Budget 2015: Government planning a new revamped interest subsidy plan for farmers

The crop loan interest subvention scheme may be overhauled, with the Narendra Modi government considering a proposal to transfer funds directly to farmers instead of getting banks to provide them loans at subsidised rates and compensating the lenders later.

Banks are unhappy with the scheme as the government's payments are often delayed and
lenders such as State Bank of India have sought changes.

A source close to the finance ministry said "the suggestion is being seriously deliberated" and detailed calculations are being worked out. If everything goes well, a refurbished crop loan interest subsidy scheme may be announced in the Union budget, scheduled on February 28.

The government may also announce a special fund to promote long-term financing for agriculture and farm mechanisation in this year's budget. At present, farmers get short-term crop loans of up to Rs 3 lakh at 7 per cent while the government offers interest subvention of 2 per cent to the lenders. Farmers get an additional 3 per cent interest subsidy if they pay back loans on time.

Banks submit their claims every six months after certification by statutory auditors but they often don't get payment on time, creating liquidity issues. SBI claimed Rs 1,500-1,600 crore as interest subvention last year but sources said the bank received only Rs 300 crore from the government.

The crop loan subvention scheme was introduced in the 2006-07 budget by the Manmohan Singh-led United Progressive Alliance government.

Some feel the scheme distorts the market and that direct cash transfer is a better option that can also curb leakages that may exist in the system.

Economists Pranab Bardhan and Kaushik Basu have said they favour direct cash transfers because doling out subsidy is a regressive step that benefits rich producers more than the poor.

Any changes may be implemented in phases and the new accounts opened under the Prime Minister's Jan Dhan scheme may be put to use for direct cash transfers. Finance minister Arun Jaitley announced that banks have opened 11.5 crore accounts till January 17 against a target of 7.5 crore accounts that Prime Minister Narendra Modi had set for achieving by January 26, 2015. The government is also looking to make the farm subsidy scheme more inclusive. India is home to about 13 crore farming households, of which 7 crore have access to bank credit. These households take advantage of the interest subvention scheme, while the small and marginal farmers are typically bereft of any government benefit.