Impact of Agriculture Credit on Agriculture Productivity

Impact of Agriculture Credit on Agriculture Productivity ABSTRACT Impact of agriculture credit on agriculture productivity. Agriculture plays vital role in Pakistans economy. It is the single largest sector and it is principal driving force for growth and development of the national economy of Pakistan. Agriculture credit plays vital role for increasing the efficiency of this sector. Timely and adequate availability of credit enables the farmers to purchase the required inputs and machinery for carrying out farm operations. There are two dimensions of this research first are measuring the impact of credit on development efficiency and second is measuring impact of credit on production efficiency. Regression model was used to determine the impact in both dimensions data collected from State Bank of Pakistan for analysis the results concluded that there is a positive relationship between agriculture credit and both development and production efficiency but not up to much extent that is required there is a minor impact on farm yield and productions le vels by agriculture credit the reasons can be credit policies timings of providing credit and can be not providing credit effectively where it is needed most. INTRODUCTION Agriculture plays an important role in Pakistans economy. It is the single largest sector and it is principal driving force for growth and development of the national economy of Pakistan. Agriculture and Livestock accounted for 23.1 per cent of the GDP in 2004-05. It employs 43.1 per cent of the labor force, provides livelihood to 68 per cent of the countrys population living in rural areas, and contributes 60 per cent share in export earnings from processed and un-processed agricultural products. Major industries like textile and sugar are agriculture based sectors. The rate of growth for agriculture sector is 4% in the past two decades, contributing significantly to overall economic growth, food supplies and exports. Although the share of agriculture in the GDP has declined over the years, in line with Development of other sectors such as industry, infrastructure, services, etc., it still remains the leading sector of the economy. The future policies in agriculture have been focused on attaining high growth rates by providing the right policies and institutional support, so that the sector can move forward and enhance its contribution to the economy. Review of Agriculture Sector The agriculture sector grew at an average annual growth rate of 4.5 per cent in the last decade, i.e. 1990s. However in 2000-01 and 2001-02, its performance was badly affected due to persistent drought conditions. It registered a growth rate of (-) 2.2 and (-) 0.1 per cent in 2000-01 and 2001-02, respectively. With subsequent improvement in the availability of Water, it grew by 4.1 per cent and 2.6 per cent in 2002-03 and 2003-04, respectively. In 2003-04, the major crops which account for 34.2 per cent of the agriculture value added grew by 2.8 per cent and minor crops which contribute 12.4 per cent to the agriculture value added, Grew by 1.7 per cent. In 2004-05, the agriculture sector registered an all time high growth of 7.5 per cent due to farmers friendly government policies, favorable weather conditions and Improvement in the availability of water. There was a recorded production around 14.6 million bales of cotton and 21.1 million tones of wheat. The contribution of major and minor crops was 17.3 and 3.1 per cent, respectively. Although the shortage of water affected the performance of crops in 2000-01 and 2001-02, its impact was reduced due to various measures by the farmers on the Recommendation of the Agriculture Departments such as efficient use of canal water, Exploitation of underground water through tube wells, sowing on ridges and better Agronomic and good management practices. The country had achieved self-reliance in wheat. Around 1.036, 1.704 and 0.553 million tones were exported due to build up of wheat stocks, in the years of 2001-02, 2002-03 and 2003-04, correspondingly. However, due to subsequent decline in wheat production, around 1.37 million tones of wheat was imported in 2004-05 to build up reserve stocks and meet domestic requirement. Although availability of water has been a serious constraint, there are other factors also, which are hampering the growth and development of the sector. Some of the factors are: low productivity of crops, inefficient use of water, degradation of land resources (water logging and salinity), imbalance application of fertilizer, inefficient use of agricultural inputs, ineffective transfer of technology to the farmers, lack of coordination between research and extension, post-harvest losses, marketing infrastructure, etc. Inspite of the reasonably performance in the agriculture sector the over all productivity is comparatively low as compare to other agriculture based countries like India for example in study based on comparison of agriculture performance in Indian and Pakistani Punjab it was found that Indian Punjab performed very well as compare to Pakistani Punjab because of the problems in infrastructure lack of mechanization most of these problems arise due to financial constraints these problems can be addressed by