The government plans to provide incentives on farm loans in the Budget. The working group on agricultural production, headed by Haryana chief minister Bhupinder Singh Hooda, had suggested that farm loans be made available at 4%. This would mean that the government will have to increase the interest subsidy it pays to banks.

At present, there is 3% interest subsidy available on farm loans, which enables banks to offer farm loans at 7%. There is an additional 2% subsidy for farmers who repay their instalments on time, which translates into an annual cost of 5% for those with a clean track record. Senior government officials said that already states have gone one up on the Centre and were providing higher subsidy through state budgets.

In addition, the agriculture ministry has proposed that the government provide the benefit of additional 2% interest subsidy to farmers who might face payment difficulties due to drought or floods. If the recommendation is accepted by finance minister Pranab Mukherjee, a farmer in a calamity-hit district who is unable to clear his dues on time will not be penalised.

It is not a big deal for the government and it will not be tough to implement since the government notifies the districts, an official said. For the current financial year, the government has provided for an interest subsidy of Rs 3,000 crore. A higher subsidy burden could push up the figure though not by a significant amount.

The working group under Hooda had been set up by Prime Minister Manmohan Singh during the last meeting of the National Development Council. The group, which also had Bihar chief minister Nitish Kumar and West Bengal chief minister Buddhadeb Bhattacharjee as members , had been set up to discuss and recommend strategies and an action plan for increasing agricultural production and productivity, including long-term policies to ensure sustained agricultural growth.

Farm loans were among a set of proposals that had been suggested. In case of several other recommendations, the agriculture ministry proposes to go back to the National Development Council before implementing them. Farm loans have now come to be a regular feature of Union budgets. Apart from setting targets, the government in 2008 announced the Rs 70,000-crore loan waiver and settlement programme and for the last two years Mukherjee has been enhancing subsidy levels on loans.