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TermPaper IIE (Doc) Parna
TermPaper IIE (Doc) Parna
TermPaper IIE (Doc) Parna
Past studies in agricultural capital formation had differential coverage of economic activities.
Some of them restricted their analysis to agriculture and allied activities (i e, crop and
livestock production activities) including government irrigation system [for example, Rath
1989; Shetty 1990; Mishra 1996; Waglel996] but many others were based on the aggregate of
three sectors, namely (i) agriculture (i e, agriculture and allied activities), (ii) forestry and
logging, and (iii) fishing [for example, Mishra and Chand 1995; Chand 2000; Purohit and
Reddy 1999].While analysing temporal trends in agricultural capital formation, one should
restrict only to the first (henceforth to be referred as only 'agriculture'). The other two, i e,
forestry and fishing sectors should not be clubbed with agriculture. This is because within the
sector proportions of public and private Capital Formation are remarkably different and even
temporal trends in total and componentwise Capital Formation have not been uniform for
them.
The discussion that follows has been divided into five sections :
Section I describes the studies assessed relevant to the subject of discussion . The second
section discusses the process and links to direct and access data using internet. Section III
shows the all relevant methodologies to work with the collected data empirically using the
software STATA. The fourth section eventually discusses about and analyzes the findings and
results that have come out. The final and fifth section eventually draws an conclusion to the
study and ends up suggesting few policy implications.
I. LITERATURE REVIEW
For several decades now, many development economists have expressed strong views on the
importance of capital and capital formation in agricultural development process of less
developed countries (LDCS). Agricultural development process includes the conditions
regarding the accumulation of knowledge and availability of technology as well as the
allocation of inputs and outputs in order to fulfill agricultural potential. Now, agricultural
productivity is defined as a measure of the efficiency with which inputs are used in
agriculture to produce an output, which in turn depends on land, labour and capital.
Again, the term ‘Capital’ connotes those ‘assets’ which are used as inputs in the process of
production to generate further goods and services. On the other hand, the term ‘Capital
Formation’ refers to a process of building up the stock of capital. It directly depends on the
amount of investment made in the capital assets during a financial year. Specifically, Gross
Fixed Capital Formation, under the classification of Fixed Capital Formation, consists of sum
of all additions to the existing stock of fixed capital in the current year. Both fixed capital(e.g,
investment in farm machines such as tractor, pump-sets, and other assets like tube-wells, land
development, farm building, etc.) and working capital(expenses on seeds, fertilizers, wages to
the workers, etc) are required for agriculture to perform its various operations in a timely and
cost-effective manner. This is also needed for augmenting agricultural production and
productivity by way of raising the cropping intensity, changing the cropping pattern and
reducing the pre and post-harvest losses. In brief, therefore, capital formation in agriculture
helps to bring technical progress by shifting the production frontier upward. It does this by
providing several benefits like: (i) increase in yield; (ii) timely completion of farm operations;
(iii) maximum possible land utilization; (iv) shift in the cropping pattern; and (v)
diversification of agriculture. The capital formation thus facilitates to expand agricultural
market as these benefits result in more marketable surplus. The market expansion, in turn,
not only raises the farm income but also provides easy access to agricultural products to the
consumers. In the process, it helps to ensure food security for the growing population and
raw material security to the agro-based industries. Capital formation also helps in improving
the quality of agricultural produce through better storage and transportation facilities. The
role of GFCF in contributing to the growth of the sector can also be explained in terms of the
types of capital in general and the complementarity that exists between the public and private
capitals in particular. Thus, being precise, we can theoretically see that there exists a very high
level of dependency of overall agricultural productivity on Gross Capital Formation. We can
thus say, an rise in capital formation would automatically lead to an increase in agricultural
productivity. Therefore, lack of capital would be considered as to be the main cause of the
prevailing low labour and land productivity in agriculture, manifesting itself in a vicious cycle
of low levels of income which in turn lead to low savings/investment, resulting in low
productivity.