emphasizing on credit programs to farms get proper inputs such as production inputs like seeds, fertilizers, pesticides on time so that production efficiency improved and on the other hand development efficiency can be increased by mainly development efficiency is farm efficiency like land leveling, water courses, tractors tube wells these all required proper credit supply so therefore credit is the vital component in the improvement of agriculture efficiency. Agriculture credit role in increasing productivity Credit plays an important role in increasing agricultural productivity. Timely and adequate availability of credit enables the farmers to purchase the required inputs and machinery for carrying out farm operations. The farmers will be facilitated through the one window operation and revolving credit scheme. The one window operation was initiated in 1997 by the ZTBL which has been found quite useful in meeting the farmers credit requirements. Credit is the back bone for any business and more so for agriculture which has traditionally been a nonmonetary activity for the rural population in Pakistan. Agricultural credit is an integral part of the process of modernization of agriculture and commercialization of the rural economy. The introduction of easy and cheap credit is the quickest way for boosting agricultural production. Therefore, it was the prime policy of all the successive governments to meet the credit requirements of the farming community of Pakistan. Agriculture as a sector depends more on credit than any other sector of the economy because of the seasonal variations in the farmers returns and a changing trend from subsistence to commercial farming. How credit improve productivity both production and development or farm efficiency the answer is through the supply of proper credit to farmers they are able to purchase proper amount of fertilizers at the right time purchase pesticides at the right time so the production process will continue without any problems that will increase production efficiency. For development efficiency credit is needed for mechanization, i.e for land leveling water courses, tube wells, tractors and other inputs so credit is needed by farms for the proper availability of theses resource of course without the availability of these resource both production and development efficiency cannot be increased. In some of the studies importance of credit in agriculture stated as According to Shephered (1979) credit determines access to all of the resources on which farmers depend. Consequently, provision of macroeconomic policies and enabling institutional finance for agricultural development has been directed to the provision of infrastructure capable of facilitating agricultural development with a view to enhancing the contribution of the sector in the generation of employment, income and foreign exchange. One of the reasons for the decline in the contribution of agriculture to the economy is lack of a formal national credit policy and paucity of credit institutions, which can assist farmers. Credit or loan able funds is viewed as more than just another resource such as labor, land, equipment and raw materials. Therefore, by injecting capital into agriculture, it is possible to increase the rate of agricultural development since credit has frequently been considered as one of the main factors in overcoming agricultural stagnation that helps to expand farmland size and production. Table 6 shows the figures of amount of credit in billion rupees disbursed by different sources in agriculture sector by analyzing the figures it has been noted that credit for production has more amounts in every year as compare to credit for development loans so therefore the area where government has to focus is how to increase development efficiency (land leveling, water courses, and tractors) etc. supply of adequate credit should be implemented for development loans like production loans. Difference between production efficiency and development efficiency Production efficiency is related to the productivity related to inputs related purely to crops production such as seeds fertilizers pesticides chemicals etc. where as development efficiency is related to mechanization of farms lands development there fore inputs are tractors, land levelers water courses etc the details are below. Production efficiency factors The input factors related to production efficiency are Fertilizer The use of fertilizer is expected to grow by 4.0 per cent per annum in order to meet the crop production targets. The growth rate for the nitrogen is estimated at 3 per cent, phosphate 7 per cent and potash 12 per cent. In quantitative terms, nitrogen will increase to 3,049 thousand tones, phosphate 1,058 thousand tones and potash 45 thousand tones by 2009-10. The overall fertilizer consumption is estimated at 4,152 thousand tones. The mean application rate at national level will be about 180 Kg nutrients per hectare. There are other fertilizer products as source of micronutrients such as Zinc, Boron and Iron would also be targeted for specific crops (rice, cotton, maize, sugarcane, vegetables and horticultural crops) for efficiency and quality. According to research by (Coady, 1995) it is stated that the introduction of high-yielding