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

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.