Capital Formation in Indian Agriculture : Issues and Concerns BRIJESH 0 PUROHIT V RATNA REDDY \T/

Transcription

1 Capital Formation in Indian Agriculture : Issues and Concerns BRIJESH 0 PUROHIT V RATNA REDDY \T/ National Bank for Agriculture and Rural Development Mumbai 1999

2 Occasional Paper 8 Capital Formation in Indian Agriculture Issues and Concerns BRIJESH C PUROHIT V RATNA R^DY Natlcmal Bmik for Agriculture and Rural Development Mumb^ 19^

3 Published by National Bank for Agriculture and Rural Development, Department of Economic Analysis and Research, Jeevan Seva Complex (Annexe), S.V. Road, Santacruz (W), Mumbai and Printed at Karnatak Orion Press, Fort, Mumbai

4 ACKNOWLEDGEMENTS We are grateful to Prof. S.S. Acharya, Director, IDSJ for his helpful comments and encouragement to complete this study. Our sincere thanks to Prof. V.S. Vyas, Professor Emeritus and formerly Director, IDSJ for his encouragement throughout and initiating this study. Thanks are due to Prof. M.S. Rathore for his valuable help at various stages of the study. Thanks are due to Prof. Vidya Sagar for his valuable comments. We are grateful to NABARD for the valuable comments and financial support to carry out this study at IDSJ. Our sincere thanks to various officials at the CSO, New Delhi and Directorates of Economics and Statistics of Andhra Pradesh, Kerala, Rajasthan and Tamil Nadu for their valuable help and cooperation. Thanks are due to Mr. Virendra Shrimali and Mr. Sanjay Mathur for their research assistance. The computer and secretarial asistance of Mr. G.G. Rajan, Ms. Rachel Varkey and Ms. Neeru Mendiratta is gratefully acknowledged. We are also thankful to our library staff for their valuable help in carrying our this study. Authors 111

5 Shri Brijesh C. Purohit and Shri V. Ratna Reddy, Institute of Development Studies, 8-B, Jhalana Institutional Area, Jaipur The usual disclaimer about the responsibility of the National Bank as to the facts cited and views expressed in this paper is implied. IV

6 CONTENTS SI. No. Title Page No. I. Introduction 1 II. The Present Study 2 III. The Data and Coverage 3 IV. All India Scenario 4 V. Pattern of Capital Formation in Agriculture at the State Level 16 V. a. Pattern of Capital Formation in Agriculture in Andhra Pradesh 21 V. b. Pattern of Capital Formation in Agriculture in Kerala 28 V. c. Pattern of Capital Formation in Agriculture in Rajasthan 33 V. d. Pattern of Capital Formation in Agriculture in Tamil Nadu 36 VI. VII. Complementarity Between Public and Private Sectors: All India and State Level Scenario 41 Factors influencing the Capital Formation in Indian Agriculture 51 VII. a. Budgetary Expenditure on Agriculture and Allied Sectors 52 VII. b. Marginal Efficiency of Capital 55 VII. c. Technology and Terms of Trade in Agriculture 57 VII. d. Institutional Credit and Role of Credit Institutions 60 VII e. Role of Infrastructure and Linkages Between Public and Private Investment 62 VIII. Policy Implications 64 References 67

7 Appendix Tables 70 Annexure I : Methodology of Estimation of Gross Fixed Capital Formation at State Level Methodology of Estimation: Kerala Methodology of Estimation: Rajasthan Methodology of Estimation: Andhra Pradesh Methodology of Estimation: Tamil Nadu 86 Annexure Tables 88 VI

8 I. Introduction During the late eighties and early nineties, a concern has been raised about the falling share of public sector capital formation in agriculture. With the presumption that there exists high complementarity between public and private capital formation, it is contended by various studies that declining trend in the former is lil<ely to have adverse impact on overall capital formation of the sector^ This might impede the overall growth of the sector and its contribution to the GDP may fall further. However, the underlying tenet of complementarity between public and private sector capital formation in agriculture has also been questioned by one recent study (Mishra and Chand, 1995). The main criticism by this study about earlier works is as follows: i) basic premise of other studies that higher rate of capital formation may lead to higher rate of agricultural growth is misleading. In fact, this may depend upon the efficiency of the capital use and not merely on the availability of it. ii) generally most of the earlier works have presumed that there exists complementarity between public and private capital formation without giving sufficient reasoning. In reality, the exact nature of relationship could be either of complementarity, substitution type or mere independence, this could be established by means of looking at the technical nature of investment in public and private sectors and their relationship. Thus, the econometric techniques for establishing correlation or using regressions to point out complementarity between public and private capital formation may be misleading, iii) the data base published by C.S.O. and used by most of the studies pertaining to capital formation may be away from the reality since C.S.O, estimates of capital formation in the household sector which accounts for the bulk of production and investment activities in agriculture are not only inadequate but also underestimates^. This is due to the fact that: a) change in stock as associated with the household sector by C.S.O. cover only the increase in inventories of livestock and due to lack of data do not cover increase in inventories including supplies and materials, work in progress and crop output help by the farming households during the accounting period, b) even in the case of change in inventories in livestock attributed to the household sector, there is an under-estimation and c) the gross fixed capital formation (GFCF) is also underestimated and the estimates of GFCF tend to capture year to year fluctuations of agricultural output into the asset construction in the household sector. Thus bearing in mind the aforesaid limitations of earlier works, the study by Mishra and Chand (1995) tries to explain the behaviour of capital formation 1. See, for instance, Rath, 1989, Gulati and Bhide, 1993, Rao, 1994, Johl, undated, Krishnamurthy, 1985, Bhattacharya and Rao, 1988, Shetty, Mishra and Chand (1995), ibid., p. A-66.

