How Crowdfunding Can Fill The Finance Gap For Farmers To Go Solar
Crowdfinanced loans are a viable solution for enabling farmers to get solar-powered pumps, which bring long term savings on electricity & diesel costs, facilitate sustainable farming and ultimately reduce farm power subsidy bills, say experts
Chennai: Frustrated with erratic power supply and voltage fluctuations that occasionally damaged his electric irrigation pump, P. Bhaskaran, a farmer in north-central Tamil Nadu's Salem district, took an institutional loan and installed a solar-powered pump in 2013. The solar pump fulfils his irrigation needs satisfactorily. "However, with two crop failures and a high loan interest rate, I ultimately paid nearly double the cost of the solar pump," he told IndiaSpend. "It took me eight years to clear the loan."
Bhaskaran's fellow farmers often use diesel-powered agricultural irrigation pumps because of unreliable electricity supply. They too wish to switch to solar pumps, which have low operational and maintenance costs, and unlike diesel are a source of clean, renewable energy. The cost, however, is proving a barrier, they told us. With an agricultural household getting an average monthly income of Rs 10,218 and having an average debt of Rs 74,121, the farmers said that they could not afford a solar pump that costs between Rs 2.42 lakh and Rs 4.59 lakh depending on the capacity of the pump.
Both the state and Union governments provide subsidies of a minimum 30%, each, towards the cost of installing solar pumps for agriculture; the farmers have to pay the rest. Some state governments, like Tamil Nadu's, provide a subsidy greater than 30%. Even so, Bhaskaran's fellow farmers say it is difficult for them to finance their share, if they manage to get a subsidised pump. Around 92% of farmers in Tamil Nadu are marginal or small, i.e. they own less than 2 hectares (about 5 acres) of land; all-India, 88% of farmers are marginal or small. The wait for a subsidised pump could extend into years, since the demand is much more than the allocation, they said.
Buying a solar pump outright is difficult, many farmers told us, as neither banks nor microfinance institutions give loans for assets like solar pumps. While buying solar pumps with farm loans is an option, these require collateral which most farmers said is also difficult to provide, since they have already pledged any asset of value.
Alternative funding models like crowdfinanced loans through peer-to-peer platforms (P2P) can fill the financing gap, farm input financing operators told us. The crowdfinancing model has already been proven in Europe, and with a rooftop solar project in Delhi, and should be further facilitated by the Reserve Bank of India. With many people and investors interested in farmers' welfare, the crowdfunding model for loans could address both the cost barrier for farmers to own their own solar pumps, and the financial burden of subsidies on both solar pumps and farm power on governments, said experts.
Solar irrigation pumps a non-polluting alternative to diesel
Most agricultural irrigation pumpsets in use in India are electric, but farmers in most states experience erratic power, especially during the day, and get proper supply only at night, said Bhaskaran. This fact was borne out by former Gujarat chief minister Vijay Rupani's reported statement in January 2021 that farmers were demanding daytime power as irrigating at night was risky.
"While many farmers install diesel pumps to overcome this problem, those who cannot afford the cost of diesel grow a single rain-fed crop," Suresh Babu, a farmer in southern Tamil Nadu's Madurai district, told IndiaSpend. Rising retail prices of diesel have increased input costs for farmers, affecting farm income and leading to protests, IndiaSpend reported in July 2021. Diesel prices in Tamil Nadu's state capital Chennai have risen 4% since March 21, 2022.
Of the 30 million agricultural pumps in India, about 8 million (26.5%) are diesel pumps, according to PM KUSUM – A new green revolution, a booklet released by the Ministry of New and Renewable Energy (MNRE) in September 2021. Increased use of solar pumps among all agricultural irrigation pumps in use in India since 2014 has been accompanied by a proportionate decrease in the use of electric pumps, while the share of diesel pumps has remained steady since 2010, per data from the International Energy Agency. These diesel pumps, combined, lead to carbon dioxide emissions of 15.4 million tonnes, annually, per the MNRE PM-KUSUM booklet.
