Rural Market Imperfections and Land Productivity in India

Ensuring the viability of farming and increasing farmers’ income are the key policy concerns in India at present. For realizing these objectives, the functioning of markets is very critical. Market imperfections can increase the production and transaction costs of farmers and have a crucial bearing on farm income. The inverse relationship (IR) between farm size and land productivity is a manifestation of the imperfections and has become a stylized fact in India over time. The study revisits this issue and, using primary data, examines whether market imperfections still prevail in India, particularly in output, input, factor and credit markets. The results show a prevalence of a strong IR between land productivity and farm size on the output side and farm size and family labour use on the input side. However, intensive use of family labour does not seem to be the only determinant of farm size-productivity relation. The results suggest that Sen’s labour dualism theory, together with imperfections in land and credit markets, can offer useful insights. Results of our study point to the prevalence of surplus family labour on small farms even after a decade of enacting a major employment guarantee program (MGNREGS) and continuing limited access to institutional credit of small farmers. Thus, particularly for marginal and small farmers, reforming land lease markets to enable easier access to land, providing better access to institutional credit and improving literacy levels to facilitate mobility to other occupations are needed to address some of the observed imperfections.