Agriculture Capital Formation in Agriculture & Impact of Public Expenditure on

Agriculture
What is capital formation in Agriculture

Net addition to assets

Examples of public sector capital formation would be investments in major and
medium irrigation, power, roads, markets etc., whereas private capital formation
would include minor irrigation, agricultural implements, machinery, tools,
transportation etc.
It helps in improving stock of tools, productivity of resources which leads to
better utilisation of existing resources such as Land and Labour.
That is why there is a direct correlation between Capital Formation, Agricultural
Growth and Decline in Poverty
Gulati and Bhalla – 10% decrease in public investment leads to 2.5% reduction in
agriculture growth
Give Broad Trends of Capital Formation

capital

1960-1970

In this period public investment in the agriculture was constant. Reasons was in
first three plans more importance was given to capital goods industries. However
after introduction of green revolution private capital formation started
increasing. Overall capital formation was constant at 6-8%.

1970-1980

In this period public capital formation increased from 2% to 4%. It also helped to
crowd in private investment. In 1978 overall capital expenditure increased to 12%.

1980-1990

In this period public investment saw a dip. By 1990 it again fall to 2%. As with
public investment, private investment also experienced a dip in the early 1990s. In
early 80s public private investment was almost equal.

Both declined not only in terms of share in GDP but also in absolute terms during
this period. Subsidy rise from 4% to 7%. It diverted funds. This led to a
perceptible slowdown in agricultural growth in the 1996- 2006.

GCFA declined in 80s ( Public ). Should have led to lower growth in the early 90s.
But it did not happen because

Private Investment increased, increasing the total GCFA

Food grain did decline, but Horticulture Production increased
Higher per capita growth (4.5%) . Favourable export shock, etc
1990-2000

In this period Public GCFA was stagnant. It was might be due to high expenditure on
subsidies. During this period difference between private and public expenditure
increased drastically. Now public investment forms only 16% share.

Reasons for higher Private Investment from the 80s

ToT better due to higher MSP and Higher International Commodity Prices
Growth of Institutional Credit – Savings 20%
2000 onwards
Projects like Bharat Nirman increased public capital expenditure. However due to
slow agriculture growth private investment decreased.

How public expenditure impacts the agriculture

Operates after a time lag (Especially public investment like DAM, Road)
Thus High GCFA in 70s led to a higher growth in the 80s
Similarly, declining GCFA in 90s led to a lower growth in the 96-2006 period
Some economists suggest that Private Investment and Public Investment are
supplementary to each other and Private Investment can fill in the gap, as seen by
the 80s Divergence. However, there does exist a strong degree of Complementarity
Gulati – Public Investment has a strong Inducement on Private investment, but
operates after a time lag due to the high Gestation Period of Public Investment
Gulati and Bhalla – 10% decrease in public investment leads to 2.5% reduction in
agriculture growth
As Sawant (pneumonic – doosra Abhijeet) et al ( 2002) show that Private Investment
can never fill the gap of Large scale public investment like in Dams , Rural
Infrastructure due to capital constraints, etc
Public Investment have large Externalities
Complementarity may have disappeared in some states where Private Capacities have
rise, but especially in rain fed areas
Since, Private Investment is mostly on groundwater irrigation. It is necessary to
undertake massive investment projects To reduce over exploitation of groundwater
What are the public expenditure instruments

RIDF – Rural Infra Development Fund (1995)

Issues (Rao & Jeorom)
Is not a additional resource (unused PSL resources). Banks less interested in
expansion of PSL (RIDF is safe place to park fund)
NABARD
Bharat Nirman – Rural Roads
i. To connect al habitations with 1000 population (500 in hills tribal areas)
with all weather roads.
To create 10 mha additional irrigation potential.
To construct 6 mm rural houses.
To provide potable water to all habitations.
To provide electricity to all villages.
To connect all villages with telephone.
PMGSY
Irrigation
According to RBI, the Positive monsoon shock less intense than negative monsoon
shock
90% of GCFA in Irrigation. As a result the cropping intensity has gone up from 120
in 1971 to 140
Thus Gross cropped area irrigated has increased from 15 % in 1950-51 to 45% –
TRIPLED
India’s existing storage capacity is 13% of the annual availability. Large number
of projects are pending.
Further groundwater is a major source of irrigation which has been over-exploited.
Thus there is a need for institutional reforms, developing smaller irrigation
projects and right incentive structures – Eg Feeder separation
Swaminathan Committee – Launch Million Wells Recharge Program
Research
Agri R&D @ 0.3% of agri GDP against 2-3% in developed
Advanced Marketing Commitment (AMC) (Like the Old Guarantee system )
Suggested by Harvard economist Michael Kremer for health funding
Since, private companies are unlikely to fund for health benefits with low returns
especially in LDCs
Install a mechanism where the 1st to develop a vaccine is awarded a large bounty
Winner is rewarded with a very high return
Yet, IP lies with the govt
Extension services to take the research to the farmer
ATMA
Agriculture Technology Management Agency
Responsible for technology dissemination at district leve
Krishi Vigyan kendra
M- Kisan
Kisan Call Centre
Credit
Share of credit to agri GDP risen to 40% from 10% in 2000
But, share of long term credit has fallen from 55% to 40% in the period
South India makes up 18% of GCA but takes 40% of credit
NSS 70th round, 40% farmers still depend on informal sources for lending
Policy suggestions

Evidence shows that long-term public investment in capital projects will give rise
to more than double the rate of return from subsidies.
Gradual withdrawal of state subsidies for irrigation, water, electricity,
fertilizers, pesticides etc. would provide a large pool of resources for public
investments
There are wide regional disparities in agricultural development; investments in
backward states will have greater productivity enhancement effect
To stimulate private GCF, alongside public GCF, there is an urgent need to
prioritize institutional credit, favourable terms of trade, flow of technology,
farmer education, and appropriately targeted subsidies, as these have a strong
positive effect on household-level investments