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The IUP Journal of Applied Economics
The Impact of Economic Policy on Institutional Credit Flow to Agricultural Sector
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The macro level determinants of the institutional credit flow to agriculture occupy a crucial position in an emerging economy like India. The aggregate level of agricultural credit may well be considered as the combined result of macroeconomic policies transmitted through different channels. The main aim of this study is to examine the inter-linkage between the institutional credit to agriculture and the macroeconomic variables. To attain this objective, the study develops a model by considering several theories, focusing only on commercial banks. This study uses vector autoregression procedure to estimate the relationship. The results of the study confirm that there is considerable response of institutional credit to macroeconomic variables and this proves that agriculture sector is not insulated.

 
 
 

The macro level determinants of the institutional credit flow to agriculture have occupied a crucial position in an emerging economy like India (Timmer, 1988). The aggregate level of agricultural credit may well be considered as the combined result of macroeconomic policies transmitted through different channels (Wagh and Dongre, 2016). Macroeconomic models evolve over time due to various externalities. Some of the macroeconomic models of the Indian economy are focusing on output, the fiscal sector and external sector (Shepherd, 1970). A survey of the existing macro models indicates that while there is harmony on certain aspects of the economy, there are other areas that are less than fully understood. Depending on their objective and focus, different models have adopted different levels of disaggregation at the sector levels. Though there are variations, in general economic activities have been classified into four sectors, viz., agriculture, manufacturing, service and public administration. Intra-sectoral disaggregation levels have also differed from model to model depending on the objective of the model builder (Gillis et al., 1992). The macro level determinants play an important role in driving the flow of institutional credit to agriculture and priority sector as well. The policy on agricultural finance at macro level is primarily concerned with the levels of credit flow to agriculture, terms and conditions under which it is made available, allocation of credit between sub-sectors (production and investment) to the needy farmers, encouraging them to adopt new agricultural technology and pre- and post-appraisal of loan disbursement (Manmohan, 1995). Initially, the reforms focused mainly on the industrial and financial sectors and agriculture was mostly kept outside the scope of reforms. However, the agriculture sector benefitted indirectly from reforms due to exchange rate policy and improvements in terms of trade (Manmohan, 1995). In a country with diverse agro-climatic, socioeconomic and institutional circumstances, the need, nature and impact of input-output market reforms would differ across regions. Development of agricultural sector is critically dependent on the use of modern input such as fertilizers, seeds, plant propagation material, agricultural chemicals and the availability of credit to purchase these and other inputs. There is a need to ensure adequate and timely supply of all these inputs (Chand et al., 2007).

 
 
 

Applied Economics Jouranl,Theoretical Underpinning on Macro Policies and Agriculture, Output Indicators ,Banking Variables .