9 both in public and private sectors, in terms of relative shifts in public policy in favour of private investments in agriculture since late 1970's as well as the political economy leading to this policy shift. The study observes that growth in private sector capital formation, since , has more than compensated the decline in the public sector capital formation. The study thus challenges the earlier held view regarding complementarity between public and private investment in agriculture. It argues that earlier researchers including Hanumantha Rao and Krishnamurthy have cited examples which really represent inducement affect and not complementarity between public and private investment, that too the former is not necessarily in agriculture but which create enabling conditions in agriculture like power, roads etc. Thus, in order to measure the complementarity it is necessary to compare the direction and rate of movement of two times series. In order to be complementary, these series should have the same direction and their movements should be of similar orders. However, at the macro level especially for the decade beginning , the two series of public and private capital formation tended to be divergent. These authors argued that complementarity should be explored at the level of investment projects and could be more prominent in the "construction of assets" sub groups. Even at that level also, probably the complementarity has not been pervasive and strong enough to determine the movements of the public and private capital formation series. In the opinion of these authors, the examples of complementarity should be lil<e public investment in the construction of major and minor irrigation works and private (complementary) investment in construction of field channels, drainage, bunding, levelling of fields etc. This kind of pure complementarity is rather difficult to find in the Indian context. Therefore, the problem of the relationship between the private and public sector capital formation should be posed and analysed more carefully rather than as one of complete dependence by way of complementarity or of complete autonomy". II. The Present Study It should, however, be noted that conceptual framework of Mishra and Chand which doubts the complementarity hypothesis needs further explorations by analysing not only the all-india trends but simultaneously also looking into state level data. Since there exists considerable variations across the Indfan states both in their agricultural development and capital formation, the trends in public and private capital formation should be different across the various states. Thus, along with all-india trends, it is important to identify the state level trends in capital formation and decipher the factors influencing them to establish whether the private investment can 3. Mi'shra and Chand, ibid., A Mishra and Chand, ibid, A-70.

10 compensate for a decline in public investment? Especially in the long run, it becomes all the more pertinent to analyse state level variations to highlight whether the public sector could be disregarded and entire investment in agriculture and be left to private sector alone. However, the issue acquires an additional dimension, with the presumption that the private sector may follow the tenets of profit maximisation, and, thus, achieving the objective of reducing inter and intra regional inequality may become doubtful. Further, keeping in view the crucial role that the nature of capital formation can play in overcoming regional inequalities, from a policy perspective the issue of the contemplemenarity between public and private capital formation in agriculture at the state level assumes greater significance. The present study is an attempt to address some of the above issues in detail. The main objectives of the study include: (i) estimate and examine the trends in capital formation, private and public, and its composition in Indian agriculture, (ii) to establish the link bejween public and private capital formation in agriculture and assess their relative importance in agriculture growth, (iii) to identify and estimate the factors influencing public as well as private capital formation in agriculture, and (iv) to suggest policy options, specifically in the context of liberalisation, for strengthening the process of capital formation in agriculture. The study is divided into eight sections. The following section describes the data base and methodology. The section IV analyses the trends In capital formation in agriculture in India. This is followed by a description of trends in four Indian states, namely, Andhra Pradesh (A.P.), Kerala, Rajasthan and Tamil Nadu (T.N.). The issue of complementarity in public and private sectors at the all-india level as well as at state level is taken up in section VI. An analysis of the factors influencing the capital formation in agriculture is carried out in section VII. The final section brings forth the policy implications. IH. The Data and Coverage Ttre study is based on secondary data. The various official publications comprise the data source. At the all-india level, the information has been collected from various publications of C.S.O. At the state level, the information has been collected from the publications of directorate of Economics and Statistics of four states, namely, A.P., Kerala, Rajasthan and T.N. The choice of these states is guided by the availability of information for capital formation in agriculture. For other states so far, the data are either not available or grossly inadequate. Besides, other important sources of data include the publication of C.S.O., Economic Survey, plan documents, and Reserve Bank of India bulletins. The data for all-india level cover the period from , Ttie state level

11 series for A.P., Kerala and T.N. has the coverage for The data for Rajasthan covers the period for Most of our analysis has been attempted at prices. In the four states covered by us, data base has been prepared by the Directorate of Economics and Statistics of respective states using C.S.O., guidelines and as such these are comparable. The exact methodology followed in preparing the state level estimates for these states is presented in Annexure II. Generally a comparable break up especially in terms of public and private sectors and item-wise, namely, construction, machinery and equipment is available for all these states. However, there are slight differences in further disaggregation within public and private sectors. In case of A.P., for instance, the data for public sector covers further sub-classification in terms of administrative departments, non departmental undertakings and local bodies. Similar sub-classification in Kerala and T.N., however, omits the category of local bodies. In case of Rajasthan, however, the break-up does not give further sub-classification within the public sector. Similarly in terms of item-wise break up there are differences. For instance, in case of A.P., the construction component in gross fixed capital formation in agriculture (GFCFA) has been further sub-divided into buildings, roads and bridges and other constructions. Similar break up in Kerala comprises of an additional heading called as land development. In case of Rajasthan and T.N., however, further sub-division under the item of construction component in GFCFA is not available. Unlike this, the sub-classification of the item, namely, machinery and equipment is covered in terms of plant and machinery and transport equipments, in a similar manner, in both A.P. and Kerala. However, such break-up in GFCFA is machinery and equipment is not available with the data set for Rajasthan and T.N. Likewise, except for Kerala estimates of GFCFA in household sector are not provided separately. IV. All India Scenario An overview of all-india trend in gross domestic product (GDP) and gross capital formation (GCF) is presented in Tables 1 and 2. In the duration of , there has been an impressive growth in aggregate GDP. It increased from Rs crores in to Rs in (Table 1). In terms of sectors of the economy, however, the GDP in agriculture increased by 2.19 times. The corresponding rise in manufacturing and construction and service sectors is observed as 5.42 times and 5.33 times respectively (Table 1). In terms of relative contribution of these sectors, the share of agriculture in GDP has declined from around 51 percent to 30 percent. By contrast the contribution of other sectors, namely, manufacturing and service sectors has gone up (Table 1). The former of these increased its share in GDP from 20 percent (in ) to 29 percent (in ). The service sector, however, has increased its share

12 much higher than the other sectors. Its relative contribution in the GDP has gone up from 29 percent to around 41 per cent. These sectoral shares, thus, indicate that with the development process the sectors other than agriculture have increased their significance. Table 1 : Sectoral GDP ( Prices) Agricul Mining Service Total Agricul Mining, Service Total ture IVIft & GDP ture Mfg. & GDP Constm. Constm Yearly Moving Averages , Source: C.S.O., Various Publications. The sectoral shares in GDP are someway also reflected in the sectoral contribution to country's gross capital formation (GCF). In absolute terms, the GCF in agriculture increased by 3.44 times from Rs crores in to Rs crores in By contrast, the corresponding increase in manufacturing and service sectors was 4.98 times and 4.20 times respectively (Table 2). In terms of trienniums the data presented in Table 2(a) indicate that agriculture sector's contribution to GCF (i.e., GCFA) had started declining in seventies. Ignoring the exceptional years (of 1978-

13 81 and others) there has been a continuous decline in GCFA from around 20 per cent in to around 11 percent in A noteworthy feature of these sectoral composition of GCF is that despite the increasing share of service sector, its relative contributions to GCF has been much lower than manufacturing sector and it has declined in fact from around 46 per cent in Triennium ending (TE) to 41 percent in TE Pertinently, these trends in GCF indicate that falling (increasing) share of a sector in GDP necessarily does not mean a falling (increasing) GCF in the sector. The nature of the sectoral activity and efficiency of use of capital may be important factors in determining the growth in sectoral GCF. Moreover, the temporal variations in the sectoral activity may also have significant impact in determining the sectoral GDP and GCF. Table 1(a) : Sectoral Shares in GDP (Percentage) Agriculture Mining, Mfg. and Service Sector Construction Sector Sector ^ ^ , Source: C.S.O., various publications.

