No Policy is an Island: Finance and Food Security in India

 

By Andre Butler and Camille Boudot, IFMR-LEAD

Abstract:

In India many of the poorest people depend on agriculture as a major source of income and employment, while the nation depends on these millions of smallholder farmers for its food security. Agricultural technology has the potential to sharply increase yields, yet many farmers cite the lack of financial capital as the main constraint to adoption. In this light, India implemented one of the world’s largest social banking program (1969-1990) which resulted in the opening of 30,000 rural bank branches and increased direct finance to agriculture from 0.4 to 158 billion Rupees.

Using an instrumental variable approach, we exploit the policies guiding this financial expansion, to empirically test their impact on agricultural investment and production during the 1980s. Our results 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 disconnect between policy targets on agricultural credit and their associated objectives at enhancing national food security. We draw upon these results to comment on the current financial support in the context of India’s rapidly declining share of agricultural output to gross domestic product.

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