Ballooning farm power subsidies
The farmers we spoke to allege that they get unreliable power supply since the electricity supplied to them is free or subsidised. "It's not because it's free but yes, the priority of daytime power is for domestic and commercial consumers," an official with the Tamil Nadu Electricity Board (TNEB), who did not want to be named, told IndiaSpend.
In Tamil Nadu, free electricity is provided for 2.2 million agricultural pumpsets for farmers. The state, however, has around 7.9 million operational landholdings, per the Agriculture Census, 2015-16. The Andhra Pradesh government supplies nine hours of free power to 1.84 million agricultural pumps daily, but the state has 8.52 million operational holdings. These figures indicate that only a fraction of farmers get free power.
Thus, even as farmers struggle without daytime power, governments spend thousands of crores on farm power subsidies. Tamil Nadu had allocated Rs 4,508.23 crore as farm power subsidy for TNEB in 2021-22. The Haryana government paid Rs 6,878.40 crore on farm power subsidy in 2019-20 and Punjab spent Rs 4,740.14 crore the previous year. Countrywide, farm power subsidies amounted to Rs 1 lakh crore annually by 2018-19, according to the MNRE PM-KUSUM booklet. This is 3.5 times the Union Budget allocation for the MNRE for 2022-23.
Solar pumps allocated under government subsidy scheme are far from demand
To address both issues of erratic power supply and diesel emissions, the Union government has been promoting solar energy through different schemes in its efforts for a clean energy transition. The latest, the Pradhan Mantri Kisan Urja Suraksha Evam Utthaan Mahabhiyan (PM-KUSUM), a subsidy programme for farmers' energy security, was launched in March 2019.
The Union government plans to install 2 million individual, stand-alone solar pumps by December 31, 2022 under Component-B (generally referred to as KUSUM-B) of the three-component PM-KUSUM scheme. KUSUM B aims to 'de-dieselise' the farm sector, and allows for farmers or farmers' associations to install new solar pumps or replace old diesel pumps of up to 7.5 horsepower (hp) capacity with solar pumps, with central financial assistance (CFA) of 30% for most states and 50% for a few smaller states and union territories, and 30% of state governments' contribution (more in certain states). For KUSUM-B, in 2020-21, the government allocated a CFA of Rs 15,912 crore.
The farmer has to bear up to 40% of the cost, depending on the extent of CFA and state government subsidy. But, with an average monthly income in 2018-19 of Rs 10,218, few farming households have income to spare, per findings of the Situation Assessment of Agricultural Households and Land and Livestock Holdings of Households in Rural India (SAS) survey, 2019. Half (50.2%) of India's agricultural households were in debt, with the average outstanding loan worth about Rs 74,000, IndiaSpend reported in September 2021. This is before the Covid-19 pandemic's economic shock to the rural economy.
If only diesel pumps are considered for substitution with solar pumps, the allocation of 2 million under KUSUM-B is only one-fourth of the need. Since the PM-KUSUM scheme was launched in March 2019, only 18% of the planned 2 million pumps have been sanctioned, of which less than a quarter have been installed, with nine months to go for the target date of December 31, 2022.
Solar pump cost offset by savings on diesel or electricity
For further promotion of solar pumps, some states have increased their share of the subsidy. The Tamil Nadu government increased its KUSUM-B subsidy contribution to 40%, reducing the farmer's share from 40 to 30%. In its 2021-22 budget, Haryana announced that 50,000 off-grid solar pumps would be installed with a 75% subsidy, 45% being the state's contribution.
In Tamil Nadu, for a KUSUM-B solar pump, a farmer's contribution varies from Rs 70,000 to Rs 1.5 lakh, depending on pump capacity and type. For B. Saravanan, a farmer in coastal Tamil Nadu's Nagapattinam district, who installed a 7.5 hp solar pump under Tamil Nadu's pre-KUSUM 90% subsidy scheme in 2018, paying his share was not easy. "Without that subsidy, or even with the present subsidy where my contribution would be over Rs 1 lakh, I couldn't have installed a solar pump," he said.
