Overreliance on Law

This chapter evaluates rural credit in India, assessing why the law has fared so poorly in regulating the rural credit market and enhancing farmer welfare. It begins by detailing the regulation of rural credit and the rise of the microfinance industry since the celebrated economic reforms of 1991 in India. The chapter notes that the levels of farmer stress is at an all-time high in India, with many farmers driven to levels of debt that they clearly cannot pay back in their lifetimes, and that there has been a large increase in the incidence of farmer suicides. It then brings evidence and analysis to show that the numerous credit laws and regulations have failed to do much to alleviate the problems because of the failure to recognize that credit markets are interlinked with other features of the rural economy. Ultimately, the chapter makes a pointed recommendation — the need to strengthen agricultural insurance and the state's willingness to absorb some of the shocks stemming from productivity fluctuations.