Synopsis: ‘This is a wake up call for the Government and the RBI to make Banks deploy credit to the extent of over all C-D ratio in rural and semi-rural areas for agriculture and micro and small enterprises in rural areas, with deterrent penalties for failure to do so. This will help in increasing farm out put thus ensuring food security and generation of additional employment and income to rural work force engaged in agri and micro and small enterprises.’

*Direct agriculture credit has significant positive impact on agriculture output. In particular, change in per capita agriculture direct credit (amount outstanding) by one per cent will lead to increase in per capita agriculture output by 0.11 per cent.

Agri credit lagged by Rs60, 000 crore as on 21st may 2010. As against mandated agri credit (direct and Indirect) of Rs4,60,000 crore, at the stipulated 18% of net bank credit, agri credit stands at Rs 3,99,000 crore thus depriving much needed credit to farm sector to the extent of Rs 60,000 crore.

This lagging trend continuous year after year  and no efforts are made by the RBI and the Govt. to ensure that banks do lend to the mandated agri credit level of 18%.

An increase of direct agri credit by 10%,(say by Rs25,000 crore in real terms ) after factoring in inflation and other things being equal, would have resulted in additional increase in agri out put by 1% ,(say by an increase of 2 M.T), benefiting 52% of the total workforce with agriculture as main activity and  ensuring availability of more food grains and other agri products for our teeming millions

*This effect is, however, more stronger from the area under cultivation; an increase in per capita agriculture area by one per cent has the potential of raising the per capita agriculture output by more than 0.5 per cent.

*The output effect of rainfall on agriculture in India is still very severe; the deviation of rainfall from normal by one per cent could adversely affect agriculture output growth by 0.8 per cent.

*Direct agriculture credit amount is significant and positively explains the variation described in the agriculture output. While the number of indirect agriculture credit accounts is significant at 10 per cent level and positive at first lag. That is more people benefited from the indirect finance to agriculture current year may lead to higher output next year.

Agriculture area is having a significant positive impact and rainfall (measured as deviation from normal) is negatively affecting the agriculture output. However, the effect of rainfall deviation from normality to agriculture output got substantially reduced once we control for the financial inclusion indicator like number of people covered under agricultural loan facilities from the formal institutional mechanism.

The indirect agriculture amount outstanding and direct number of agriculture accounts is found to be insignificant in explaining the variation in agriculture output.

Summary

Among the striking features of the agricultural credit scene in India are the wide regional disparities in the disbursement of agricultural credit by scheduled commercial banks.

The share of agricultural GDP is falling in total GDP. In this context this paper examines the role of direct and indirect agriculture credit in the agriculture production taking care of the regional disparities in agriculture credit disbursement and agriculture production in an econometric framework.

The number of accounts of the indirect agriculture credit also has a positive significant impact on agriculture output, but with a year lag. These results reveal that agriculture credit is playing a critical role in supporting agriculture production in India.  Its role can be further enhanced by much greater financial inclusion is ensured.

Decline in share of deployment of Agri Credit

• The share of agriculture credit in gross bank credit declined marginally to 10.9 per cent from 11.3 per cent in 2008.