14 Table 2 : Capital Formation In Indian Economy (Rs. Crores) Agriculture & Allied Manufacturing & Service All Sectors Construction Sectors Sectors Sectors Source: Same as Table 1. A graphic presentation of GCF for tfie TE , for instance, confirm that curvature of GCF for the aggregate economy, agriculture, manufacturing and service sectors tended to vary for different time horizons (Fig 1 to 4). In case of agriculture sector, particularly the curvature of GCF tended to vary for the period between , and Thus, Table 3 presents linear growth rates for these periods for GDP, GCF and GFCF for the aggregate economy and agricultural sector. A comparison of these growth rates suggest that for the entire duration of , the GDP in agriculture sector has grown at 2.49 percent per annum which is much lower than 4.01 percent for GDP in the entire economy. The same, in fact, has been the case for the different periods presented in Table 3. It should be noted, however, that despite falling share of agriculture in total GDP, its

15 6000 Figure 1 : GCF in Indian Agriculture & Allied Sectors (aggregate, public & pvt.) 5000' 4000 ~ M 0) %^ o o 3000 m *Try"riT"T"r < s i j i i? i' '^ "< ): r-r"!r""r-n r~r~'r"t Year (triennium ending) 94

16 Figure 2 : GCF in Indian Manufacturing & Allied Sectors (aggregate, public & pvt.) *^^pahww^^w<^bo0latfqm<^co^k^ 20000' M O o ( ' 5000, Public GCF Year (triennium ending)

17 Figure 3 : GCF in Indian Service Sector (aggregate, public & private) Kir«nA*A'pV>WAMM> ^» g i Total GC n E ^J Private G0F A \./ Public GCF 4000, 2000AY"'J( " { f' t "rt^ rnrt'*f''t ^ r,y',y,imf^ j-rrp ? Year (triennium ending) 94 10

18 Figure 4 : GCF in Indian Economy (aggregate, pubiic & private) Total GCF «a o o c M cc C Public GCF 500o\ 1 I I I I I I I I I i I I I I I I I I I I r I I I I r Year (triennium ending) 11

19 growth rates reflect a movement in tandem with the increasing growth rates of aggregate GDP for the time intervals considered here. Nonetheless in case of GCF and GFCF, despite the similarity in trends between aggregate economy and agriculture sector, the duration of is marked by a drastic decline in growth for GCF and GFCF for the agriculture sector. For instance, as against the fall in rate of growth for GCF from 6.37 percent per annum (in ) to 4.15 percent (in ), the agriculture sector depicts a decline from 4.96 ppa to 1.57 ppa. Similar observation holds for GFCF (Table 3). This kind of drastic decline in growth in GCFA and GFCFA suggests a need to look into a break up of capital formation originating in public arid private sectors. Table 2(a) : Sectoral Shares in Gross Capital Formation (Three Yearly Moving Averages; Percentages) Agriculture and Allied Mining Mfg & Service Sector Construction Sector Sector , AG.BO It , , &t mm a m.sf »ft tl.^ mir! Source: Same as Tatite' H. 12

20 Figure 5 : GCF in Indian Agriculture & Allied Sectors (aggregate, public & pvt.) ^ 4000 ' «o u 3000' O^y'T'" t""'f""t t y...y»>yw..(...,yii,^.,..y y,.i.^^v~y T,^i...,j,,i-,, ji ^ i.y..i,j.i.ii.)...,.,.- -,.i.y ffi 87 Si 94 Year (triennium ending) 13

21 Based on C.S.O. data (Appendix Table 3), Table 4 presents percentage shares of public and private sectors in capital formation in Indian agriculture. Generally in the duration covered by the period TE to TE , the private sector has comprised a major proportion which varied between percent of total GCFA. However, the graphic presentation of these shares of public and private sectors in GCFA indicates and as the outlets (Fig. 4). An exclusion of these two points by omitting averages ending 1979 to 1982 provides a smooth series of GCFA and a graphic presentation of its public-private components in Figure 5 depicts a kink free or relatively smooth curves^. Table 3: Linear Growth Rates (Percent per annum) Aggregate Economy GDP GCF GFCF GCFPUB GCFPVT Agriculture Eind Allied Sectors GDP GCF GFCF GCFPUB GCFPVT Source : Same as Table 1. Table 4 : Capital Formation in Indian Agriculture Public & Private Sectors (Percentage) a ^ Public Private Total contd.. These kinks in the curves are possibly caused by the erratic nature of change in stocks in the private household sector resulting in sharp changes in the private sector capital formation during TE to TE The estimates of change in stock in the private household sector are not reliable due to the method adopted by C.S.O. (See, Mishra and Chand, P. A-68). 14

22 Source: Same as Table 1. Public Private Total , , The trends in capital formation in Indian agriculture are presented in Table 5. The simple growth rates for these are also presented in Table 6. It is noteworthy that capital formation in public sector grew at a positive rate during the period TE to TE and TE to TE After reaching a peak of 12 percent per annum, there was a decline in capital formation in the public sector since early eighties at a rate of 3 percent per annum (Table 6). This decline is more marked for the TE to TE when a negative rate of around 5 per cent is depicted. The decline in public sector capital formation is reflected in total capital formation in the agriculture sector. Its growth rate declined from around 6 percent until early eighties to around 2 percent only in the following decade with the decline being more marked for to Table 5 : Percent Change In Capital Formation in Indian Agriculture Source: Same as Table 1. Time period Public Private Total Triennium Ending Sector Sector to to to to to to