varieties (HYVs) of wheat and rice in Pakistan in the mid-1960s was heralded as a major breakthrough in the problem of food supply. A crucial characteristic of these new HYVs was their high yields when used in conjunction with chemical fertilizer (henceforth just fertilizer) and controlled irrigation. Great emphasis was placed on increasing the supply and use of fertilizer, which was still regarded as of crucial importance by the mid-1980s-of the total increase in agricultural output envisaged by the Sixth Five Year Plan (Government of Pakistan 1983), 48% of it was expected to come from increased use of fertilizer. Although the technology associated with HYVs is essentially regarded as being neutral to scale, constraints such as those arising from inadequate irrigation, an inability to secure credit and access to extension services can bias the technology towards larger farms. The researcher focuses on the use of fertilizer. Earlier analysis of the data showed that just over 80% of the sample applied fertilizer, this the farms more than 25 hectares have higher percentage. However, that simple analysis of fertiliz er use did not indicate any systematic relationship between land size and per-acre levels applied (henceforth, fertilizer intensity). There, as in most studies of fertilizer use, zero observations are dropped. Much of the literature on agriculture in developing countries argues that, because of lack of access to crucial complementary inputs (such as irrigation, knowledge or credit), the productivity of fertilizer is lower on smaller farms. This would suggest that fertilizer intensity ought to be positively correlated with farm size. However, although my data suggest that a larger proportion of smaller farms do not apply any fertilizer, focusing only on users, I do not find any systematic relationship between fertilizer intensity and farm size. However, when I allow in my analysis for lack of access, I find a negative relationship between fertilizer intensity and farm size, in spite of the fact that productivity-enhancing characteristics appear to be biased in favor of large farms. I suggest that this could reflect the effect of uncertain yields on risk adverse farmers. If one accepts this interpretation, then it appears that the effect of uncertainty is strong enough to outweigh the produc tivity bias towards larger farms Pesticides and Plant Protection The productivity of crops is mainly depends upon control of pest. Around approximately 20% to 25% cent of crop production output lost due to hit of insects and pests. The use of pesticides has increased from 665 tones in 1980 to 69,897 tones in 2002. It has been estimated that its consumption may touch 78,000 metric tones till 2010. Approximately around 54% of the pesticides are useful on cotton crop, 23 per cent on rice, 9 per cent on fruits and vegetables, and 5 per cent on sugarcane. The rising and unsystematic use of pesticides must be avoided as it also kills useful predators and insects and causes environmental deprivation. Importance will be given on support of Integrated Pest Management (IPM) in order to reduce the application of pesticides in the best way. According to research (Alagh, 1988) states that INSECT pests, diseases and weeds inflict considerable damage to crops and plantations resulting in an estimated. Crop loss of over one-third of realizable output globally. Losses are higher in Africa and Asia, more than 40 per cent annually. The earliest use of chemicals to prevent crop losses is reported in the nineteenth century with the use of inorganic salts. The thirties of this century represent the beginning of the modern era of synthetic organic pesticides which saw the discovery of DDT (in 1939) and BHC (in 1942). A host of chloro organic compounds were introduced subsequently. Then came the organophosphorous com- pounds representing another extremely important class of organic insecticides, malathion being the first example of a wide spectrum insecticide with low mammalian toxicity. The new crop varieties and cropping sequences for intensive agriculture brought to the forefront problems of pests which caused tremendous losses to various crops and their produce. Pest problems have shown marked increase in changing agriculture. Pest problems have increased with the intensification of agriculture. Also improved agriculture brought about a transformation and an all round consciousness not to allow/tolerate yield losses especially because of the availability of modern pest control technology which makes it possible to avoid or to minimize such losses. Losses to crops and their produce are caused by various agencies which include insects, diseases, nematodes, weeds and several other non-insect pests. The estimated losses vary from crop to crop and region to region. However, it has been estimate that in India annual monetary loss in agriculture due to weeds, diseases, insects, nematodes, storage pests, rodents and birds runs into Rs 6,000 crore. This estimate is somewh at speculative yet it gives a first order approximation of the nature of the problem. Estimates with respect to many crop pests or diseases are available both in terms of percentage avoidable loss or loss in value. Such information is valuable and essential planning and implementation point