JEL Classification   : Q 10, Q12, 14
Keywords               : Agriculture, Investment, Farm Inputs

*   Authors are working in the Department of Economic Analysis and Policy of the Reserve Bank of India. They are grateful to Shri KUB Rao, Adviser for encouragement and guidence. Usual disclaimer applies.

The investments in any sector generate capital in the form of infrastructure, improvement in the quality of natural resources and assets, and lead to the creation of productive assets. The importance of capital in a country’s economic development is well recognised and documented. Several studies have found investment as the single most important factor in the growth process (Lewis, 1955; Rostow, 1960). Given the importance of investment in economic growth, there has been a considerable interest in the factors affecting investment during different periods and stages of development. While public investment is determined largely as a matter of policy and by the availability of funds, private investment is affected by a variety of factors, which differ over time and space.

Investment in agriculture is generally undertaken for realising the long-term potential by (i) augmenting natural resources, (ii) enhancing efficiency of use of existing resources and (iii) generating value addition. Thus, in simple terms, investment means acquiring physical assets that result in the creation of a stream of incremental income over a period of time. Capital formation through investment in agriculture helps in improving the stock of equipment, tools and productivity of natural resources, which, in turn, enables the farmers to use their resources, particularly land and labour, more productively. Creation of capital goods, thus, is necessary for raising productivity of existing resources and realising the long-term growth potential.

The relationship between capital formation and agricultural growth, and agricultural growth and poverty alleviation are very well articulated in literature. Given the positive impact of agricultural growth on poverty alleviation, the role of capital formation as one of the major engines of agricultural growth has been well placed in the development policy perspective. There are some major streams of research on capital formation that have sharpened this role in the development policy framework (FAO 2004).

Investment in agriculture is undertaken by both public as well as by private sectors. While public sector investment in agriculture is undertaken for building necessary infrastructure, private investment in agriculture is made either for augmenting productivity of natural resources or for undertaking such activities, which supplement income sources of farmers. Private sector investment includes investments made by private corporates and households. The corporate sector investment includes investment by organised corporate bodies like big private companies and unorganised entities like sugar co-operatives and milk co-operatives. The household sector investment comprises investment on farm equipments, machinery, irrigation, land improvement and land reclamation. With about 90 per cent share, households dominate the private investment scene. These investments enable farmers to grow existing crops more productively and intensively and take up non-conventional/high value crops.

Section II
Investment Trends in Indian Agriculture

• Over the years, the share of agriculture investment in the total investment has declined, particularly more rapidly in the 1990s to 7.9 per cent of GDP and between 2000-01 to 2005-06 to 7.4 per cent of GDP as compared to the level of 1980s (11.4 per cent of GDP) (Table-2).

●   Following the above trend, the share of public sector in the total investment in agriculture has declined more sharply during the 1990s (6.5 per cent), as compared to the 1980s (11.6 per cent), while that of private sector investment has gone up simultaneously (Table 3).
●      Notwithstanding an increase intermittently, the average share of public sector investment between 2000-01 to 2005-06 still remained below the level of 1990s.

● The loss in momentum in public sector investment in agriculture is more clearly noticed when it is juxtaposed with the private sector investment in the economy as a whole. Private sector investment in agriculture also showed a similar trend over the years. It could, therefore, be inferred that the decline in investment in agriculture is due to relatively lower shares of both public and private sector investments compared to their shares in total investment in the economy.

● The trends in the contribution of agriculture to the overall GDP reveals that the share of agriculture GDP in the total GDP has been declining over the years, the decline being sharper after 2001-02, implying relatively faster growth in sectors other than agriculture.

● The ratio of GCF to GDP is an important measure for the assessment of investment efficiency in a given sector. The ratio of GCF to GDP originating in agriculture declined to 6.5 per cent in the 1990s from 8 per cent in the earlier decade before showing a trend of gradual revival since 2002-03.

● Furthermore, the share of the agricultural sector investment in GDP declined from 2.2 per cent in the late 1990s to 1.9 per cent in 2003-04 and has remained unchanged upto 2005-06. This decline was partly due to the stagnation or fall in public investment in irrigation, particularly since the mid-1990s (Economic Survey, 2006-07) (Table 4).

2. Trends in Investment Credit and Private Capital

Private investment in agriculture depends, among other things, on the availability of enabling infrastructure, investable resources and expected rate of return on investment. The expected rate of return to an investor is largely determined by the prices of agricultural inputs and output. It is in the context of availability of investable resources that credit from financial institutions becomes critically important.