23 Table 6 : Annual Percent Change in Capital Formation in Indian Agriculture Source: Same as Table 1. Time period Public Private Total Triennium Ending Sector Sector to to to to to to However, the falling trend in total capital formation in Indian agriculture seems to have reversed since despite the persistently declining public sector. This is depicted by a 3 percent per annum growth in to (Table 6). Interestingly, these trends in private capital formation in this declining phase of eighties to early nineties (i.e., to ) has been positive. In fact the fall in total capital formation seems to has been arrested due to an accelerated growth of private sector at 6 per cent per annum for the trenniums to (Table 6). These trends in capital formation in Indian agriculture namely, decline in public sector, more than compensatory growth in private sector and resulting recovery in overall capital formation raise pertinent questions. The latter could be posed as : (1) do the state level trends confirm similar phenomenon? (2) does it mean that the claims of earlier studies regarding complementarity in public and private sector hold no longer? (3) in case there is no complementarity, what is the nature of relationship between public and private sector capital formation in Indian agriculture? We take up these questions in seriatum in the following sections. V. Pattern of Capital Formation in Agriculture at the State Level As mentioned in Section III, the analysis at the state level has a much shorter coverage owing to non-availability of data. Nonetheless, this section aims at studying the state level trends for the four states, namely, A.P., Kerala, Rajasthan and T.N. This is carried out with a view to substantiate the all-india trend by state level analysis for the duration of Table 7 presents the gross fixed capital formation in agriculture (GFCFA) and state domestic product in agriculture (SDPA) for to the latest triennium for the state covered by our analysis. The state level variations in terms of capital formation are noteworthy. As against the all-india trend, in 16

24 Table 7 : Gross fixed Capital Formation in Agriculture (GFCFA) and SDP in Agriculture (SDPA); Kerala, Rajasthan, T.N. and All-India (Three Yearly Moving Averages, Rs. Lal(hs) A.P., StateWear Percent per annum ANDHRA PRADESH GFCFA SDPA GFCFA/SDPA (%) KERALA GFCFA SDPA GFCFA/SDPA (%) RAJASTHAN GFCFA SDPA GFCFA/SDPA (%) TAMIL NADU GFCFA SDPA GFCFA/SDPA (%) ALL INDIA (Rs. Crores) GFCFA GDPA GFCFA/GDPA (%) Source: Same as Table 1.

25 the states of A.P., and Kerala, the GFCFA has grown at faster rates than the SDPA. The reverse has been the case for the states of Rajasthan and T.N. In the former, the GFCFA has even declined at the rate of 3 percent per annum. These differences in growth rates of GFCFA and SDPA are reflected in their ratios also. As such, therefore, the GFCFA as a percent of SDPA has increased from 6 to 9 percent in A.P. and 9 to 10 percent in Kerala. The same has declined, however, in Rajasthan from 10 to 4 percent and 11 to 6 percent in T.N. (Table 7). It is pertinent to observe that during the decade of eighties, the growth of GFCFA in A.P. and Kerala has been higher than all-india average (Table 9). By contrast Rajasthan and T.N. have shown negative growth in the duration. Moreover, in the TE to TE , when the growth in GFCA at the all-india level was at the lowest (0.16 percent per annum), the growth of GCFA was much higher in the states of A.P. and Kerala. By contrast, it was negative in T.N. In Rajasthan, however, the growth of GCFA remained around 1 percent, which is higher than comparable all-india growth. Table 8 : Percent Change in Capital Formation in Indian Agriculture: All India and State Level Source: Same as Table 1. Time period Public Private Total Triennkim Ending Sector Sector All India to to to to to An(#ira Pradesh to to to Kerala to to to Rajasthan to to to Tamil Nadu to to to

26 Table 9 : Annual Percent Change in Capital Formation in Indian Agriculture: all India and State Level Source: Same as Table 1. Time period Public Private Total Triennium Ending Sector Sector All India to to to to to Andhra Pradesh to to to Kerala to to to Rajasthan to to to Tamil Nadu to to to It is pertinent to explore whether the composition of capital formation at the state level has public-private sector movements in tune with all-india trends. In this regard, the state level variations can be also observed from Table 9. For instance, like the all-india movements the capital formation in public sector has declined both in Kerala and Rajasthan. The capital formation in private sector has been compensating for negative growth in public sector capital formation in Kerala for TE to TE Similar has been the case for Rajasthan for the TE to TE By contrast, as against the all-india trends, the growth in public sector GFCA is higher in A.P. and T.N. In the latter, however, private sector growth in GCFA has been negative. These state level variations, thus, indicate that nature of public-private sector relationship in capital formation in Indian agriculture has State specific dimensions which require a separate analysis for individual state. Bearing this in mind, the following section provides a somewhat detailed analysis for the states. 19

27 Figure 6 : GCF in Agriculture in A.P. (aggregate, public & private) Total GCF ^ ««25000 c DC Public GCF Private GCF'-' r- T Year (triennium ending) 20

28 V a. Pattern of Capital Formation In Agriculture In Andhra Pradesh The major features of GCFA in A.P. include (1) positive growth in GFCA (2) a dominant and growing public sector (3) within public sector administration departments being the major contributor, with nearly 91 percent of public sector GFCFA originating in the latter. (4) higher share of construction (60.70%), and both within public and private sectors the construction component being dominated by items of irrigation projects, flood control, soil conservation, areas development, forest clearance, land reclamation and plantations. In Andhra Pradesh, between 1980 and 1989, the gross capital formation in agriculture (GCFA) has increased from Rs. 20,623 lakhs to Rs. 37, lakhs at prices (Table 10). The linear growth has been 7.55 percent per annum. In terms of the sub-sectors, agriculture and allied has been the major component. It comprised percent of the GCFA in the state (Table 11). The growth has been negative for fishing (-0.85 percent), whereas the other sub-sectors, namely, agriculture and allied activities and forestry and logging recorded a linear growth rate of 7.78 percent p.a. and 5.39 percent p.a. respectively. Table 10: State Gross Domestic Capital Formation by type of Industry of use in A.P., during the years to at constant prices (Rs. in Lakhs) ^ Agri. & allied activities Forestry & Logging Fishing Total Source: Directorate of Economics & Statistics, Government of A.P. Hyderabad. Table 11: State Gross Domestic Capital Formation by type of industry of use in A.P. during the years to at constant prices (Three Yearly Moving Averages) (Rs. in lakhs) Years TE Agri & allied Forestry & Logging Fishing Total (95.33) (1.70) (2,97) ^ (95 10) (1.99) (2.91) (95.4) (2.55) (1.99) (95.36) (2.80) (1.84) (96.20) (2.32) (1.50) (96.55) (1.80) (1.64) (96.35) (1.82) 692,78 (1.83) Source: Estimated. Note: Figures in the parentheses denote percentage to total. 21

29 Public Vs. Private Sector The share of private sector in GCFA in A.P. has been increasing since (Figure 6). Between to , the share of public sector increased from around 41 percent to 58 percent. However, since , the share of private sector has been on the rise. Except the year , share of private sector has consistently increased from around 46 percent to 50 percent (Table 12). A similar situation is depicted even by looking into changes between the trienniums. For instance, between the TE and TE the increase in GCFA in public sector has been percent. By contrast, in the latter period, i.e., TE and TE , the increase in public sector GCFA has been only percent (Table 13). As against these trends, the GCFA in private sectors between these two periods increased by 0.63 percent and percent respectively (Table 13). Table 12 : Estimate of Gross Capital Formation in Andhra Pradesh, to (Percentage of Public and Private) (constant prices) Years Agri. & A1 Agriculture Animal Hus. Forestry Fishing Total Public ipo.oo M , Private ^ Source: Directorate of Economic & Statistics, Government of A.P., Hyderabad. 22