of view of economic programs. So therefore pesticides plays important role in increasing production efficiency by reducing diseases and damage to the crops by the insects or pests because if crops production is effected by any of the reasons stated above crops production efficiency will be decreased. Development Efficiency How mechanization helps in improving farm efficiency Animal draft has conventionally remained a source of traction powers at farm over centuries. All operations at farm from tilling of the land to sowing, cultural management practices, lifting of water from shallow wells, harvesting, threshing, winnowing and transport were carried through animal provided draft. The use of fuel run machinery is a matter of about half a century. The major focus in the area came since the times of green revolution in late 1960s when the high yielding varieties (HYVs) inspired farming community for paradigm shift in adoption of other new technologies including farm mechanization. The major emphasis has been on farm traction, exploitation of sub surface water resources from sweet water aquifer, harvesting/threshing of crops, spraying of crops against insects, pests/diseases and pressurized irrigation operations. The main purpose of farm mechanization is to improve efficiency by replacing techniques with more efficient use of machines which performs sowing, harvesting, shallow wells and transport with less time and more efficient that animals based techniques. Mechanization of farm operation has become necessary due to shortage of labor and animal power at planting and harvesting stages of crops. It helps in timely sowing, cultural practices and harvesting of crops and reduction in post harvest losses. The most popular forms of mechanization are tractors with cultivators, drills, wheat threshers, sprayers, power rigs, tube-wells and bulldozers. The total number of operational tractors in the country is estimated to be 342,000 by June 2005. Thus available horsepower (hp) at farm level will be 0.82 hp per hectare as compared with 1.4 hp per hectare recommended by FAO for developing countries. It is projected that 45,000 tractors per annum will be added to the existing fleet. Thus, the total number of operational tractors will be increased to 466 thousand in 2009-10, increasing the horsepower at farm level to 1.1 hp per hectare. The fleet of bulldozers in the provinces will be strengthened for the development of wastelands and construction of slow action dams. The availability of institutional credit for the purchase of tractors and other agricultural machinery will be ensured through earmarking the actual credit requirement to Zarai Taraqiati Bank Limited (ZTBL) and other commercial banks. The farmers will be facilitated to procure small seed processing units and establish primary grading facilities at farm level to fetch good price of their produce. The sugarcane harvesters, maize and cotton pickers, paddy transplanters and laser land leveling equipments will be introduced. Custom hire farm service centers will be established at suitable places for costly agricultural machinery/implements for small and medium farmers under public-private partnership. The public sector will provide seed money and technical assistance for the establishment of these centers. The farmers organizations will be responsible for the operation and maintenance of these centers on sustainable basis. The factors included in farm efficiency are Left bank outfall drainage scheme Land leveling Water courses Drainage schemes Left bank outfall drainage scheme Emerging drainage problems The greatly increased continuous use of Indus water for irrigation (from storage or direct river diversions) has significantly altered the hydrological balance of the Indus Basin. Seepage losses from irrigation canals, distributaries, minors, and watercourses and deep percolation from the irrigated lands have resulted in a gradual rising of the groundwater table, bringing with it critical problems of water logging and salinity over a vast area. Water logging is widespread throughout Punjab and Sind provinces, where most of the countrys food and fiber crops are produced. In the early 1900s, the water table was generally more than 15 meters (m) below the surface throughout the Indus Plain. However, by 1978 (when the Indus Basin Salinity Survey was completed), the water table in 22% of the Indus Basin was within 1.8 m of the surface, and an additional 30% was within 3 m. The condition has get worse since then. There was a comprehensive survey conducted in 1961 calculated that about 40,0 00 ha of land were being lost per year to agricultural production due to water logging and salinity. While these estimations have not been updated available information suggests that land neglected in severely waterlogged areas is continuing. What is left bank outfall drainage schemes The Left bank outfall drainage concept embraces major drainage and agricultural development and represents the collective efforts of Government of Punjab, Government of Sind, WAPDA, 1UNDP, international consultants, and potential co financiers, led by the World Bank. The Stage I Project has evolved from numerous investigations and studies initiated in the mid-1960s and refined thereafter. The project was subjected to