Continued higher proportion of short-term credit could probably be due to the relatively higher comfort level of those who demand and those who supply credit. Since expenditure on inputs is inevitable to sustain their agricultural operations, irrespective of the weather conditions obtaining in the field, farmers prefer to borrow short-term credit as it provides them necessary control over resources through continued liquidity. The suppliers on the other hand, favour short-term credit due to relatively lower lending and risk costs, supervision and monitoring costs and a better asset-liability management.

3. Trends in Plan Outlay on Agriculture and Allied Activities

Another evidence of investment in agriculture could be the share of agriculture in the total Plan outlay. There has been a continuous decline in the share of plan outlays for agriculture and allied activities, over the years. The share of agriculture and allied sector in the total Plan outlay registered a fall from 5.8 per cent during the 6^th Plan (1980-85) to 4.9 per cent during 9^th Plan (1997-2002). According to the Mid-term Review of the Tenth Plan, the share of agriculture and allied activities during 10^th Plan period (2002-07) came down further to 3.9 per cent lower than the earlier projected level (5.2 per cent) (Chart 2).

4. Pace and Pattern of Investment in Agriculture and Allied Activities

National Level Trends

Composition

●  The investment is concentrated and skewed in favour of irrigation and flood control, which accounts for a major share (around 12 per cent) in the total development expenditure, while the share of agriculture and allied activities (around 10 per cent) and rural development (7 per cent) is relatively low.

●  Of the total development expenditure on agriculture and allied activities, crop husbandry occupies the largest share (27 per cent) followed by forestry/wild life (20 per cent) and animal husbandry (11 per cent).

●  The other items such as dairy development, food storage and warehousing also account for a significant share (around 8 per cent). However, the share of expenditure on agriculture research and education (6 per cent) - an important component - stands on the lower side.

Growth Pattern

1. The total expenditure on agriculture and allied activities which recorded, on an average, a growth of around 13 per cent in the 1990s, dropped thereafter to around 10 per cent during the current decade (early part).
2. Similarly, the growth of expenditure on irrigation and flood control slackened considerably to 10 per cent in the second half of the 1990s and further to 4 per cent in the subsequent period from the level of around 14 per cent during the first half of the 1990s.
3. The expenditure on rural development, which recorded highest growth (among all) at around 18 to 19 per cent during the 1990s also came to register a decline at over 5 per cent.
4. The only exception was special area programme, the expenditure on which witnessed continued growth momentum from around 8 per cent in the first half of 1990s to around 17 per cent in the subsequent period.
5. Of the total expenditure on agriculture and allied activities, the growth in expenditure on crop husbandry, soil and water conservation, fishery, plantation was impressive in the second half of the 1990s, but lost the momentum during the current decade.
6. On the other hand, investment in animal husbandry and dairy development witnessed a continuous decline over time. The only exceptions were food storage/ warehousing and other agricultural programmes, which witnessed increase in the expenditure during the current decade.

State Level Trends

Composition

●   The share of agriculture and allied activities in the total development expenditure in the case of agriculturally important

States such as Punjab, UP, Gujarat, Bihar and Karnataka is below the national average (10 per cent). Only Madhya Pradesh with over 18 per cent share followed by Maharashtra (13.3 per cent) and Haryana (10 per cent) fare better in this regard.

● Of the total outlay on agriculture and allied activities, crop husbandry stands out as one of the major items- occupying first or second place in most of the States under review.

●  Animal husbandry also accounts for a major proportion in States such as Punjab, Haryana and Bihar, while forestry and wildlife account for the largest share in the States like MP, Gujarat and Karnataka.

● On the agriculture research and education front, Punjab (16.7 per cent) and Haryana (10.9 per cent) fare relatively better, while the share of other States stands below the level of 10 per cent.

●  In terms of the share of irrigation and flood control in the total development expenditure, Gujarat (18.5 per cent) occupies the first place followed by Karnataka (15.7 per cent), Maharashtra (14.7 per cent), Punjab (13.6 per cent) and Haryana (13 per cent).

Growth Pattern

The analysis of growth pattern of investment in terms of total outlay (Revenue and Capital) on agriculture and allied activities since the 1990s in respect of major States brings out the following:

● In the first category are the States such as Punjab and Haryana, which recorded remarkable growth during the 1990s and continued the momentum in the subsequent period (2001-2006).

●     In the second category, States such as Madhya Pradesh, Gujarat and Karnataka, witnessed considerable growth in the second half of the 1990s, but lost the momentum thereafter.

●     In the last category, the States such as UP, Maharashtra and Bihar, which posted significant growth during the second part of the 1990s, came to register a sharp negative growth in the subsequent period.

