The agricultural sector plays a unique role in developing the Indian economy due to its involvement in alleviating poverty and the potential to provide a livelihood to a vast section of the population.
India’s agriculture and allied sector broadly encompass four significant activities: farm yield, fishery, forestry, and animal husbandry. Out of a total working population of 48.17 crores, 14.43 crores are agricultural labourers, and 11.87 crores are cultivators, i.e. agriculture and allied sectors employ around 55% of the total working population of the country (Census 2011). Despite agriculture playing a crucial role, the declining contribution of this sector to the overall Indian GDP is not a new phenomenon. The agricultural segment’s contribution to India’s GDP has come down from 52% (1950s) to 30% (1990s), and the dwindling trend continues to below 20% (2010 onwards). GDP of agriculture and allied activities doubled in about 20 years before 1991, and it took the same number of years to double again (long-run average growth of 2.9%). As per Economic Survey 2018-19, the share of agriculture and allied Gross Value Added (GVA) at current prices was 16.14 %, and at 2011-12 prices was 14.4%.
A considerable amount of push has been provided by the government in agricultural investment to achieve contemporary growth in agriculture; however, a lot needs to be done for its sustainable and inclusive development.
In India, there has always been a debate among the policy think-tanks for striking a proper balance on whether to provide short-term assistance to the farming community like farm-loan waiver, fertilizer subsidies etc., or offer long-term investment for supply chain management, warehouses, micro-irrigation facilities, etc.
Agricultural credit has not been able to direct its potential in the right direction considering the allocative inefficiencies in achieving long term goals. There have been capital constraints in terms of the deficit budget. Still, also accountability and transparency of the Public Distribution System, Agricultural Produce Marketing Committees (APMCs), Electronic National Agriculture Market (e-NAM) trading portal, etc. has not been adequately studied. The evolving area of Green Finance, especially green bonds, can bring about a transformational change in terms of issuance and utilization of its proceeds for the sustainable growth of agriculture.
The most formidable challenge in achieving the GoI’s target of doubling farmers’ income, wherein the farm income has to grow by 10.4 % (NITI, 2017), is the massive investment required in the agricultural sector. Agriculture credit has been provided mainly by the banks, which has grown by over 1000 times since the last four decades. But banks have their limitations considering the long-term nature of agricultural infrastructure development and the risks in this domain. Hence, the need of the hour is to transform the regulatory framework and look for innovative and sustainable Green Finance solutions for achieving this mammoth objective.
REGULATORY SPACE IN INDIA
Considering the systemic impact agriculture plays in India’s progress story, the GoI, along with the Reserve Bank of India (RBI), has played a fundamental role in establishing a formal credit and investment-related framework in fostering the growth and development of this sector from time to time. RBI seems to be the first central bank that has pioneered the task related to credit in the agricultural domain and persists in achieving that objective (Reddy, 2001).
Policies about the agricultural credit flow have been primarily focussed on three main pillars: Targeted credit at the bottom of the pyramid, Interest subvention schemes of GoI and direct lending in terms of RBI’s regulatory instructions under Priority Sector Lending Guidelines.
As per RBI’s Master Directions – Priority Sector Lending (PSL) – Targets and Classification, the target set under priority sector lending to the agriculture category stands at 18% of Adjusted Net Bank Credit or Credit Equivalent of Off-Balance Sheet Exposures, whichever is higher, out of which 10% is prescribed for Small and Marginal Farmers. The influence of these various measures in leveraging the institutional framework for providing credit to the agricultural sector is noteworthy.
Last Mile Connectivity & Fixed Asset Creation
As pointed out in the NABARD All India Rural Financial Inclusion Survey (NAFIS, 2016-17), around 70% of the average loan to the agricultural sphere was sanctioned by institutional sources. Agricultural households, which formed 52.5% of the households surveyed, have some outstanding debt, pointed out that there is more necessity of financial aid in this sector. Also, the PSL annual return indicates that both public and private sector banks have covered approximately 40% of small and marginal farmers. This lack of interest in the banking industry for long term lending can be attributed to the fact that the Gross Non-Performing Assets (GNPA) is at a high level of about 11% as of July 2019 in the agriculture sector. Also, the banks are weighed down by their risk in asset-liability management to provide long term credit in agriculture.
As can be evident from Table 1 below, the gross fixed capital formation as a percentage of GVA (2019-20) for agriculture is just a meagre of 15.56%. Also, approximately 82% of the total investments in agriculture is contributed by the household sector, whereas the support provided by the private sector is not 1%.
Table: 1. Aggregates by Economic Activity (Gross Fixed Capital Formation- GFCF for the period 2019-20)
Thus, we can conclude that ample opportunities exist for both the public and private sector (including the banking industry) to provide long-term agricultural funding by cashing on the opportunity provided by the evolving green bonds market. It would require assistance from Indian regulatory authorities to provide a comprehensive policy for the green debt securities market at the national level.
GREEN BONDS AND THEIR STATUS IN INDIA
SEBI’s circular on “Disclosure Requirements for Issuance and Listing of Green Debt Securities” dated May 30, 2017, enumerates eight categories to be considered eligible for utilizing the proceeds from the issuance of Green Debt Securities.
