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Title On Political Economy of State-Level Credit Flows and Economic Development in Rural India: Non-linearity and Convergence*
Authors Sushanta Mallick, Banikanta Mishra and Tapas Mishra
Type Working Paper
Publication Date 12-Nov-2012
Year 2012
Abstract The paper investigates the effect of rural financial development on the agricultural sector in India using the state level data for 15 major states over the time period spanning 1988-2006. Several hypotheses have been tested to differentiate whether financial development and financial liberalisation have had a discernible impact on the traditional sector, which absorbs around 70% of India’s labour force. The empirical results show that financial development (credit-GDP ratio) at state level has had a negative relation with per capita output in the agricultural sector and the impact turns positive with higher level of financial reforms. We also find support for the hypothesis that credit flows tend to increase per capita rural income during election years relative to non-election years. As lack of rainfall has created severe droughts and crop failures leading to farmer suicides in India in the recent years, the paper confirms the expected result that the states with more than normal rainfall tend to have a positive impact of credit on per capita income implying that states with less than normal rainfall cannot benefit from financial development, making rainfall act as a catalyst. We find strong non-linearity (in both parametric and non-parametric regressions) in the sense that when rural financial development increases above 18% of state-level GDP, it generates a permanent positive impact on per capita income in those states’ agricultural sector. We also identify three different patterns of development (convergence clubs) among the 15 major regions of India.
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