Interestingly, the rate of return to investment in agricultural research (based on studies carried out from 1953 to 1997) is found to be highest in the case of Asian region (50 per cent), higher compared not only to the developing countries as a whole (43 per cent) but also developed countries (46 per cent) (Alston et al., 1998) (Table 9). Investments in agricultural

research and development (R&D) from both the public and private sectors can lead to technology generation and productivity improvements. The impact of investment on agricultural research can be seen most clearly from Rosegrant, Agcaoili-Sombilla, and Perez (1995). In their global food projections for 2020, they assumed a baseline scenario of US$10 thousand million public investment in national agricultural research and extension services. The low-investment scenario, which assumed an annual cut of US$1.5 billion to the current level of public investment, resulted in a fall of 15 per cent in crop and livestock yield growth rates by 2020. In contrast, if funding of national and international research were to rise by US$750 million per year, crop yield growth would be six percent higher in 2020 than under the baseline scenario. Although these figures are projections and their accuracy is subject to underlying assumptions, they indicate strongly the negative effects of reduced public investment in research and extension, and the crucial role of investment in increasing agricultural productivity.

The growth of public expenditure on research and extension, at constant prices, decade-wise for four decades upto 2006 indicates that the growth has slowed since 1990. In the case of extension services the slowdown is particularly sharp. It is interesting to note that for this category the growth of expenditure was highest by far in the sixties the period of the last acceleration in the agricultural growth rate, suggesting that extension is a crucial component of an enabling policy. The rate of growth of expenditure on extension services has declined three-fold since the nineties (Table 10).

Linkages Between Public and Private Investment:
Policy Implications

● First, during post-reform regim, since the early 1990s the rate of increase in the share of private sector in total agriculture investment has been less than what it was during the pre-reform period, unlike the other areas, where private sector has increased its stake.

● Second, it may be recalled that the impact of public investment on private investment is found to be asymmetric. An increase in public investment is found to have positive impact on private investment, but a decline in public investment is found to have increased private investment (S. Bisaliah, 2001). The Government has to create a favourable policy and development support environment for private sector (both domestic and foreign agri-business investors) to fill the investment gap in agriculture. Increased share of private investment in agriculture tends to improve the efficiency of capital use.

●  Third, there has to be a shift of emphasis from the present situation where the infrastructure investment is dominated by the public sector towards a system where public-private partnership functions.

● Fourth, institutional transformation through social capital formation has high potential for increasing the efficiency ofcapital use (lowering the capital requirement for achieving a targeted output growth).

● Fifth, while designing policy options to stimulate private farm investment, the interaction between technology, terms of trade and private investment has to be kept in view.

●  Sixth, public sector investment with proper project portfolio would be crucial for inducing private investment. Further, public investment alone cannot be expected to fill the investment gap in agriculture. Hence, the role of private investment could be placed in the perspective of huge investment gap.

Traditionally, most agricultural research is publicly funded. However, in recent years, the costs of agricultural technology generation and transfer are shared increasingly with the private sector, particularly in more advanced countries. The proportion of privately funded research is in the order of 30 to 40 per cent of all research expenditures in developed countries (nearly two-thirds in the United States) and about five percent in the less-developed countries. Thus, the relationship between public and private investment in agriculture is complementary.

Private research is attracted to sectors of the market where research results exist and benefits can be privately appropriated (Alston, Norton and Pardey, 1995). This is typically the case in more developed countries where intellectual property rights are well established and protected for inputs such as agrichemicals, agricultural machinery and seeds.

Constraints to Investment in Agriculture

●    Meagre growth in minor irrigation and farm mechanisation, which are the major sub-sectors in agriculture;
●    Declining public sector investment in the basic infrastructure;
●    Limited credit absorptive capacity;
●    Lack of effective mechanism for technology transfer and poor extension services
●    Limited infrastructure for agro-processing, storage, warehousing, value addition and marketing;
●    Restrictions on purchases outside the mandis;
●    Weather aberrations and output price fluctuations;
●    Inadequate risk mitigation mechanism; and
●    Absence of proper land records.

Some of the reasons for slower growth particularly in public investment in agriculture are: i) diversion of resources from the investment to current expenditure in the form of subsidies (Economic Survey, 1997-98), ii) large expenditure incurred on maintenance of existing projects, iii) inordinate delays in completing the projects on hand, iv) relatively lower allocation for irrigation, v) poor rural infrastructure and research, and vi) belated growth in private investment in agriculture.

Policy Initiatives

Recognising the importance of adequate investment in agriculture, both the Government and the Reserve Bank have taken several policy initiatives. As a response to inadequate private investment in agriculture, the Rural Infrastructure Development Fund (RIDF) was set up way back in 1995. The fund is financed by the scheduled commercial banks to the extent of their shortfall in meeting the stipulated target of 18 per cent of adjusted net bank credit to agriculture.