For many small and marginal farmers like Saravanan, even their contribution in a subsidy scheme is a financial burden. But many of them say they wished to be self-reliant for their energy needs with solar pumps. They also want to avoid the pollution caused by diesel pumps. The farmers see reliable power and zero spending on diesel as the advantages of switching to solar pumps.
"If PM-KUSUM subsidy is available at 60%, and if diesel pump usage is avoided for around 150 hours or more, the farmers will benefit," Selna Saji, head of policy and advocacy at SunEdison, a Chennai-based solar energy company, told IndiaSpend. Replacement of existing diesel pumps with solar pumps will reduce the cost of irrigation by around Rs 50,000 per year for a 5 hp pump, per the MNRE PM KUSUM booklet. "The more diesel usage is avoided, the more the benefits," Saji added. "For a 5-hp solar pump, if diesel pump usage is avoided for say 300 hours, the payback of the initial investment will be as short as 2-3 years, with over 30% internal rate of return."
When K. Somu in Virudhunagar district in south Tamil Nadu applied for an agricultural power connection, he learnt that the electricity charges would be Rs 3.5 per unit, since many farmers' free-power applications have been pending for several years. As getting the electricity line up to his field would entail an additional cost of about Rs 1 lakh, Somu installed a solar pump.
"For farmers like Somu who have to pay Rs 3.5 per unit of power, there will be additional savings besides the savings mentioned earlier, when he uses a solar pump instead of an electric pump," said Saji. "That would again depend on the hours of avoided usage of the electric pump."
Filling the financing gap
Most farmers we spoke to said they cannot afford non-subsidised pumps that cost upwards of about Rs 1.20 lakh for a 1 hp pump, including installation. They also said that bank loan interest rates are high, or that some banks reduce the interest rates but increase other fees, and they struggle to repay.
The public sector National Bank for Agriculture and Rural Development (NABARD) is no longer involved in the PM-KUSUM scheme, which is handled by the Union and state governments, and hence does not fund solar pumps, a NABARD official who did not want to be named, told IndiaSpend. Tamil Nadu Grama Bank (TNGB) officials also told IndiaSpend that they gave loans for solar pumps only during the state government's pre-PM-KUSUM subsidy programme a few years earlier.
"Besides crop loans, a farmer can't get a loan without collateral. So, some farmers have used their crop loan to buy a solar pump," Venugopal, a solar solution provider in Tamil Nadu, told IndiaSpend. A TNGB official agreed; but said the crop loan is capped at Rs 1.6 lakh. Somu installed a 2-hp solar pump for his 1 acre land, spending nearly Rs 2 lakh. As an engineer-turned-farmer, he could pay for it. But for farmers with bigger land sizes, the crop loan will not suffice, he said.
"Non-banking financing companies can offer farmer's loans," Emmanuel Murray, a Hyderabad-based consultant with vast experience in the agriculture, rural credit and microfinance sectors, told IndiaSpend. But the microfinance institutions that we contacted said they gave micro credit only to women's self-help groups (SHGs). A few peer-to-peer (P2P) lenders, which provide web-based platforms to bring lenders and borrowers together, except for one, said they operate only in urban areas.
"Farmers' credit worthiness is always considered low. Maybe that's why [P2P lenders] don't lend to villagers," Dhanapal, a farmer based at Nagapattinam District, Tamil Nadu, told IndiaSpend.
Alternative funding models
A cooperative model similar to the Dhundi Solar Cooperative in Gujarat's Kheda district, where a group of farmers own a pump, will work, Ruchit Garg, founder CEO of Harvesting Farmer Network, a platform that connects farmers and buyers across India, told IndiaSpend. (Read our June 2017 and June 2021 stories explaining the Dhundi model.) Many farmers, however, told us they prefer their own pumps for various reasons besides practicality.
One model where an agency connects farmers with investors has been functioning in Chennai since 2016. I Support Farming (ISF), a Chennai-based company, collects money as an advance from urbanites interested in agriculture. "ISF uses the advance to buy agri inputs for farmers who lack the financial resources to buy these inputs and helps with post-harvest marketing too. These farmers are selected after extensive due diligence. The profits are split between ISF, the urban investors and the farmers," co-founder Vasanth Kumar told IndiaSpend.
