Productivity of Rural Credit: A Review of Issues and Some Recent Literature

Abstract

The policy intervention in agriculture has been credit driven. This is even more pronounced in the recent interventions made by the State, in doubling agricultural credit, providing subvention and putting an upper cap on interest rates for agricultural loans, the package announced for distressed farmers. We use existing literature and data to argue that the causality of agricultural output with increased doses of credit cannot be clearly established.

We argue that Indian agriculture is undergoing fundamental change wherein the technology and inputs are moving out of the hands of the farmers to external suppliers. This, over a period of time may have resulted in the de-skilling of farmers and without adequate public investments in support services and without appropriate risk mitigation products has created a near-crisis in agriculture. Thus, we argue that policy interventions have to be necessarily patient and holistic.

Looking specifically at the rural financial markets, using some primary data we argue that it is necessary to understand the rural financial markets from the demand side. We conclude the paper by identifying some directions in which the policy intervention could move, keeping the overall rural economy in view rather than being unifocal about agriculture.