutually beneficial partnership should be based on comparative strengths of each sectors. Informal sector microfinance institutions have comparative advantage in terms of small transaction costs achieved through adaptability and flexibility of operations. They are better equipped to deal with credit assessment of the urban poor and hence to absorb the transaction costs associated with loan processing. On the other hand, formal sector institutions have access to broader resource-base and high leverage through deposit mobilization. Therefore, formal sector finance institutions could form a joint venture with informal sector institutions in which the former provide funds in the form of equity and the later extends savings and loan facilities to the urban poor. Another form of partnership can involve the formal sector institutions refinancing loans made by the informal sector lenders. Under these settings, the informal sector institutions are able to tap additional resources as well as having an incentive to exercise greater financial discipline in their management. Microfinance institutions could also serve as intermediaries between borrowers and the formal financial sector and on-lend funds backed by a public sector guarantee. Weaknesses of Existing Microfinance Models One of the most successful models discussed around the world is the Grameen type. The bank has successfully served the rural poor in Bangladesh with no physical collateral relying on group responsibility to replace the collateral requirements. The brief idea about Grameen is given in the next part of this report. This model, however, has some weaknessed. It involves too much of external subsidy which is not replicable Grameen bank has not oriented itself towards mobilising peoples' resources. The repayment system of 50 weekly equal instalments is not practical because poor do not have a stable job and have to migrate to other places for jobs. If the communities are agrarian during lean seasons it becomes impossible for them to repay the loan. Pressure for high repayment drives members to money lenders. Credit alone cannot alleviate poverty and the Grameen model is based only on credit. Micro-finance is time taking process. Haste can lead to wrong selection of activities and beneficiaries.

Another model is Kerala model (Shreyas). The rules make it difficult to give adequate credit {only 40-50 percent of amount available for lending). In Nari Nidhi/Pradan system perhaps not reaching the very poor. Most of the existing microfinance institutions are facing problems regarding skilled labour which is not available for local level accounting. Drop out of trained staff is very high. One alternative is automation which is not looked at as yet. Most of the models do not lend for agriculture. Agriculture lending has not been experimented. • • Risk Management : yield risk and price risk Insurance & Commodity Future Exchange could be explored

All the models lack in appropriate legal and financial structure. There is a need to have a sub-group to brainstorm on statutory structure/ ownership control/ management/ taxation aspects/ financial sector prudential norms. A forum/ network of micro-financier (self regulating organization) is desired.

5.0 Rural Market Contribution In Total Indian Economy When you consider a rural market then the measure part of the rural buiness directly or indirectly connected with agriculture. In this condition,whenever you study about rural market you have to consider the impact of agriculture towards Indian Economy. 5.1 Profile of Rural people:-If we classify the rural people by their occupation, we find cultivators as the predominant occupation group who account 72% of rural households. Distribution of rural households by their profession or business activity Occupation Cultivators Agricultural labourers Other non-cultivators Artisans All house holds Percentage of Households 72 15 11 2 100

However this group of cultivators contain both prosperous and well as marginal cultivators within itself. This is rural India’s picture where 20% of rural households (mostly cultivators) control about 66% of assets in rural India. In this way rural population broadly divided into 6 categories:

1.

Proprietors of land includes feudal tribute gatherers like zamindars, rich moneylenders and traders who acquire large tracts of land and companies or persons who own large populations.

2. Rich farmers who belong to dominant caste of the area. 3. Small peasants or marginal farmers owning uneconomic land holdings. 4. Tenant farmers operating on rented lands belonging to large land holders and working on small uneconomic land holdings. 5. Agricultural labourers who work on lands of landlords and rich farmers. 6. Artisans and others, which include the unemployed also.

5.2 Stastitical Profile Of The Rural Business in India
TABLE: VILLAGE & SMALL INDUSTRIES (Production)
Industry Unit # <-------------------- Production ---------------> 1973-74 Traditional Industries: Khadi M.Sq.Mtres Value (Rs. crores) Village Industries Handlooms Value (Rs. crores) Mill Meters Value (Rs. crores) Sericulture Lakh Kgs. of raw silk (value Rs.crores) Handicrafts Value (Rs. crores) Coir Lakh tonnes of fibre Value (Rs. crores) Sub-total (A) Value 60.00 21.83 86.00 4447.00 100.50 7790.87 139.51 8289.93 161.00 16272.95 25553.489 1.50 1.85 1.49 1.83 2.11 2.63 63.00 1065.00 131.00 2050.00 345.69 3500.00 310.14 3800.00 868 11325 25200 2100.00 840.00 29.00 2900.00 1740.00 48.00 3600.00 2880.00 76.70 3692.00 2953.60 78.97 4888 3633 12836 13909 7020 56.00 33.00 122.00 82.00 92.00 348.00 103.98 157.62 807.06 108.58 186.30 900.38 1088.8 285.95 1994.06 1052.63 353.49 356216 1979-80 1984-85 1985-86 1990-91 1995-96!

