Whether Credit Kuznets Curve Exists in Rural India?: A panel household data analysis from 2001 to 2012

Improving access of low-cost credit to farmers is an important public policy for increasing agricultural production in developing countries. It improves liquidity in rural areas and also supports for expansion of non-farm sector activities in the economy. However, the relationship between access to credit and households’ income and asset has not yet been properly understood in the literature. Therefore, using 500 panel form of rural household data in India from 2001 to 2011, we have analyzed relationship between credit and household income using kuznets curve framework. We test a hypothesis that “household credit behaves like a Kuznets curve.” Our empirical results clearly suggest that debt of a rural household exhibits an inverted U-shaped relationship with income of a household. That is, income elasticity of debt is not constant across the household but it varies with the income level of household, resulting in a non-linear relationship. The household income also determines consumption. If access to credit (level of credit) of a household is also determined by income of the household, then it raises a serious doubt on validity of consumption smoothening hypothesis in developing countries where credit rationing is widespread. The credit has important role in smoothening level of consumption of a household even though household income fluctuates year to year. The study finding has huge policy implications on designing credit policy and in understanding permanent income and consumption of rural household.