Cash Transfers and Landholding Inequality

Is there a trade off while influencing borrowing behavior vis-á-vis consumption by cash transfers? We consider the case of Telangana, an Indian state, which saw implementation of an unconditional cash transfer to change the borrowing behavior of agricultural land-owners – the transfer amount being proportional to the size of land. We exploit a difference-in-differences design with households in the border districts of Telangana with those in the neighboring state districts as a control group, to show that the direct effects were large – organized farmers with large land-holdings increased bank borrowings whereas small and marginal farmers with smaller land-holdings responded by increasing both consumption and borrowing from banks. There were no spillover effects on the local landless agricultural laborers. Within small and marginal farmers, households belonging to relatively higher quartiles respond less in terms consumption, but more in terms of borrowing. All results go through a battery of robustness checks. Our findings brings forth land-holding inequality as the key mediating factor for agricultural households’ responses to cash transfers