(Rs. crores)

Modern Industries: Small Scale Industries Powerlooms Value (Rs. crores) Mill Meters Value (Rs. crores) Sub-total (B) Value (Rs. crores) 7200.00 2400.00 1980.00 9180.00 21635.00 3450.00 3250.00 24885.00 50520.00 4930.00 6423.00 56943.00 61228.00 5886** 7668.51 64768.51 155340 10988 12337 167677 219968 219968 17201

Total (VSI)

(Rs. crores)

11353.00 29332.00 64733.87 73058.44 183949.95 245521.48

TABLE: VILLAGE & SMALL INDUSTRIES (Employment) Industry Unit # <-------------- Employment (Lakh persons) --------> 1973-74 Traditional Industries: Khadi M.Sq.Mtres Value (Rs. crores) Village Industries Handlooms Value (Rs. crores) Mill Meters Value (Rs. crores) Sericulture Lakh Kgs. of raw silk (value Rs.crores) Handicrafts Value (Rs. crores) 15.00 20.30 27.40 28.00 43.84 65.50 12.00 16.00 20.43 53.60 52.00 59.50 52.40 61.50 76.80 73.70 96.87 128.00 9.27 16.13 24.84 25.50 34.42 8.84 11.20 13.05 15.00 14.15 N.A. 1979-80 1984-85 1985-86 1990-91 1995-96

Coir

Lakh tonnes of fibre Value (Rs. crores)

5.00

5.59

5.89

8.00

5.46 N.A.

Sub-total (A) Modern Industries: Small Scale Industries Powerlooms

Value (Rs. crores)

102.21 39.65

130.72 67.00

168.41 90.00

203.80 96.00

246.74 124.3

253.00 152.61

Value (Rs. crores) Mill Meters Value (Rs. crores) 10.00 11.00 32.19 35.32 55.00 N.A.

5.3 Agricultural Impact on National Economy: Agriculture is a backbone of the Indian Economy. It is important to note that importance is given to industrialization in last four decades, agriculture is largest industry in the country.

5.4 Agricultural Production The agricultural sector as a whole is estimated to record a real growth rate of 6.6 per cent during 1998-99. The overall growth in agricultural production during 1998-99 has been provisionally estimated at 6.8 per cent, as against a negative growth rate of (-) 5.4 per cent during 199798. In spite of the damage caused to the cotton crop in Punjab by excessive rains and unexpected cyclonic storms in Andhra Pradesh in October 1998, cotton production was estimated to be higher at 13.3 million bales in 1998-99, as against 11.1 million bales produced in 1997-98. Similarly, the sugarcane output is expected to touch 282.7 million tonnes during 1998-99, compared to 276.3 million tonnes during 1997-98. The production of oilseeds is also likely to be higher at 25.3 million tonnes during 1998-99, as against 22.0 million tonnes during 1997-98. Foodgrains Production The production of kharif foodgrains estimated at 102.5 million tonnes during 1998 showed a marginal growth of 1.4 per cent over the production achieved (101.1 million tonnes) in 1997.

The rabi foodgrains production for 1998-99 is expected to go up to 98.4 million tonnes compared to 91.3 million tonnes in 1997-98. The foodgrains production is estimated to be 200.9 million tonnes in 1998-99 compared to 192.4 million tonnes during 1997-98, recording an impressive increase by 4.4 per cent (Advance Estimates). During 1998-99, efforts have also been initiated by various government agencies to double the food production in the next decade. During 1998-99 rice production is estimated to increase to 84.5 million tonnes from 82.3 million tonnes produced in 1997-98, while the wheat production during 1998-99 is estimated at 70.6 million tonnes, compared to the previous year's level of 65.9 million tonnes, an increase by 7.1 per cent. Production of pulses in 1998-99 is expected to be around 15.2 million tonnes, as against 13.1 million tonnes during 1997-98. Agricultural Production-Major crops (in million tonnes)
Year Crops 1995-96 Achievement Target 1996-97 Achiev ement % change over 199596 Rice Wheat Coarse Cereals Pulses Total Foodgrains Oilseeds Sugarca -ne Cotton* 77.0 62.1 29.0 12.3 180.4 81.0 65.0 29.0 15.0 193.5 81.7 69.4 32.5 14.2 199.4 6.1 11.8 34.1 15.4 10.5 83.0 68.5 17.6 15.0 200.0 82.3 65.9 33.5 13.1 192.4 Target 1997-98 Achiev -ement % change over 199697 0.7 (-) 5.0 31.1 (-) 7.7 (- 3.5 84.2 70.0 (-) 8.8 15.5 204.0 Target 1998-99 Production (Adv. Est.) % change over 199798 2.7 7.1 30.6 16.0 4.4

