Agricultural Credit and Economic Growth in Rural Areas

In this paper, we set out to establish if there is a link between finance and economic growth in rural areas. In particular, we evaluate the relation between credit by major lenders in rural areas - commercial banks and Farm Credit System institutions - and economic growth for the period 1991-2010. The motivation for this work comes from empirical studies showing a link between economic development and financial system development as well as from work which highlights the positive role of long-term finance provided by banks. Using two different datasets - with regional and with state level data - we find a positive association between agricultural lending and agricultural GDP growth per rural resident with the positive association stronger during the 1990s. Our results point to a positive link between credit and economic growth in rural areas during that period, attributable to the lending by FCS institutions and by commercial banks