Examining the Role of Formal Credit in Agricultural Growth and Food Grain Productivity in India:  An Empirical Analysis.

Sarath A M

doi:10.56093/ijas.v96i10.168675

Authors

Sarath A M University of Madras

https://doi.org/10.56093/ijas.v96i10.168675

Keywords:

ADF, Agricultural Growth, ARDL, Food Grain Productivity, India

Abstract

This study examines the role of formal credit in promoting agricultural growth and food productivity in India, with a focus on gross value added in agriculture (GVA_AG) and total food grain yield (TFGY). Using annual data from 1990–91 to 2023–24, the study employs an Autoregressive Distributed Lag (ARDL) modelling framework to analyse both short-run and long-run relationships among total formal credit (TFC), gross sown area (GSA), total food grain area (TFGA), and inflation (INF). The empirical findings reveal that TFC has a significant positive effect on both GVA_AG and TFGY in the short and long run, emphasising the critical role of sustained credit flows in improving agricultural performance. Specifically, a 1 per cent increase in TFC is associated with approximately a 0.055 per cent increase in GVA_AG and a 0.085 per cent increase in TFGY in the short run, while in the long run, the same 1 per cent increase in TFC is linked to about a 0.16 percent rise in both GVA_AG and TFGY, with all effects statistically significant at the 1 per cent level. Likewise, GSA and TFGA positively contribute to agricultural output, confirming the importance of land utilisation for productivity gains. Inflation, however, does not have a statistically significant influence in either the short or long run, suggesting a relatively weak link between inflationary pressures and agricultural outcomes. Diagnostic tests, including heteroskedasticity, serial correlation, normality, and stability tests (CUSUM and CUSUMSQ), confirm that the models are statistically robust and stable. The adjusted R² results further indicate a satisfactory explanatory power, with the ARDL models explaining about 63 per cent and 67 per cent of the variation in GVA_AG and TFGY, respectively. The study concludes that strengthening formal credit systems, promoting land utilisation, and integrating financial inclusion initiatives are essential for enhancing India's agricultural growth and ensuring food security.

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