84.5 70.6 34.3 15.2 200.9

22.1 281.1

23.0 270.0

24.4 277.6

10.4 (-) 1.2

25.5 280.0

22.0 276.3

(-) 9.8 (-) 10.5

27.0 300.0

25.3 282.7

15.0 2.3

12.9

13.0

14.2

10.0

14.8

11.1

(-) 21.8

14.8

13.3

19.8

* Million bales of 170 kg. each.

Agricultural Exports and Imports The share of exports of agriculture and allied products in the total exports had declined marginally, from 18.9 per cent during 1997-98 to 17.8 per cent during 1998-99. During the same period, the value of exports of agriculture and allied products amounted to US$ 5,994 million, showing a decline of 9.6 per cent from a level of US$ 6,634 million in 1997-98. Major items of agricultural exports were basmati and non-basmati rice, raw cotton, meat, oilmeals, tea, coffee, unmanufactured tobacco, cashew, spices, fresh and processed fruits and juices, vegetables and marine products, etc.

Agricultural imports related to food and other items constituted 5.8 per cent of the total imports during 1998-99, as against 4.0 per cent during corresponding period of the previous year. Important agricultural items imported during the year were vegetable oils (edible), sugar, wheat and fruits & nuts. During 1998-99, the volume of agricultural imports aggregated US$ 2,409 million, as against US$ 1,678 million during the corresponding period of the previous year, recording a growth of 43.6 per cent. Agricultural markets: There were 7,062 agricultural regulated markets operating in India, 162 agricultural commodities considered for grading standards and 3,253 cold storage with capacity of 8.73 million tonnes as on end March 1998. With the introduction of economic reforms, futures trading was permitted in coffee, cotton, castor oil and jute goods during 1997-98. Earlier futures trading were permitted in gur, potato, castor seed, pepper, turmeric, etc. Further, during 1998-99, futures trading was introduced in oilseeds, oil cakes and edible oils. A network of co-operatives at the national, state and primary level operates to help farm producers with access and further reach for sale of produce. As per the Annual Report (1998-99) of Ministry of Agriculture, Government of India, the value of agricultural produce marketed through co-operatives has registered a remarkable growth of 21.6 per cent, from Rs.9,500 crore in 1994-95 to about Rs.11,551 crore in 1995-96.

5.5 Agriculture role in Indian Economy Agriculture for Industrial Development: Indian agriculture has been the source of supply of raw materials to our leading industries. Cotton and jute, textiles, sugar, plantations— all these directly depend on agricultural output. There are many industries, which depend on agriculture indirectly. Many of our small scale and cottage industries like handlooms, oil crushing, etc depend on agriculture for their raw materials. But then, in recent years, agriculture is losing its significance to industries such as iron and steel, engineering, chemicals, etc. generation of employment. Agriculture in economic planning: Importance ofagriculture in the national economy is indicated by many facts. For example, agriculture is main support for transport sector as railways and roadways secure bulk of their business from the movement of agricultural goods. Further it is seen that good crops implying large purchasing power with the farmers lead to greater demand for manufactures and therefore better prices. In other words prosperity of farmers is also the prosperity of the industries and vice-versa. Agriculture is backbone of the Indian economy and the prosperity of agriculture can also stand for the prosperity of the economy. At the same time it is true that per capita productivity in agriculture is less than in the industry. Many scholars think that so long as the Indian Economy is dominated by agricultural activity, per capita income will not rise to an extent, which is necessary and desirable. However in recent years, the importance of food processing industries is being increasing recognized both for generation of income and

5.4 Capital Formation in Agriculture The Gross Capital Formation in agriculture, at 1993-94 prices, increased from Rs.18,214 crore in 1994-95 to Rs.20,995 crore in 1997-98. The share of private sector investment in agriculture has been registering

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