The Effect Of Interest-Free Agriculture Credit On Market Participation And Income

The growing concerns for broader integration of resource-poor smallholder farmers into markets,the transformation from subsistence systems to market-oriented agriculture,and improving smallholders’ income are key policy agendas in developing countries.Therefore,interest-free credit provision can chart a route for improved market participation,market arbitrage,and farm income.Improving agricultural productivity,smallholder farmers’ extent of market participation and broader integration into regulated markets,and farm income is one of Pakistan’s key policy priorities.To this end,this work estimates the effect of interest-free agriculture credit on the market participation of rice growers.This study also examines the impact of interest-free agriculture credit on market arbitrage(choice of market outlets,selling frequency,and quantity sold per transaction).Further,this study investigates the impact of interest-free agriculture credit on rice growers’ income in PunjabPakistan.This study examines the impact of interest-free credit on smallholder rice growers’ market participation and income in Punjab-Pakistan using the two-stage least squares IV approach.For this purpose,we applied the three relevant,valid and statistically robust IVs – land registration,willingness to constitute a farmers’ group,and social collateral – and also introduced their interaction term.Likewise,we used primary data – cross-sectional –collected during February-April of 2019 employing systematic random sampling technique in Punjab-Pakistan.The data set consists of 570 smallholder rice growers,both interest-free credit participants(300)and non-participants(270).Using various appropriate statistical tools and econometric models(t-test,Cobb-Douglas production function,two-stage least squares IV approach,bivariate logistic regression and ordered probit model),this study brings forth this issue and suggests coherent policy actions suitable for developing countries.In the first study,presented in Chapter 4,we used t-test to examine the difference in peracre rice inputs used,crop yield,and land allocation.The results show a significant difference in per-acre variable inputs used(improved seed,fertilizer,irrigations,hired labor and mechanical harvesting)and per-acre yield.Further,t-test results indicated that interestfree credit significantly enhanced cultivated land under rice and other cash crops when farmers availed interest-free credit for the successive year(more than one year).Likewise,the Cobb-Douglas production function results confirmed that interest-free credit participation,land preparation cost,fertilizer cost,irrigation cost,hired labor cost,and adoption of improved seed positively influence per-care rice productivity.The two-stage least squares IV model results confirmed that the provision of interest-free credit helped improve smallholder regulated market participation and confirmed our hypothesis.Amongst control variables,improved seed,land under rice,number of irrigations,mechanical harvesting,recommended use of fertilizer,farmers’ literacy,advisory participation,livestock heads,and smart phone ownership were positively related to market participation.In contrast,the distance from all-weather roads was negatively related to regulated market participation.In the second study,presented in Chapter 5,the descriptive analysis indicated that a large share of rice,wheat,and maize produce was sold in village,primary,and secondary markets.It confirmed a greater degree of market arbitrage.The bivariate logistic regression result showed the significant influence of interest-free on selling to both village and regulated(primary and/or secondary)markets.Further,the result reveals that a higher village-level interest-free credit penetration rate significantly influenced selling to regulated markets only.The ordered probit model results confirmed the significant impact of interestfree credit on selling frequency and quantity sold per transaction.These results showed a positive connection between interest-free credit participation and higher selling frequency of cereals – rice,wheat and maize.It indicates that credit participation allows farmers’ to sell their commodities in chunks rather than at once in the glut period to seek higher prices.Further,the village-level interest-free credit penetration rate was significantly related to selling rice and wheat more than twice per year.The third study,presented in Chapter 6,based on descriptive analysis results,indicated that almost half of the subsistence farmers were excluded from both formal and informal financial markets.Further,it revealed a positive connection between land size and borrowing from financial markets.The result of two-stage least squares indicated that the interest-free credit helped improve smallholders’ income and therefore confirmed our hypothesis.It implies that the provision of interest-free credit serves a better function in integrating farmer-market linkage that might be translated into improved farm income.The results also revealed a positive influence of improved seed,mechanical harvesting,farmers’ literacy,livestock heads,farm logistics and mobile phone holding on smallholder income.However,distance to the all-weather road was negatively connected with smallholders’ income in Punjab-Pakistan.Further,the results of producer price showed that interest-free credit participants relatively received higher per 40 kg prices for rice(Rupees 217),wheat(Rupees 338)and maize(Rupees 169).Lastly,t-test results suggested that interest-free credit improved the smallholder net cash income at all landholding levels(approximately PKR 9673/per-acre).Understanding the role of interest-free agriculture credit is essential to infer appropriate policy actions that help overcome the snags in smallholders’ market participation,market arbitrage and higher income.Measures that relax credit constraints and enhance smallholders’ crop productivity,and develop a broader integration of smallholders to markets are particularly beneficial for resource-poor farmers to foster market-oriented systems and,therefore,income expansion.Hence,to improve the impact of interest-free credit on smallholders’ market participation,market arbitrage and income in PunjabPakistan and enhance the contribution of smallholder agriculture to economic growth,the policy directions should focus on four main areas:(i)the provision of interest-free credit for successive periods and its inclusive and a broader villager-level coverage should be implemented,(ii)investments to remove the snags at mesoscale;particularly,poor road infrastructure,remoteness,and information barriers,(iii)government must regulate,document and institutionalize the role of rural moneylender-cum-traders,informal money lenders,agriculture service providers,input-output dealers,assemblers and traders,and(iv)implementing instruments that bolster smallholder vulnerabilities and immediate wealth –like provision of livestock productive assets – and subsidized provision of crop inputs can therefore help generate marketable surplus and encourage more feasible and worthwhile market participation by breaking smallholder credit dependence on village stakeholders,the low-level equilibrium and semi-subsistence poverty traps that are primarily associated with semi-subsistence systems.