As per Climate Bonds Initiative (CBI) India Report in 2018, India is among the top 10 labelled green bond issuers globally with cumulative issuance of USD 3.2 billion. Axis Bank’s green bond issuance of USD 500 million became the first Indian green bond listed on the London Stock Exchange. However, the majority of the bonds floated have been used for the sectors like Renewable Energy (84%), Transport (12.8%), Water (1.7%), etc. The Indian green bond market has been reasonably booming where the NTPC 5-year USD 150 million bond issuance was oversubscribed by almost three times. As per CBI’s country briefing in July 2018, 51% of the issuance was contributed by government-backed entities, whereas 78% was by financial institutions. The largest issuer was Greenko (USD 1.5 billion), and the most frequent issuance was by Indian Renewable Energy Development Agency (IREDA), i.e. six bonds in 3 deals.
PROSPECTS OF GREEN BONDS IN THE FIELD OF AGRICULTURE
Agriculture in India has witnessed a massive transformation from being a food shortage nation during the 1960s to becoming a food surplus nation. However, the way ahead is to focus on radical innovation in this field rather than looking for incremental changes to meet short-term objectives. Agriculture today is grappling with three significant challenges- to provide food security for the younger demographic profile of the country, challenges related to global warming and effective use of natural resources in enhancing productivity. It also poses a unique challenge during the Covid-19 times, as the low and semi-skilled workers involved in the manufacturing sector are returning to their homeland and increasing the onus on the already over-burdened primary industry suffering from the problem of disguised unemployment.
As per the current regulatory guidelines mentioned above, the three prospective areas where proceeds from the floating of green bonds can be utilized are as follows:
- Climate change adaptation: The overall growth in agriculture since the times of the green revolution has been on the backdrop of relentless use of fertilizers/ chemicals, old and non-sustainable flood irrigation methods, livestock rearing, etc. Green House Gas Emissions from agriculture is almost equivalent to its contribution in GDP (around 18%). Three-fourths of this is contributed by methane emanated from rice cultivation, livestock and the remaining is nitrous oxide from fertilizer use. The issuance of green bonds for state-of-the-art mechanization techniques can minimize global warming concerns, crucial to achieving Goal 13 of the United Nations Sustainable Development Goals.
- Sustainable water management: It is a well-known fact that India uses 2-4 times more groundwater per tonne of food production than major agricultural countries (Dhawan,2017). Around 80% of the total groundwater is used by agriculture; however, the irony is that approximately 50% area under cultivation is non-irrigated. Soil Health Cards (SHCs) provide crop-wise recommendations of nutrients and composts to improve yield with prudent use of water and other inputs. Green bonds can invest in advanced sensor-based inputs like drip/ sprinkler irrigation methods, as mentioned in SHCs.
- Sustainable waste management: As our agricultural space lacks modern technological developments, land waste and post-harvest crop residue create a nuisance by contributing to the menace of air pollution. The use of green bonds to support the business enterprises deploying equipment like Zero-till seed-drill, Happy Seeder, Straw Chopper, Hay rakes, Straw reaper, balers, etc., can control crop residue burning issues of India.
POLICY GUIDELINES AND THE WAY AHEAD
As is visible, to achieve the vision of the present government of “Sabka Saath, Sabka Vikas, Sabka Vishwas“,- the agricultural space provides a massive opportunity in the area of inclusive and sustainable growth for a developing economy like India.
Some of the policy suggestions that may find a mention in the regulatory framework for faster and effective adoption of green bonds in India are as follows:
- As traditional funding sources are not sufficient to tap the burgeoning credit needs, alternate sources of financing like capital markets need to be explored to attract domestic institutional investors like insurance & pension funds and international investors. Listed entities will get an additional option with these bonds to fulfil the Environmental, Social and Governance (ESG) criteria as per extant regulations.
- Retail investors may also be allowed to invest in the green bonds market as the bond markets in India is still at their nascent stage. For this, they may be given tax incentives/ holidays on interest/ coupon payments received from the issuers of green bonds, similarly as provided in the case for Infrastructure bonds.
- As the overall development of the green bonds market requires coordination between regulators (RBI, SEBI, IRDA) with the GoI, the Financial Stability and Development Council (FSDC) may be the appropriate platform to discuss the merits and nuances of this evolving market dynamics.
- To attract international investors, proper labelling and independent credit rating of the prospective bonds has to be one of the primary focus areas for the underwriters.
- GoI may also float sovereign green bonds for agricultural and ancillary activities. The proceeds can be a part of the newly created Agriculture Infrastructure Fund- the aim is to provide long-term credit facilities for investment in viable investment projects for post-harvest management infrastructure and community farming assets.
- India may also follow the unique example of Brazil, wherein around 40% of its green bond issuance has been for forestry-related assets. Financial institutions, Municipal Corporations, private bodies, etc., can explore the possibility to issue green bonds based on their sector-specific needs.
To sum up, we can conclude that appropriate nurturing of this market and curbs on greenwashing has a considerable potential to address the high cost of financing and unattractive covenants under which credit is available for the agricultural community.
(Views expressed in the blog are personal and not of any organization/institution)
By Mr. Saugat Das & Dr. P.K.Singh; ARF group members
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