30 Table 13 : Estimate of Gross Capital Formation in Andhra Pradesh, to (Three yearly moving average) (constant prices) (Rs. in lakhs) Years Agri. & A1 Agriculture Animal Hus. Forestry Fishing Total Public Private Total Source: Estimated. Sub-sector Composition Within Public Sector Within the public sector. In A.P. the major contribution to GCFA (nearly 91%) comes for administrative departments. This is followed by local bodies and non-departmental undertal<ings which currently contribute around 5 and 3 percent respectively. However, there have been fluctuations in these shares. Except the year , the administrative departments's share ranged between 90 and 95 percent of total public sector GCFA (Table 14a 23

31 to 14c). Likewise, the shares of non-departmental undertakings and local bodies moved in the intervals of 2-7 percent and 1-5 percent respectively. Table 14(a): Estimate of gross capital formation - Administrative departments in Andhra Pradesh to (constant prices) (percentages) Agriculture & Allied ,86 Agriculture Animal Husbandry Forestry & Logging Fishing Total Source: Estimated. Table 14(b): Estimates of gross capital formation - Non-Departmental undertaking in Andhra Pradesh to (constant prices) (percentages) Agriculture & Allied , ,60 Agriculture ,97 0, Animal Hust)andry 2, , ,43 0,46 Forestry & Logging , ,56 Fishing , , ,36 Total , Source: Estimated. Table 14(c): Estimates of gross capital formation - Local bodies in Andhra Pradesh to (constant prices) (percentages) Agriculture & Allied , Agriculture Animal Husbandry 000 0, Forestry & Logging , Fishing , Total , , Source: Estimated. 24

32 Components of GCFA In Public and Private Sectors Within the public sector, the trends in terms of the components of GCFA are noteworthy. Over the duration between , generally the share of construction remained between percent. The machinery and equipment comprised around percent. (Table 15). However, it is pertinent to observe the pattern of movement of these two series. In public sector, since , the construction component went on falling from around 62 percent to 35 percent. This was accompanied by the increase in machinery and equipment component. The latter increased in the same duration from around 34 percent to 59 percent. However, since , there was increasing trend in construction and it rose from 53 percent to arotjnd 79 percent. There was simultaneous fall in machinery and equipment component from around 45 percent to 21 percent. In the last two years, namely and 88-89, again there was a decline in construction from 70 percent to 67 percent. Whereas the machinery and equipment component rose from 28 per cent to 32 percent (Table 15). It is also noteworthy that in the public sector within the construction, the component referred as "others" dominated, which comprised of irrigation projects, flood control projects, area development, forest clearance, land reclamation and orchards and plantations (Tables 15 & 16 a to c). Comparing the above trends with the corresponding trends in private sector, it is interesting to observe that except for the two years namely and , the movements of private sector are similar in direction to public sector (Table 16). Table 15: Estimates of gross capital formation - All Institution in Public Sector In A.P., to (constant prices) (percentages) B Construction Buildings Road & Bridges Other Construction Total Machinery and Equipment Plant & Machinery Transport Net (P) of Second * hand Phy. assets Total , Source: Estimated. 25

33 Figure 7 : GCF in Agriculture in Kerala (aggregate, public & private) Total GCF 10000' 8000' Private GCF ^--'.. ««- " Public GCF [ iiim,,i, noocaaeodwo Year (triennium ending)

34 Table 16: Estimates of gross capital formatioh by type of Assets in Private Sector A.P., to (constant prices) (percentages) Construction Buildings Other Construction Total Machinery & Equlpement Plant & Machinery Transport Total Source: Estimated. Table 16(a): Gross Capital Formation by type of Assets in Non Departmental Undertakings In Public Sector in A.P., to (constant prices) (percentages) Construction Buildings Other Construction ^ Total Machinery & Equipment Plant & Machinery Transport ;^ 425 Total Source: Estimated. Table 16(b): Estimate of gross capital formation in Local Bodies in Public Sector in A.P., to (constant prices) (percentages) ^ ^9 Construction Buildings Other Construction Total Machinery & Equipment Plant & Machinery Transport Total , Source: Estimated. 27

35 Table 16(c): Gross Capital Formation by type of Assets In Government Administrative Departments In Public Sector A.P., to (constant prices) (percentages) 1980^ Construction Buildings Other Construction Total Madiinery & Equipment Plant & Machinery Transport Total Source: Estimated. V b. Pattern of Capital Formation in Agriculture in Kerala The main features of GCFA in Kerala include: (i) a positive growth in GCFA (ii) dominant and growing private sector (iii) entire GCFA in fishing and forestry originating in private and public sector respectively (iv) government and departmental enterprises comprising a major component of GCFA in public sector and (v) machinery and equipment component dominating in fisheries. Over the period from , the GCFA in Kerala has grown from Rs. 11,474 lakhs to Rs. 16, lakhs in prices (Table 17). Table 17: Gross Fixed Capital Formation In Kerala for the Years From to By Industry of Use of Constant Prices (Rs. in lakhs) Construction 1. Agriculture Forestry & Logging 3. Fishing Total Source: Directorate of Economics & Statistics, Government of Kerala, Thiruvananthapuram, 28

36 After a decline unit TE , the GCFA in Kerala continuously increased (Table 18a & Figure 7). Among the sub-sectors, the agriculture proper has comprised between 80 and 91 percent. This is followed by fishing and forestry, which remained between 6-19 percent and less than one percent to 2 percent respectively (Table 18b). However, there has been a consistent decline in the share of agriculture proper which has fallen from percent in to per cent in By contrast, the share of fishing has been consistently increasing to reach percent in from 6.10 percent in (Table 18b). As against these trends, the contribution of forestry in GCFA is nearing negligible (Table 18b). Table 18(a) : Gross Fixed Capital Formation in Kerala for the Years From to By Industry of Use at Constant Prices (Rs. in Lakhs) (three yearly moving averages) Agriculture Forestry Fishing Total , : Source: Estimated. Table 18(b) : Gross Fixed Capital Formation in Kerala for the Years From to By Industry of Use at Constant Prices (Percentages) Agriculture Forestry Fishing Source: Estimated. 29

