Dynamics of institutional agricultural credit and growth in Punjab: contribution and demand-supply gap

The contribution of institutional credit to agricultural growth has been estimated in the state of Punjab. The demand-supply situation under different scenarios and change therein over a decade period have been examined. A simultaneous (four) equation model has been used to estimate the contribution of institutional credit towards use of production inputs, private investments and agricultural growth. The study has revealed that supply of production credit doubled and that of investment credit increased by about 80 per cent during the period 2001-02 to 2003-04. It took more than 15 years to double from 1984-85 to 2000-01. The relationship between use of variable inputs and production credit disbursement has been found highly significant. A similar relationship has prevailed between private capital formation and investment credit. The results have further exhibited significant and positive impact of capital investments on productivity with elasticity of 1.02. Higher use of inputs was ushered by favourable input-output pricing policy along with easy and cheap short-term credit availability in the state. Private capital formation has also helped in increasing the use of variable inputs in the crop sector. The contribution of institutional credit in promoting use of modern production inputs and private capital investments has been found to be significantly positive. The demand-supply situation in terms of short-term institutional credit has undergone a change over time, with the demand exceeding supply by 49 per cent in 1995-96, but later, the supply has been found exceeding demand by 122 per cent in the year 2005-06. It, therefore, becomes imperative that first the demand for agricultural credit in each state/region be assessed, depending on crop patterns and current inputs and capital requirements in relation to targeted output growth-rate and then, policy framework should be put in place to meet those requirements, instead of increasing the credit supply uniformly across the board in all the states/ regions of the country. Such a policy sometimes proves counterproductive and that appears to have happened in the Punjab agriculture.