This study evaluates the impact of government policies aimed at improving access to agricultural credit, and production in India.
Background
A significant majority of the Indian population still relies on agriculture as a source of livelihood. Agricultural productivity, however, is marred by technological inadequacy and lack of financial penetration in India. Against the backdrop of one of the world’s largest social banking programmes implemented by India from 1969-1990 to combat the dual challenge of finance and food security, this study evaluates the policies guiding this agricultural shift and the impact on farmers.
Approach
The study uses an instrumental variable approach to empirically test the impact of government policies, such as agricultural credit targets, on agricultural investment and production during the 1980s. This method involves estimating the supply of credit independently by using an instrument which affects supply but is uncorrelated with demand.
Key Findings
Results from the study suggest that rural branch expansion had a negative impact on usage of key agricultural technologies, including macro-nutrient fertilisers, thereby reducing the district-wise aggregate crop production to the tune of 11.7 million rupees for every additional rural bank branch. In contrast, while imposing agricultural credit targets increased mechanisation, there appears to be no significant improvement in aggregate production. This suggests a disconnect between policy targets on agricultural credit and their associated objectives at enhancing national food security.
Implications
By examining the impact of India’s formal social banking programme, this study assesses the outcome of financial expansion on food security as well as poverty reduction among agricultural households. By independently analysing policies related to bank branch expansion as well as targeted finance, the study provides insights into the effectiveness of these two financial inclusion instruments with regards to agricultural productivity.