The Productivity of agricultural credit in India

Abstract

This study examines the nature of the relationship between formal agricultural credit and agricultural GDP in India, specifically the role of the former in supporting agricultural growth, using state level panel data covering the period 1995-96 to 2011-12. The study uses a mediation analysis framework to map the pathways through which institutional credit relates to agricultural GDP relying on a control function approach to tackle the problem of endogeneity. The findings from the analysis suggest that over this period, all the inputs are highly responsive to an increase in institutional credit to agriculture. A 10 % increase in credit flow in nominal terms leads to an increase by 1.7% in fertilizers (N, P, K) consumption in physical quantities, 5.1% increase in the tonnes of pesticides, 10.8% increase in tractor purchases. Overall, it is quite clear that input use is sensitive to credit flow, whereas GDP of agriculture is not. Credit seems therefore to be an enabling input, but one whose effectiveness is undermined by low technical efficiency and productivity. Notwithstanding these aggregate findings detailed micro studies would be necessary to provide insights into this issue.