Institutional credit is vital for sustaining India’s agriculture-driven rural economy and enhancing farm productivity. Despite noticeable progress, access to credit remains regionally unequal, affecting agricultural output in many states. This study assesses institutional agricultural credit’s impact on productivity in 31 Indian states from 2014–2023. Based on Credit Rationing Theory, the study examines structural issues and uneven credit productivity effects. Panel data regression is used with both fixed and random effects to estimate the impacts. Impact of Crop loans (CL) and term loans (TL) on state-wise agricultural Gross Value Added (GVA) is studied. Usage of NPK fertilizer and Electricity and Storage infrastructure are included as a control variable. Results indicate strong regional differences in agricultural credit distribution and its alignment with performance. Both crop loans and term loans significantly and positively impact agricultural GVA across the regions. Crop loans show a stronger effect than term loans, emphasizing their importance in short-term productivity. NPK fertilizer and electricity consumption also have a positive association with agricultural GVA levels. However, storage infrastructure has a negative or weak significance, hinting at inefficiencies or substitution problems. Endogeneity checks confirm a two-way relationship between credit access and agricultural productivity, ensuring result robustness. The study highlights the urgent need for targeted, region-specific institutional credit and policy interventions. It recommends reforming financial systems to suit agro-climatic differences and specific crop requirements. Such regionally adapted reforms can ensure inclusive, sustainable agricultural development across India’s rural landscape. These insights can guide state-level financial strategies and improve agricultural credit allocation efficiency. Improved credit flow can help maximize productivity and support rural economic transformation sustainably.