extensive professional scrutiny and is a milestone in the Banks long-standing involvement with Indus Basin development. The LEFT BANK OUTFALL DRAINAGE SCHEME concept has been subject to intensive project preparation during the past 20 years. The Lower Indus Project report, prepared in 1966 by Sir N. MacDonald and Partners Ltd. and Hunting Technical Services Ltd., both of the United Kingdom, contains a comprehensive plan for optimum development of agriculture in the LEFT BANK OUTFALL DRAINAGE SCHEME area. Why this scheme is so important for Pakistani agriculture due to the irrigation conditions of agriculture Major factors in recent improvement of agriculture have been favorable weather and the affirmative response of farmers to GOVERMENT OF PUNJABs policies and programs for agriculture sector development. Land leveling in Pakistan Studies have indicated that a significant (20 to 25 %) amount of irrigation water is lost during its application due to poor farm designing and uneven fields. It has been estimated that the farmers keep on applying water until the maximum point in a field is covered. This leads to over-irrigation of low-lying areas and under-irrigation of superior spots in those results in irregular supply of all nutrients to the plants besides accumulation of salts in such areas. The fields not correctly leveled, because wastage of land, low irrigation efficiencies, and eventual result is considerably lesser yields than the possible. Accurate Land leveling (PLL) consists of grading and planning land to a smooth level or no slope to facilitate efficient irrigation. Modernized method of carrying out PLL is by using LASER equipment that helps in attaining mandatory degree of precision at lesser cost and effort. LASER land leveling equipment is provided to the farmers on nominal average rental charges i .e. Rs 150/hour to 200/hour. An area of about approximately 400,000 acres has been accurately leveled in the Punjab since inauguration of OFWM program that includes over 113,000 acres leveled with LASER technology. Precision Land Leveling (PLL) is a mechanical process of grading and smoothing the land to a accurate and consistent plane surface at grade or no grade (zero slope) with variation of less than  ± 2cm. It is carried out to control irrigation application losses at the farmers fields besides other advantages. LASER technology has been proved to be advantageous as it minimizes the cost of irrigation operation, ensures better degree of precision in much lesser time, saves irrigation water, ascertains consistent seed germination, increases fertilizer use efficiency and resultantly enhances crop yields. Impact studies on LASER land leveling identify that it: Curtails the irrigation application losses up to the extent of 25% Reduces labor requirements for irrigation by about 35% Enhances the irrigated area by about 2% by brining the number as well as length of field ditches and dikes to a minimum * Increases the crop yields by about 20% Pakistan is considered to be the pioneer in South Asia for promoting use of LASER technology in irrigated agriculture. OFWM Punjab has tested the first laser leveling equipment in 1985. Before devolution, there were 140 LASER land leveling units available with District Governments which have been procured through donor assisted projects, respectively. One hundred units were equipped with tractors while 40 units were without tractors. These machines have accurately leveled about 125,000 acres of land. The yearly potential of available LASER equipment was about 25,000 acres per year. The major operational limitation encountered to make sufficient use of this equipment was insufficient availability of OM funds with the public sector. Drainage schemes The constant expansion of the irrigation system over the past century drastically altered the hydrological balance of the Indus River basin. Seepage from the system and percolation from irrigated fields caused the water table to get higher, attaining crisis conditions for a significant area. Around 1900 the water table was typically more than sixteen meters below the surface of the Indus Plain. A 1981 study found the water table to be within about three meters of the surface in more than one-half the cropped area in Sindh and more than one-third the area in Punjab. In some areas, the water table is much nearer to the surface. Cropping is fatally affected over a wide area by poor drainagewater loggingand by accumulated salts in the soil. Officials were conscious of the need for additional expenditure to prevent further worsening of the existing situation. Emphasis in the 1980s and early 1990s was on rehabilitation and preservation of existing canals and watercourses, on farm improvements on the farms themselves (including some land leveling to conserve water), and on drainage and salinity in priority areas. Emphasis was also placed on the short-term projects, mainly to improve the operation of the irrigation system in order to lift up yields. Element of the funding would come from stable increases in water use fees; the objective is gradually to raise water charges to cover operation and maintenance costs. Substantial time and money are needed to understand the full potential of the irrigation system and bring it up to modern standards.