Now if we look at the trends of Gross Capital Formation, we will see that Gross Capital
Formation in agriculture (GCFA) as percent of total GCF of the economy was 20.2 percent in
1979-80. This has since fallen down steeply to just about 7.7 percent in 2009-10. The
declining share of agriculture in the total GCF in the Indian Economy reveals that the capital
formation in the non-agricultural sectors grew faster than that in the agricultural sector. This is
quite obvious because over a period of time, contribution of agriculture in the overall GDP of
the country has also declined significantly.
On the other hand, the compound growth of the Gross Fixed Capital formation in Indian
Agriculture is 15.6%, at the same time the growth in the Gross Capital Formation in Indian
Agriculture is 15.9%, because the major part of capital formation in agriculture is fixed capital
formation. But many farmers are also dealing with sociopolitical and economic
unpredictability ----- without working capital, farms cannot reinvest in their crops. Farmers are
then not able to pay out their employees, nor will they invest in new reliable equipment.
Thus capital formation takes a very crucial role in order to increase productivity.
Given the contribution which capital formation can make to productivity increases in Indian
agriculture, the main objective of this paper is to find actual level of dependency of
agricultural productivity on Gross Capital Formation over last 20 years and to provide
estimates of future capital formation of next 5 years.
A precise measure of productivity is the ratio of output to all inputs used in the production
process. Considering Cereals’ productivity for working of this paper, the ratio between the
output to the inputs used in the Cereals’ production has been termed as “Cereals’ Yield”
which is being measured in kg per hectare. Furthermore, Gross Capital Formation at the
constant prices of the base year 1999-00 has been taken into account and reckoning it as a
independent and non-stochastic variable, this paper has made an effort to measure the
volume of dependency of the explained variable Cereals’ Yield. We therefore work on to
construct a Simple Linear Regression Model of the following form :
Logged_Yield = β0 + β1 logged_GCF + u,
assuming that all the classical assumptions to hold.
Now, we will test our null hypothesis as H 0 : β1 = 0, that is, Gross Capital Formation has no
effect on Cereals’ Yield. The rejection of null hypothesis proves empirically that Gross
Capital Formation leaves a certain effect on Cereals’ Yield.
This constructs the basic finding of this paper.
It has also aimed to find out how much the other factors(or inputs) like land, labour other
than capital that affects the productivity, are correlated among themselves by computing
autocorrelation coefficient. In addition, a small attempt of forecasting the future Capital
Formation and Yield has been made to sum up the possible trend in next five years.
2011-12 121576 2415 other Y, then we use the following formula to change the base
2012-13 125375 2449 year of X to Y :
2014-15 136231 2373 Value of Y = Value of X (Value Y /Value X )
t+1 t+1 t t
III. METHODOLODGY
Importing the TABLE 12 into Stata, the respective variables are renamed and labeled using
the commands as the following :
rename A Year
rename B GCF
label variable GCF "Gross Capital Formation (in Rs. Crores, at ‘99-00 prices)"
rename C YIELD
label variable YIELD "Agricultural Productivity(Cereals) in kg/hectare"
Now, since the time variable Year is not in the appropriate time format for Stata, so, to create
time variable in appropriate form, each interval of the two respective years has been
considered as a single unit representing time and has been enlisted under the new variable t
by using the following commands in Stata :
generate var4 = 1 in 1
replace var4 = 2 in 2
replace var4 = 3 in 3
replace var4 = 4 in 4
replace var4 = 5 in 5
replace var4 = 6 in 6
replace var4 = 7 in 7
replace var4 = 8 in 8
replace var4 = 9 in 9
replace var4 = 10 in 10
replace var4 = 11 in 11
replace var4 = 12 in 12
replace var4 = 13 in 13
replace var4 = 14 in 14
replace var4 = 15 in 15
replace var4 = 16 in 16
replace var4 = 17 in 17
replace var4 = 18 in 18
replace var4 = 19 in 19
replace var4 = 20 in 20
rename var4 t
Now, to set t as the time variable, the command tsset has been used :
tsset t
time variable: t, 1 to 20
delta: 1 unit
Now to fit the trend line against time on the data collected on GCF and Agricultural YIELD,
we use the following command :
twoway (tsline GCF) (tsline YIELD, yaxis(2))
And the graph has been saved into the device in image(png) format :
graph export "C:\Users\user\Downloads\Graph.png", as(png) replace
(file C:\Users\user\Downloads\Graph.png written in PNG format)
Now a Simple Linear Regression Model has been introduced between the two variables GCF
and YIELD considering the latter one to be the explained or dependent, where the former
one has been taken as the explanatory or the independent one.