37 Public Vs. Private In Kerala there has been a consistent rise in the share of private sector in GFCA. The latter's share has increased from around 54 percent in to 79 percent in (Table 19). Except for which depicts a marginal improvement, the public sector's share in the same duration has been declining from around 46 percent to 21 percent (Table 19). Table 19 : Gross Fixed Capital Formation in Kerala - By Industry of Use In Public and Private Sectors for The Years From in constant prices (percentages) Years Public Agriculture Private Forestry & Logg, Public Fishing Private Public Total Private , , ,99 54, , , , , , , ,00 100,00 33, , , , , ,25 100, , ^ ,00 100,00 21,32 78:68 Source: Estimated. It should be pointed out that entire GCFA in fishing in Kerala originates from private sector only. Whereas the GCFA corresponding to forestry remains in the domain of public sector alone. Within the public sector, the share of Government and departmental enterprises (GADE) has been consistently increasing. Except , the share of GADE in GCFA in Kerala's public sector has gone up from percent to percent (Table 20). By contrast, the share of nondepartmental commercial undertakings (NDCUs) in the public sector GCFA has fallen from 6.33 percent to 1.42 percent during this period. Table 20: Share of Different Institutions in Public & Private Sector GFCFA in Kerala from to [percentages] Public Sector Private Sector Years GADE NDOVs HH Live stock Fishing , , ,33 85, ,81 82, , , , , ,42 76, , ,03 73, , ,42 73, ,23 Source: Estimated. 30

38 Within the private sector, the share of household sector in QCFA has declined. Except the years and , its share has failen from percent (in ) to percent (in ). With minor fluctuations, the share of livestock in private sector GCFA in Kerala has remained around 3 percent. However, major increase in the share of GCFA in private sector has been in fishing. Except for , it has increased from percent to percent (Table 20). A similar picture is portrayed by the three yearly moving averages (Table 21). It is also pertinent to note that the household sector in Kerala has been increasingly dominated by the rural component (Annexure Table 2). At the same time, the fisheries has been mainly associated with machinery and equipment, especially the mechanized and non-mechanized boats etc. (Table 22). Table 21 : Gross Fixed Capital Formation in Kerala, by Industry of Use and by Type of Institution from to (at constant prices) (three yearly moving averages) 1. Agriculture II. Forestry and III. Fishing Iv. Grand Total Logging Public Sector Private Sector Public Sector Private Public Private Total Sector GA&DE NDCUs HHS Live Stock GADE&E NDCUs Source: Estimated. Table Fixed Capital Formation in Kerala - at Constant Prices ( to ) (Rs. in '000) Tijfpe j*t iboats , ihtedtante^ Boats t. iil fkrittters &m mm ;2;i.aD 'Prawlers mm so.eg M.T Uners 6.09 AM Others Non-Mechanized Bo^s 1. Beachscine boat Plant bink boats Dugsoat canoes ,00 4. Catamarans Others 0.00 e.cc Total TOO.O Source: Estimated. 31

39 Figure 8 : GCF in Agriculture in Rajasthan (aggregate, public & private) Total GCF Private GCF M DC Public GCF \ \ " I 1 I 1 1 ^-i r r Year (triennium ending) 32

40 V c. Pattern of Capital formation in Agriculture in Rajasthan The main features of GCFA in Rajasthan include: (i) a decline in GCFA (ii) dominant public sector, and (iii) construction being the main component of GCFA both in public and private sectors. Over the period from to , the gross fixed capital formation in agriculture (GFCFA) in Rajasthan has declined with a linear rate of percent per annum. In this duration it declined from Rs lakhs to Rs lal<hs at prices, l-lowever, there are mixed trends over different time period encompassing the entire duration of 13 years (Figure 8). In terms of three yearly moving averages in the trienniums ending and , there was an increase by percent. This was followed by a major decline by percent from TE in to TE and a recovery in the TE to TE by percent (Table 23). Table 23 : Estimates of Gross Fixed Capital Formation (GFCF) at Constant Prices In Agriculture in Rajastlian (Rs. In Lac) (Three Yearly ivioving Averages) Years Public Private Total « T iS ^ SSkS Source: Estinated, original iinfermation Obtained from Directorate of Economics & Statistics, Government of Rajasthan, Jaipur. Public Vs. Private Sectors In terms of public and private sectors, tliere are interesting notable trends. From to , the GFCFA in private sector remained higher than its public counterparts. Since , however, curve for GFCFA in public sector has remained above its private counterparts (Figure 8). Viewed from the three yearly moving averages, it is observed that ug^ the TE , GFCFA in private sector in Rajasthan had moved m opposite 33

41 direction to its public sector counterpart. For instance, from TE to TE the public sector GFCFA had shown a decline, whereas the private sector had depicted a positive trend. The reserve was the case for the next two trienniums, namely, TE and TE when GFCFA in public sector had been increasing (Table 23). However, since TE the movements in GFCFA in public and private sectors have followed similar negative or positive directions. Share of Agriculture of GFCF vis-a-vis Other Sectors In comparison to other sectors, the share of agriculture in total GFCF in Rajasthan has been declining. In public sector GFCF for instance, its share has declined from percent in to 16.92, 8.61 and percent respectively in , and (Table 24). Relatively, there has been consistent increase in share of manufacturing (unregistered) which increased from 9.94 percent in to percent in Electricity, Gas and Water supply and Public Administration continue to occupy an important place in GFCF with their current share in public sector GFCF being as percent and percent respectively. Table 24 : Estimates of Gross Fixed Capital Formation (GFCF) of Public Sector in Rajasthan by Type of Assets at Current Prices (in Percentage) Years Agriculture EGAWS Manufacturer (Unreg.) Public Admin. Others Total Source: Same as Table 23. Note : Others - manufacturing (regd.). Table 25 : Estimates of Gross Fixed Capital Formation (GFCF) of Private Sector In Rajasthan by Type of Assets (constant prices) Years Agriculture Manufacturer (Reg.) Manufacturer (Unreg.) Resi. BIdgs. Residence Total Source: Same as Table

42 The declining share of agriculture in relation to other sectors is more dominant in private sector (Table 25). In 1981, more than one fourth of GFCF (i.e., percent) originated in agriculture. The same is, however, around one tenth (i.e., percent) in Currently a major chunk of GFCF in private sector in Rajasthan (around 47 percent) is emerging in manufacturing (registered and un-registered) and residential buildings (41.49 percent). Components of Gross Fixed Capital Formation In Agriculture (GFCFA) Within the agriculture sector, the share of sub-sectors, namely, forestry and fishing, has been almost negligible in private sector (Table 26 & 27). The same has been less than or around one percent in public sector. Table 26 : Estimates of Gross Fixed Capital Formation (GFCF) in Rajasthan at Constant Prices for Construction Assets [3 Yearly moving averages] [Public and Private] [Rs. in Lakh]. Agriculture Forestry Fishing Years Public Private Total Public Total Public Total , Source: Same as Table 23. Table 27 : Estimates of Gross Fixed Capital Formation (GFCF) in Constant Prices for Machinery & Equipment [3 Yearly moving averages] [Public and Private] [Rs. in Lakh]. Agriculture Forestry Fishing Years Public Private Total Public Total Public Private Total , , , ,58 3, , , Source: Same as Table