(detected) Irrigation and watercourses In the beginning of 1990s, irrigation from the Indus River and its tributaries comprised the worlds largest contiguous irrigation system, capable of watering over 16 million hectares. The system includes three major storage reservoirs and numerous barrages, head works and canals, distribution channels. The total length of the canal system exceeds 58,000 kilometers; there are a further 1.6 million kilometers of farm and field ditches. Over the use of Indus waters there were prolonged disputes between India and Pakistan because partition placed portions of the Indus River and its tributaries under Indias control. After nine years of dialogue and technological studies, the issue was resolved by the Indus Waters Treaty of 1960. India use of the waters of the main eastern tributaries in its territorythe Ravi, Beas, and Sutlej rivers after a ten year transitional period, the treaty awarded Pakistan received use of the waters of the Indus River and its western tributaries, the Jhelum and Chenab rivers. When the treaty was signed, Pakistan began an extended and rapid irrigation construction program, partly financed by the Indus Basin expansion Fund of US$800 million contributed by various nations, including the US, and administered by the World Bank. Several huge link canals were built to transfer water from western rivers to eastern Punjab to substitute flows in eastern tributaries that India began to redirect in accordance with the terms of the treaty. In 1967 the Mangla Dam, on the Jhelum River, was completed. The dam provided the first major water storage for the Indus irrigation arrangement. The flood control was also contributed by the dam, for regulation of flows for some of the link canals, and to the countrys energy supply. At the same time, further construction was undertaken on barrages and canals. The vital need in the 1960s and 1970s to raise crop production for domestic and export markets led to water flows well beyond designed capacities. Completion of the Mangla and Tarbela reservoirs, as well as enhancement in other parts of the system, made superior water flows possible. In addition, the government began installing public tube wells that frequently discharge into upper levels of the system to add to the available water. The higher water flows in parts of the system significantly go beyond design capacities, creating stresses and risks of breaches. However, many farmers, mainly those with smallholdings and those on the way to the end of watercourses, suffer because the supply of water is unreliable. The irrigation system represents a considerable engineering achievement and provides water to the fields that account for ninety percent of agricultural production. Nevertheless, serious problems in the design of the irrigation system avert achieving the highest potential agricultural output. LITERATURE REVIEW Production Efficiency and Agriculture Productivity According to research (Taylor, Drummond, Gomes, 1986) which relates to effectiveness of subsidized credit programs in improving the productivity of traditional farmers in developing countries the credit program known as PRODEMATA it is concluded by empirical results suggest that PRODEMATA has had no desire impact on technical efficiency and a slightly negative effect on allocative productivity (it is defined as a theoretical measure of the advantage or utility resulting from a planned or actual choice in the distribution or distribution of resources). The poor but efficient hypothesis states that the provision of agricultural credit will be ineffective in improving productivity and incomes since investment opportunities are limited. Traditional farmers are hypothesized to be efficient but faced with technological barriers that can- not be overcome by the mere influx of capital provided by credit programs alone. It is further analyzed that the economics of credit in Brazil and concluded there was an underutilization of capital on small farms and that credit would relieve capital shortages and improve output. However, in analyzing farm-level production in it is found that technological barriers were present which would prevent credit programs from having a significant impact on capital formation and incomes. Studying traditional agriculture in southern Brazil concluded that in- creased investment capital formation, such as use of mechanized equipment and fertilizer, alone is not the answer to increasing crop production. Better management, Information sources and consumption of resources are as significant and should be equally emphasized if any advantage is to be anticipated from increasing disbursement on these inputs. The implication here is that, while credit availability may afford traditional farmers the opportunity to invest in modernized inputs, there is no guarantee that these inputs will be used in such manner as to recognize the full level of output gains possible. It thus seems appropriate that the effectiveness of subsidized credit in traditional farming depends on concerns of technical as well as allocative efficiency. The research above illustrated credit program named as PRODEMATA was instituted The result was that participated in the program compared to those of nonparticipating farms indicate that the program wa