The National Agriculture Policy adopted in July 2000 and various committees appointed earlier had highlighted the need for adequate and timely supply of institutional credit to farmers. There is a wide gap in supply of credit, requiring a large increase in credit, particularly investment credit, to facilitate capital formation in agriculture and to achieve the stipulated growth rate. The Government of India had emphasised the need for doubling of credit flow to agriculture during the three-year period, viz., 2004-05 to 2006-07. In 2005, the Government of India launched the Bharat Nirman Programme, a time-bound plan for action in rural infrastructure for the four years (2005-2009). The Union Budget 2005-06 also stepped up public investment significantly for rural infrastructure development.

The public investment in agriculture has been declining and is one of the main reasons behind the declining productivity and low capital formation in the agriculture sector. With the burden on productivity-driven growth in the future, this worrisome trend needs a reversal. Private investment in agriculture has also been slow and must be stimulated through appropriate policies.

The broad thrust areas for increasing investment and investment credit in agriculture could be as follows:

●      Traditional investments on land development, irrigation and farm mechanisation and integration of small and marginal farmers in the mainstream in the case of marketing and exports deserve renewed attention.
●      Public investment needs to be channelled appropriately in agricultural infrastructure should get a greater priority especially in poorer states, viz., Eastern and North Eastern regions for facilitating greater private investment.
●      Public investment in research and development of varieties of crops, breeds of livestock, strains of microbes and efficient packages of technologies, particularly those for land and water management, for obviating biotic, socio-economic and environmental constraints also calls for increased attention.
●      Effective and credible technology, procurement, assessment and transfer and extension system involving appropriate linkages and partnerships; again with an emphasis on reaching the small farmers also remain the other thrust areas.

In this context, the need for augmenting term credit to agriculture cannot be overemphasised. In view of the structural weaknesses of co-operative banks and the limited presence of RRBs, commercial banks may have to shoulder the responsibility of supporting private investment in agriculture. As observed by the Mid-Term Policy for 10^th Five Year Plan, there is a need to step up public investment, particularly in irrigation and water resources management; watershed development and reclamation of waste/ degraded land; and provision of essential infrastructure such as roads, markets and electricity.

Over time, agriculture investment has been loosing its share, more rapidly since the 1990s led by loss in momentum of public sector and compounded by inadequacy of farm credit. Not only the pace of investment has been slow, but even the pattern of investment has skewed. The share of agriculture and allied activities in the total development expenditure in the case of agriculturally important States such as Punjab, UP, Gujarat, Bihar and Karnataka is below the national average. Inadequacy of new capital formation has slowed the pace and pattern of technological change and the infrastructural development with adverse effects on agricultural productivity.

The need of the hour is to step up domestic investment in agriculture sector, notwithstanding the fact that the ICOR of agriculture sector is very high. The idea is to modernise the agriculture sector through conscious investments and bring down the ICOR and thereby allow the agriculture sector to perform well like industrial sector. Investment in agriculture, the prime mover needs to be accelerated to achieve the desired level of growth of over 4 per cent per annum as envisaged by the 11^th Five Year Plan. More importantly, this investment needs to be appropriately structured, timed and well implemented to have the maximum impact.

NOTE

Alagh, Y.K. (2000), "Macro Policies for Indian Agriculture", in G.S. Bhalla (edited) ‘Economic Liberalisation and Indian Agriculture', New Delhi: Institute for Studies in Industrial Development.

Alston, J. M., B. J. Craig, and P. G. Pardey. (1998), “Dynamics in the Creation and Depreciation of knowledge, and the Returns to Research.” EPTD Discussion Paper No. 35. International Food Policy Research Institute, Washington, D.C

Devarajan, S., Swaroop, V. and H. Zou. (1996), “The Composition of Public Expenditure and Economic Growth”, Journal of Monetary Economics,

Fan, S., Hazell, P. and S. Thorat (2000), “Government Spending, Growth and Poverty in Rural India”, American Journal of Agricultural Economics,

Fan, S., Zhang, L. and X. Zhang. (2002), “Growth, Inequality and Poverty in Rural China: The Role of Public Investments”. Research Report 125, IFPRI: Washington, DC.

Government of India, Economic Survey, various issues
Mohan, Rakesh (2006) “Agricultural Credit in India: Status, Issues and Future Agenda” Economic and Political Weekly.

Pulapre B, R.Golait and P.Kumar (2008) “Agricultural Growth in India since 1991” DRG Study No. 27, Reserve Bank of India, Mumbai.