Before running the regression, we have created two separate variables named logged_GCF
and logged_YIElD which are the simply the log values of the respective variables by using
the following commands in Stata :
gen logged_GCF = ln(GCF)
gen logged_YIELD = ln(YIELD)
And now we regress logged_YIELD on logged_GCF by giving the command :
reg logged_YIELD logged_GCF
And to test the presence of autocorrelation, Durbin-Watson test has been taken up :
estat dwatson
Residual from the estimated model is obtained by using the following command:
predict e, resid
Thereafter the residual plot : Scatter e t
And the scatter diagram has been saved into the device as :
graph export "C:\Users\user\Downloads\Residual Plot.png", as(png) replace
(file C:\Users\user\Downloads\Residual Plot.png written in PNG format)
To find out the autocorrelation coefficient, AR(1) model of the residual from the above
regression equation has been used :
reg e l.e
To remove autocorrelation and correct the variables and get the exact relationship between
YIELD on GCF, the following command has been used :
prais logged_YIELD logged_GCF, corc
Now to forecast the future values of both of the variables concerned, two separate regression
models between the variable concerned and the one year lagged value of that variable, that is,
we are estimating AR(1) model with each of the variables logged_GCF and logged_YIELD
has been constructed by using the following the commands respectively:
reg logged_GCF l.logged_GCF and reg logged_YIELD l.logged_YIELD
After estimating the model, we have to store the estimated results in memory by executing the
command :
estimates store lbc1/lbc2 3
We define our model using the forecast commands. To initialize a new model, we use the
following command:
forecast create lbc1/lbc2model
The command, forecast create generates the internal data structures in Stata we define our
model as lbc1/lbc2model that controls how output from forecast commands is labeled.
To add the equation to the model in the next step, we use forecast estimates:
forecast estimates lbc1/lbc2
The command forecast estimates uses the estimation results which are stored in memory to
determine that there is one endogenous variable.
To perform out-of-sample forecast, we need to expand the time variable by using the
tsappend command.
tsappend, add(5)
This command adds 5 time points or dates to the end of the sample.
Now to finally obtain forecasted values for the endogenous variable, we have to use the
following command :
forecast solve
The forecasted values for next 5 years are recorded in the data editor by the variable name
f_GCF and f_YIELD respectively.
Taking anti-log to the forecasted values of both the variables f_GCF and f_YIELD, which
are in log terms, the actual forecasted values in Rs. Crores and in kg/hectare, can be
respectively derived :
gen actual_f_logged_GCF = exp( f_logged_GCF )
and
gen actual_f_logged_YIELD = exp( f_logged_YIELD )
These real forecasted values similarly can be seen in the data editor by the variable name
actual_f_logged_GCF and actual_f_logged_YIELD respectively.
It can then be seen the changes in trend line drawn on the basis of the forecasted values by
using the command :
twoway (tsline actual_f_logged_GCF) (tsline actual_f_logged_YIELD, yaxis(2))
2
The Excel Version of the Dataset constructed as in TABLE 1 and 3lbc1 and lbc2 models
represents AR(1) model constructed for logged_GCF and logged_YIELD respectively.
