Agricultural Credit-led Agricultural Growth: A VECM Approach

Aims: To explore the agricultural credit potential, performance and relationship with agricultural growth in India’s.

Study Design: The study is based on secondary data of agricultural GDP and agricultural credit (Direct Institutional Credit). At first, the performance of agriculture credit is conferred using compound annual growth rate of credit disbursement over the time and analyses the disbursement of agricultural credit of scheduled commercial banks to marginal, small, medium and large farmers. Further, the empirical research has conducted to explore the relationship between agriculture credit and economic growth in long-short run using time series data.

Place and Duration of Study: Time series data of Agricultural gross domestic product and farm credit has been taken from Hand Book of RBI and National Account Statistics (CSO) from the period of 1980 to 2011.

Methodology: The study uses Johansen Co-integration test to analyze the long term association between agriculture gross domestic product (AGDP) and Agriculture Credit. Moreover, Vector Error Correction Model is applied for understanding the long run and short run causality.

Results: Findings from the analysis suggest that over the period, agriculture gross domestic product is highly responsive to an increase in agricultural credits. A unidirectional causality is running from Agricultural credit to Agricultural Gross Domestic Product.

Conclusion: It can be concluded that Agricultural credit is a necessary input for inclusive agricultural sector growth. For financial and social inclusion, the government should take strong steps to disburse credit to agricultural sector as agricultural credit leads to production of agriculture and agriculture has the power to cause growth to all sectors of the economy inclusively.