Capital Formation in Agriculture & Impact of Public Expenditure on Agriculture | Economics Optional Notes for UPSC PDF Download

Introduction

• 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?

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.

[Question: 958510]

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
  • 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.