IV. RESULT AND ANALYSIS
Being more specific, institutional factors refers to the particular system under which land is
owned and managed. The ownership and management have a direct bearing on agricultural
productivity and efficiency. The institutional advancement works through advancement in
land reforms, banking(or credit) system, transaction costs, adequate transportation facilities
etc, besides the technological advancement.
On the other hand, there are six main components of weather. They are temperature,
atmospheric pressure, wind, humidity, precipitation and cloudiness. Together, these
components describe the weather at any given time. And Climate is the average of weather
over time and space. Now increased temperature, changed precipitation conditions and
increased CO2 content in the atmosphere are the major climatic factors crop production. Rise
in atmospheric temperature will increase the crop demand for water which in turn reduces
water availability and eventually results in reduction in agricultural productivity.
. estat dwatson
Thus, from the above estimated results, the following regression equation can be estimated :
logged_YIELD = 4.334296 + 0.2945289logged_GCF, from where it can be seen that if there
is 1% increase in GCF on average, it will lead YIELD to an increase by about 0.29%, holding
other factors that can affect YIELD, constant.
It can be seen that the regression coefficients, that is, both of the intercept and slope
coefficients are individually highly statistically significant, for their t values being quite high
and p values being quite low. Secondly, on the basis of the F statistic[F(1, 18) = 139.49], it can
also be concluded that the GCF is highly statistically significant, because its p value is also very
low [Prob > F= 0.0000]. The R2 value of 0.8857 is also quite high explaining 88.57% changes
in YIELD by GCF, but the Durbin-Watson d-statistic shows d=1.538399<2, which shows that
there might be positive autocorrelation in the random error, that is, the error terms consisting
with the other factors affecting YIELD can be positively correlated among themselves.
To see whether the
errors are
correlated, the
residuals [i.e, the
difference between actual
value of the regressand and
the predicted value of the
regressand] have been
predicted and the residual
plot shown in this figure,
exhibits roughly a cyclical
pattern suggesting that the
residuals are slightly correlated, where the autocorrelation coefficient has been estimated to
be ρ^ = 0.1562045.
e
L1. .1562045 .253526 0.62 0.546 -.3786887 .6910976
Thus the estimated autocorrelation coefficient being 0.1562045 indicates that the error terms
ie, the other factors than GCF which can affect agricultural production, the correlation
coefficient among those factors is equal to 0.1562045.
To remove this effect of autocorrelation and to correct the variables by taking lags[yt∗= β0∗ +
β1xt∗ + ut∗, where yt∗ = yt − ρyt−1; xt∗ = xt − ρxt−1; ut∗ = ut − ρut−1 ], in order to derive the exact
dependency of YIELD on GCF, the analysis has been done with the help of Prais Winston
command to estimate the parameters in this regression model where the errors are serially
correlated, specifying Cochran-Orcutt option.
The estimated results from the relationship between the corrected values of the variables
logged_GCF and logged_YIELD respectively, are shown in the following output :
rho .1605974
Thus, the corrected estimated regression model after removing autocorrelation will be
therefore the following :
logged_YIELD = 4.203558 + 0.3058041logged_GCF, from where it can be seen that if there
is 1% increase in GCF on average, it will lead YIELD to an increase by almost about 0.31%,
holding other factors that can affect YIELD, constant; which can be declared as the final
result of our regression model.
It can also be seen that the transformed d-statistic is almost tending to be 2, which shows the
null hypothesis considering zero autocorrelation being accepted.
Now, the result of forecasting the future values of Gross Capital Formation and Cereals’
Yield for the next 5 years, are the following :
YEAR actual_f_logged_GCF(in Rs. Crores) actual_f_logged_YIELD(in
Kg/Hectare)
2019-20 158171.6 2777.244
2020-21 164172 2801.701
2021-22 170179.3 2825.387
2022-23 176186.1 2848.317
2023-24 182184.8 2870.509
REFERENCES :
4. Unit-15.pdf