How infrastructure and financial institutions affect agricultural output and investment in India

Abstract

This paper has sought to quantify the inter-relationships among the investment decisions of government, financial institutions and farmers and their joint effects on agricultural investment and output. Empirical results using district-level time-series data from India confirm the importance of input and output prices in the determination of aggregate crop output, but also confirm that aggregate outout supply elasticities are low. Education infrastructure availability and the rural banks play an overwhelming role in determining investment, input and output decisions. Availability of banks is a more important determinant of fertilizer demand and aggregate crop output than interest rates. While farmers respond to infrastructure, the governments in turn allocate their infrastructure investments in response to the agroclimatic potential of the districts and banks locate their branches where the agroclimate and the infrastructure are favorable to their operation. Agricultural output is therefore determined in a complex interactive process where farmers, government and intermediaries respond to the same factors. This sharply affects the econometric techniques which have to be used to analyze output supply.