Institutional versus non-institutional credit to agricultural households in India: Evidence on impact from a national farmers’ survey

Anjani Kumar,Ashok K Mishra,Sunil Saroj,P.K Joshi

doi:10.1016/j.ecosys.2016.10.005

Abstract

A goal of agricultural policy in India has been to reduce farmers’ dependence on informal credit. To that end, recent initiatives are focused explicitly on rural areas and have a positive impact on the flow of agricultural credit. Despite the significance of the above initiatives in enhancing the flow of institutional credit to agriculture, the links between institutional credit and net farm income and consumption expenditures in India are not very well documented. Using large, national farm household level data and IV 2SLS estimation methods, we investigate the role of institutional farm credit on farm income and farm household consumption expenditures. Findings show that, in India, formal credit does indeed play a critical role in increasing both net farm income and per capita monthly household expenditures of Indian farm families. Finally, we find that, in the presence of formal credit, social safety net programs like the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) may have unintended consequences. In particular, MGNREGA reduces both net farm income and per capita monthly household consumption expenditures. On the other hand, in the presence of formal credit, the Public Distribution System may increase both net farm income and per capita monthly household consumption expenditures.

Highlights

Since India’s independence, the main objective of the nation’s agricultural policy has been to improve farmers’ access to institutional credit and reduce their dependence on informal credit
This study investigated the relationship between institutional credit and the economic well-being of farm households in India
Net farm income and per capita household consumption expenditures were taken as proxies for measuring the economic welfare of agricultural households

Summary

Introduction

Since India’s independence, the main objective of the nation’s agricultural policy has been to improve farmers’ access to institutional credit and reduce their dependence on informal credit. Examples include the establishment of the Lead Bank Scheme, direct lending for priority sectors, and the banking sector’s linkage with government-sponsored programs targeted at the poor. Other programs such as the Differential Rate of Interest Scheme, the Service Area Approach, the Self Help Group–Banks Linkage Program, Special Agricultural Credit Plans, and the Rural Infrastructure Development Fund were introduced to enhance the flow of credit to the rural sector. About 85 percent of agricultural credit is used to secure inputs in the agriculture and allied sectors (Narayanan 2016)

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Discussion

Conclusion