43 The available break-up of GFCFA, in terms of construction and machinery and equipment, depicts discernible opposite trends in public and private sectors (Annexure Table 3 and 4). In the public sector, for instance, the share of construction which remained around 78 percent came down to around 74, 46 and 60 percent respectively In , and In comparison to this, the share of construction in private sector increased from around 56 percent In to around 46 percent, 56 percent and 58 percent respectively in the years , and Unlike the public sector, through the changes in machinery and equipment in private sector have not been so sharp, yet relatively Its share in private GFCFA has declined to 42 percent in from 44 percent in These differences in the shares of construction and machinery & equipment indeed indicate that composition of capital formation in public and private sector has.been changing overtime. As a matter of fact, lesser construction activity in the public sector is being indicated by this changing composition. V d. Pattern of Capital Formation in Agriculture In Tamil Nadu The main features of GCFA in T.N. include : (i) declining GCFA (ii) dominant private sector (ill) major shares of forestry and logging belong to public sector. By contrast fishing mainly remains in private sector and (iv) state government departmental enterprises being the major contributor to public sector GCFA. In the duration of , GFCFA in Tamil Nadu increased from Rs> lakhs to Rs lakhs. In terms of trinniums, the GFCFA in the state declined by percent between TE to TE and it recovered in the latter TE to TE with an increase by 8.84 percent (Table 28). Table 28 : Gross Fixed Capital Formation in Agriculture & Allied Sector in Tamil Nadu, to (three yearly moving averages, constant prices, Rs. In lakhs) Year Public Sector Private Sector Total a« e« Source: EstimatBd, original information obtained from Directorate of Economics & Statistics, Government of T.N., Mackas. 36

44 Figure 9 : GCF In Agriculture In Tamil Nadu (aggregate, public & private) \ \ Private GCF c « ^ '^^^^^ tm-mrr-rm-jim' Q 0 0 ^*''>w>««aw»*^ivw.'*r.w 1983 "T"^ T r T Year (triennlum ending) iriitfir>rrfiriinfvviritf -iritmn<mirbitmwiiiirrfin

45 Table 28 (a) : Share of Agriculture & Allied, Forestry & Logging and Fishing in Tamil Nadu (By Triennium) Year Agril & Allied F & Logging Fishing Source: Same as Table 28. Within the GFGFA, the agriculture proper comprised between percent. This share increased from around 62 percent to 85 percent in the TE to TE However, since TE , the agriculture proper declined from around 82 percent to 78 percent. (Table 28a). Similar trend in observable for forestry and logging whose share in the corresponding duration increased initially from around 6 to 10 percent and fell in the latter period to around 9 percent. The reverse trends are observed for fishing which in the latter period (i.e., TE to TE ) recovered from the earlier steep decline to around 13 percent (Table 28a). Public Vs. Private Sectors The aforesaid trends also reflect the changing shares of public and private sectors. Pertinently the major shares of forestry and logging and fishing belong respectively to public and private sectors. (Table 29). Nearly 95 percent of GFCFA in forestry and logging for the entire duration from originated in public sector. By contrast, more than 90 percent of GFCFA in fishing came from private sector (Table 29). These trends coupled with the agriculture proper are reflected in the overall shares of public and private sectors in GFCFA. Though for almost entire duration, the private sector has been dominant, yet there appear two phases (Figure 9). in one of these phases, comprising the TE to TE , the private sector steadily declined from around 73 percent (in TE ) to 44 percent (in TE ). In the second phase of TE to TE , the private sector recovered and increased from 53 percent (in TE ) to 56 percent (in TE ; Table 29). In absolute terms, the public sector depicted an increase of percent and 3.40 percent respectively in these two phases (Table 30). By contrast, in absolute terms the private sector depicted a decline of percent and an increase by percent in the corresponding phases (Table 31). 38

46 Table 29 : Share of Public & Private Sector in GFCFA in Tamil Nadu Year Agri. & Public Allied Private F & Logging Public Private Fishing Public Private Total Public Private 1982-S Source: Same as Table 28. Table 30: Estimates of Gross Fixed Capital Formation of Public sector in Tamil Nadu by Industry of use to [three yearly moving averages] [at constant prices] [Rs. in lakhs] Year Agri. Forestry & Logging Fishing Total Source: Same as Table 28. Table 31: Estimates of Gross Fixed Capital Formation of Private sector in Tamil Nadu by the type of Industry of use to at (constant prices) (three yearly moving averages) Year Agri. & allied Forestry & Logging Fishing Total ; Source: Same as Table

47 The composition of public sector in GFCFA indicated that a major share (around 71 percent) originates from state government departmental enterprises, this is followed by government administrative departments (around 26 percent) and government non-departmental enterprises (around 3 percent). In the duration of , these shares have fluctuated respectively in the interval of percent, and 2-6 percent (Tables 32 to 34. Table 32 : Gross Fixed Capital Formation of state government admlhistrative departments in Tamil Nadu by the 'Type of Industry of use' to (as percentage to total public sector) Industry Agri & Allied Rshing Total Source: Same as Table 28. Table 33 : Gross Fixed Capital Formation of state government departmental enterprises in Tamil Nadu by the 'Type of Industry of use' to (as percentage to total public sector) Industry Agri & Allied Fishing Total Source: Same as Table Table 34 : Gross Fixed Capital Formation of state government non-departmental enterprises In Tamil Nadu by the 'Type of Industry of use' to (as percentage to total public sector) Industry Agri & Allied Forestry & Logging Fishing Total Source: Same as Table

