Credit Constraints and Land Tenancy Markets in Rural India

This paper provides an empirical investigation of the extent to which rural households in India are effectively constrained in the Government controlled or "formal" credit sectors by analyzing the impact of access to such credit on production decisions, in particular the decision to rent land. The linkage between land rental and credit markets is of particular interest because of its potential effect on the distribution of operated land and hence income inequality in agriculture. The extent to which access to credit affects the decision to lease land is estimated using an endogenous switching regression model which distinguishes between the leasing behavior of borrowers and nonborrowers, conditional on their credit status. The determinants of the leasing decision of borrowers is found to be significantly different from those of non-borrowers. However, there is no strong statistical support for the hypothesis that credit constraints affect leasing decision. This suggests that formal sector credit constraints are not effective, perhaps due to substitution possibilities between credit-financed capital and other inputs. This paper also finds that the increased demand for land by large farmers is primarily the result of their increased productivity and declining land size.