Farm level impacts of credit constraints on agricultural investment and income

Abstract

Pakistan is an agriculture based economy and the main economic activity in Sindh province is farming, which is a capital intensive business. For diversified and efficient agricultural production, agricultural investment is important. Despite the importance of the modern technological practices, most farmers are still practicing subsistence agriculture. The lack of capital is the one of the major constraints in increasing investment in farming. The main focus of this article is to examine rice farmer’s investment and the income under credit constraints in rural Sindh, Pakistan. For this research an endogenous switching regression model was employed to conclude the problem of selection bias and endogeneity of credit constraints. In order to achieve the results from visible and invisible factors average treatment effect was utilized. The results revealed that more than half of farmers (65.0 percent) from the total sample are hampered by supply-side (34.0 percent) and demand-side (31.0 percent) credit constraints. Importantly, the results have significant implications that agricultural investment and income can be increased up to 7.3 and 5.1 percent, if there are no credit constraints. Therefore, it is suggested that investment in agriculture can be increased if there is no or minimized credit constraints, which can ultimately increase the farmers’ income in the country.