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University Microfilms International 300 N. Zeeb Road Ann Arbor, Ml 48106 8311750 Grewal, Harpal Singh AN EVALUATION OF RESEARCH ON RURAL FINANCIAL MARKETS IN IND IA The Ohio State University PH.D. 1983 University Microfilms International300 N. Zeeb Road, Ann Arbor, M I 48106 AN EVALUATION OF RESEARCH ON RURAL FINANCIAL MARKETS IN INDIA DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Harpal Singh Grewal, B.Sc., M.Sc. ***** The Ohio State University 1982 Reading Committee: Approved By Dr. Dale W Adams Dr. Stephen A. Bneer O j O j U ^ Dr. Douglas H. Graham Advisor Department of Agricultural Dr. Warren F. Lee Economics & Rural Sociology Dedicated to my lovely wife Karam, and sons Jagjit and Rupinderjit. ii ACKNOWLEDGEMENTS I am deeply Indebted to ray advisor Dr. Dale W Adams for all his help, encouragement, patience and thoughtful assistance throughout my graduate program. I wish to express my deepest appreciation to Drs. Stephen A. Buser, Douglas H. Graham and Warren F. Lee for their valuable comments and suggestions throughout the dissertation effort. Sincerest gratitude is also extended to Drs. Richard L. Meyer, Francis E. Walker and Leroy J. Hushak for their continuous advice and encouragement. I am very grateful to ray and my wife’s parents for providing me all types of support during ray graduate education. I would also like to express ray deep appreciation to the Department of Agricultural Economics and Rural Sociology, The Ohio State University, for providing me finan­ cial support in the form of research associateship. I wish to express warmest gratitude to all of my colleagues for their support and encouragement. I am specially grateful to Adelaida Alicbusan, Agyapong Gyekye, Babiker Babiker, Girraai Abrahim, Steve Pollard, Mike McCullough, Ohene Nyanin, Jeff Kalbus and Young Key Ro. My wife Karam, and friend Paramjit S. Johar did all the typing and proofreading of the dissertation. Ms. Jill Loar did several drafts of the dissertation on the word processor machine. I express my sincere thanks and appreciation to all of them. iii Finally, I owe a largest debt of gratitude to ray wife Karam, and sons Soni and Rupi for their patience and understanding in the course of ray graduate education. I dedicate this dissertation to them. iv VITA September 28, 1951 .......... Born - Kila Raipur; Punjab, India 1973 ....................... B.Sc. (Agriculture), Punjab Agricultural University, Ludhiana, India Major: Agricultural Economics and Rural Sociology 1975 ....................... M.Sc., Punjab Agricultural University, Ludhiana, India Major: Agricultural Finance 1978-1982 .................. Research Associate, Department of Agricultural Economics and Rural Sociology, The Ohio State University, Columbus, Ohio, U.S.A. PUBLICATIONS "What's Wrong With Credit Impact Studies: A Comment." American Journal of Agricultural Economics, May 1983 (co-author). "Student Course Evaluation: A Longitudinal Study." NACTA Journal, September 1982 (co-author). Annotated Bibliography on Agricultural Credit and Rural Savings. Volume IV, March 1980; Volume V, April 1986; Volume VI, September 1980 (co-author) . FIELDS OF STUDY Major Field: Agricultural Economics Studies in Economic Theory. Professors Howard P. Marvel, Tetsunori Koizumi and Robert Driskill. Studies in Agricultural Finance and Development. Professors Richard L. Meyer, Dale W Adams and Warren F. Lee. Studies in Business Finance. Professors Stephen A. Buser, Gailen L. Hite and Harry Blythe. v Studies in Agricultural Policy, Management and Marketing. Professors David H. Boyne, Dennis R. Henderson, Donald W. Larson and Roger D. Blackwell. Studies in Quantitative Methods. Professors Francis E. Walker, Jerry Thursby, Leroy J. Hushak, J. Stephen Henderson, Richard H. Steckel and Danny S. Wong. vi TABLE OF CONTENTS Item Page DEDICATION......................................................... ii ACKNOWLEDGEMENTS.................................................. H i VITA............................................................. v LIST OF TABLES..................................................... ix LIST OF F I G U R E S ...................................................xi CHAPTER I. INTRODUCTION............................................. 1 The Problem......................................... 2 Objectives........................................... 13 Design o£ the Study................................... 14 Organization of the Study..............................17 II. AN OVERVIEW OF RURAL FINANCIAL MARKET POLICIES IN INDIA . 18 Institutional Development Policies .................. 21 Loan Supply Policies................................. 32 Savings Mobilization Policies..........................40 Interest Rate Policies......... 42 III. FINANCE AND FINANCIAL MARKETS ........................... 48 Characteristics of Financial Assets................. 48 Characteristics of Financial Markets ......... 50 Implications for Rural Financial Market Research . 51 IV. RESEARCH ON RURAL BORROWERS ............................. 60 Rural Credit Demand Studies............................61 Studies on Loan Impact ............................... 71 Studies on Cost of Borrowing in Rural Financial Markets....................... 80 Studies on Repayment of Rural Loans.................... 82 vii Item Page CHAPTER V. RESEARCH ON RURAL SAVINGS............................... 85 Saving Capacity and Determinants of Rural Household Savings............................................ 86 Research on Composition of Rural Household Savings . 96 Mobilization of Savings Through Rural Financial Markets........................................... 100 VI. RESEARCH ON RURAL FINANCIAL INSTITUTIONS AND POLICIES . 104 Formal Rural Finance Research...................... 104 Informal Financial Agencies and Related Policies . 116 VII. A PLAN FOR RURAL FINANCIAL MARKET RESEARCH............... 122 A Resource Allocation Plan for Rural Financial Market Research....................................122 Coordination Between Rural Financial Market Research and Policies.............................. 133 VIII. SUMMARY, CONCLUSIONS, AND IMPLICATIONS...................138 Summary. .......................................... 138 Conclusions........................................150 Implications ....................................... 153 BIBLIOGRAPHY ........................................... 155 viii LIST OF TABLES ge Nominal Value of Formal Rural Loans and Deposits in India, 1951-79 ......................................... 3 Real Value of Formal Rural Loans and Deposits in India, 1951-79 (1978-79=100) ................................. 6 Distribution of Published RFM Studies on India, 1950-79 . 16 Maximum Moneylenders Interest Rate Limits Allowed by Regulations in Different States in India Prior to 1947 . 47 Impact of Changes In Interest Rates and Input and Output Prices on Demand for Credit and Use of Inputs by Marginal Farmers of U.P., India ................................. 64 Estimated Regression Coefficients and Ratios of Marginal Value Product to Factor Cost of Factors Affecting Demand for Credit in Econometric Studies ..................... 65 Annual Per Acre Production Credit Requirements Based on Estimates of Programming Studies in India .............. 68 Estimated Impact of Loans on Farm Business of Rural Borrowers in Descriptive Studies on India .............. 72 Linear Regression Estimates of Factors Determining the Adoption of Modern Rice and Wheat Varieties and Use of Fertilizer by the Farmers