Though ISF takes only an advance and not a loan, considering Reserve Bank of India (RBI) regulations on P2P lending, it now arranges for financial support for farmers through Rang De, a P2P platform that matches lenders and borrowers after due diligence on both parties. "This is because with a P2P lender, as specified in the RBI guidelines, investors are aware of the risk of not getting their money back," said Vasanth Kumar.
P2P platforms like Rang De, however, do not lend directly to individuals. "We lend only through an SHG or a non-government organisation," said a Rang De executive, who did not want to be named. He, however, cited an interest-free loan for farmers campaign they ran for 18 months because of investors' positive response, to indicate investors' interest in agriculture. "Our target is the credit-denied community and so our interest is as low as 4% and maximum is 10%, whereas local lenders charge 20% to 60%," said the Rang De executive.
Dhanapal pointed out that not all farmers are denied credit. "Most of us have already pledged our assets for farming, and so we don't have anything to show as collateral. That's why it's not easy to access credit," he said.
ISF can arrange for solar pump loans through Rang De, but the platform caps loans at Rs 1.5 lakh, that too in rare cases. "RBI caps a borrower's limit at Rs 10 lakh, so a P2P platform can make it work," said Vasanth Kumar.
Crowdfinanced loans can be the way forward for farmers and reduce the subsidy burden
Subsidies for installing solar-powered pumps are vital for short term adoption by farmers given the high capital cost, but are unsustainable in the long term, said a 2014 feasibility analysis by Shakti Sustainable Energy Foundation, a Delhi-based think-tank.
This is where crowdfunding, or crowdfinancing, can make the difference, said experts. Crowdfinancing of infrastructure and renewable energy projects is becoming a popular method of alternate financing in Europe and America, but has been in limited use in Asia, per an Asian Bureau of Finance and Research paper published in 2020. Crowdfunding is a method of raising a relatively small amount of money from a large number of individuals, whether as donation or loan.
Crowdfunding is an increasingly proven model in India. Oorja, a company that instals community solar pumps, raised crowd-sourced funds in 2019 for a project in Assam. In October 2021, Delhi-based company Oakridge Energy raised finance from German crowdfinancers for a rooftop solar project. Other platforms such as Nirvana Foundation are into solar crowdfunding aimed at companies and investors.
Can similar crowdfunded loans aimed at individual borrowers help farmers install solar pumps? "Directly giving money to an individual and collecting money back might be problematic," said Murray.
But ISF, Rang De and other such platforms have a due diligence process to vet everyone, said Vasanth Kumar. "In our present model, ISF cannot collect money as advance since a solar pump is not considered an input but a fixed asset. But with some flexibility, and based on our farmers' demand, ISF can do it. Crowdfunding is feasible," he said.
"Crowdfunded donations don't have any limits," S. Kumar, a Chennai-based trader in the export industry who sources value-added organic products from farmers, told IndiaSpend. "We don't have to donate. Anything given for free loses its value. So, we can give a low or no-interest crowdfunded loan."
"Why not make crowdfinancing easy so that interested people can lend money and help farmers install solar pumps. After all, so many people are interested in farmers' welfare." he added.
Vishnu Mohan Rao, a senior researcher with Citizen Consumer and Civic Action Group (CAG), a Chennai-based advocacy organisation, suggested that solar pumps could also be considered a farming input, for which getting loans is easier, rather than an asset.
"Crowdfunding is a viable solution. RBI should take the social equity angle into consideration and initiate or facilitate sectoral lending since farming has inherent risks," said Rao. "If we can iron out the roadblocks, and have a proper system for crowdfunded loans, we can facilitate carbon-free, sustainable farming. The solar pumps will be independent of the grid, and thus save a lot of farm power subsidy money for the government as well."
This story has been produced with the support of an Earth Journalism Media Grant for Renewable Energy Innovations.
We welcome feedback. Please write to firstname.lastname@example.org. We reserve the right to edit responses for language and grammar.