48 Vi. Complementarity Between Public and Private Sectors: All India and State Level Scenario As observed in section I, the use of complementarity between public and private sectors has attracted considerable attention by various researchers. Since an existence of complementarity between public and private sector or its absence is likely to have an Impact on the overall investment and growth of agriculture sector, the government policies should take due cognigence of such phenomenon in deciding upon public outlay for the sector. While it is convincingly argued by Mishra and Chand (1995) that the complimentarity can not be determined by a simple causal relationship (positive) between private and public investment. In the same vein we argue that the substituability of public investment with private investment can not also be determined by a simple causal relationship (negative in this case) or by looking at the compensatory impact of private investment on the total capital formation in agriculture. In other words, it is not rightly to say that private capital can replace public investment as long as the total investment continues to grow. One has to understand the implications of public vis-a-vis private investment i.e., the accrual of benefits from these investments. A cursory look at the type of investment by public and private agencies makes it clear that the benefit flows are more equitable, inter and intra regionally, in the case of public investment when compared to private investment. As long as quity aspects continue to dominate our policy agenda, the issue of complimentarity and substituability between public and private investment in agriculture remain secondary. Following the argument of Mishra and Chand (1995), the phenomenon of complementarity should not be confused with a causal relationship or inducement effect between public and private investment in agriculture. In fact "complementarity is not only a relationship of being or coming together to form a unity but also of acting together so as to produce an outcome which neither of the complements can produce all by itself^". Conceptually, therefore, we should also bear in mind the fact that the examples xited by earlier researchers^ of public investment in infrastructure like rural link road or rural power supply which creates enabling condition for agriculture and may induce private investment in agriculture in tractors or tube wells denote inducement effect and not the complementarity. The instances of complementarity would include private investment in field channels which come up in a canal irrigation project as the irrigation benefit from canal irrigation cannot materialise in the absence of former. As against it, the example of private investment in tubewell in a canal command area is more a phenomenon of external benefits emerging from the canal irrigation 6. Mishra and Chand (1995), ibid, P. A See, for instance, Rao (1994). 41

49 system. The absence of the latter does not prevent the benefits emerging from private tubewells. Thus bearing in mind the distinction between complementarity and* other phenomenon like causal relationships, inducement effect or external benefits emerging from public investment in agriculture, the appropriate method for measuring complementarity would not be based on a regression analysis, if there is a priori reason to believe that public and private investment in agriculture are complementary, an appropriate method would involve finding out "the direction and rate of movement of the two time series", namely, public and private investment in agriculture which should be the same and of similar order starting from any initial position. Adopting the logic, thus, we have prepared the graph of the indices of the public and private capital formation in agriculture at the constant prices of and common base year of the triennium ending These indices and graphs are presented for all-india as well as state level (Table 35, Figures 10-14). Viewed from these graphs of the public and private capital formation indices at the all-india level as well as the growth rates given for the capital formation series both in public and private sectors in Table 3 and 6, it could be observed that movement of two series, in the decades of 1960's and 1970's was broadly in the same direction. The two series had grown at different rates, however, in these two decades (Table 3 and 6). Further, a divergent movement of these series is notable since After this year, private sector capital tormation series is marked by a continuous growth and the reverse has been the case for public sector until the latest year of These diverse movements of the two series with differential growth rates generally fail to bringout any clear relationship between the public and private sector capital formation. The Indices for capital formation for the states of A.P., Kerala, Rajasthan and T.N. are also presented in Table 35. These have been presented in graphic form in figures 11 to 14. It could be observed from these graphs also does not provide any clear pattern between public and private capital formation in agriculture for any of the four states. In A.P., for instance, although the direction of movements of two series is the same but the latter have different growth rates. By contrast, in Kerala, both the series have been moving in opposite directions. The public sector series is declining with more than commensurate rise in private sector, indicating a substitution type relationship. Similar phenomenon of substitution between public-private sectors is prominent in T.N. till 1986 and later it resembles a positive relation. In Rajasthan, however, these series are moving in opposite direction since TE with a steeply declining private sector. The latter is not being compensated by the growth in public sector, thus, ruling out substitution type nature between the two series. To sum up, at the 42

50 Figure 10 : Index of GCFA in Indian Economy (base , public & private) 160f 140^ f u o M a Private GCF Year (trlennium ending) 43

51 Figure lib?: Indeacjpf ficfik; In A>P. (base % publics&fpriy^e> 190 T ^r<'^*>w?«<^^>;<o>:o( >>>u<>l*m^w»* < u. O O X a c i 130 Public GCF " Private GCFj 1983 f "T Year (trieririium ending) 44

52 Figure 12 : Index of GCFA In Kerala (base , publlc & private) i20 u. o X o a 110' Private GCpy Public GCF 80' ~ T & 1987 ^VAU.oAau«daMie«A.*i!sa ^----^1-'-'--'''--' ^' Vear (triennlum ending) 45

53 Figure 13 : Index of GCFA in Rajasthan (base , public & private) 140 ' 120 ' Private GCF x" / 100 u o» C 80 ': V L Year (triennium ending) 46

54 Figure 14 : Index of GCFA in Tamil Nadu (base , public & private) Public GCF 130^ o 100 X o c '\ Private GCF \y T Year (triennium ending) 47

55 aggregate level the above analysis does not provide any clear cut evidence regarding the relationship between public and private capital formation in agriculture at the all-india as well as at the state level. Therefore, it is necessary to examine the relationship using more rigorous techniques like regression analysis. Though simple regression analysis is not sufficient to prove ^e complementarity argument, it would at least help in understanding the existing relation (causal) between public and private capital formation in agriculture. Table 35 : Index of GCFA (Base ) Year TE All India A.P. Kerala Rajasthan T.N 1. Public Pvt. Public Pvt. Public Pvt. Public Pvt. Public Pvt ' : , , , Source: C.S.O. Data, Appendix Table 3, 13, 21, 23, 30 & 31.. Note : Blanks in the above table indicates non-availability of data. 48

56 Here our intention is to establish the kind of relationship that is existing between public and private investment at the all India level and state level. So far, the attempts at all-india level have been used to indicate and analyse phenomenon such as complementarity. It is also pertinent, however to carry out state level analysis to determine whether the direction of public investment policies in agriculture in the states covered by us follow the all- India trends. Such a comparative analysis will highlight the significance of state specific variation in agriculture policies in influencing the direction of public-private investments in agriculture. The purpose is to examine whether the regional picture commensurates with the macro picture. For this purpose we have estimated, the elasticity coeiildent between public and private investment at the all India level and for the four selected states using the following functional form: Log (PVTGCFC,^,) = a -H (b) log (PUBGCFC,) The estimated elasticities are presented below : STATE PERIOD EUSTICITY SIGNIFICANT AT 1. ALL INDIA to Percent 2. ANDHRA PRADESH to , Percent 3. KERALA to Not significant 4. RAJASTHAN to Not significant 5. TAMIL NADU to Percent Our estimated elasticity for all India is and significant at 1 percent level. This indicates the strengthening of the phenomenon of substituability between public and private capital during the process of liberalisation, as the elasticity for the period to was estimated at by Mishra and Chand (1997). But, our state level estimates provide a different picture. For all the states the estimated elasticities are positive and also significant for two states. One reason for this opposite trend could be the difference in the time period. Even in this regard Ihe elasticity estimate for Rajasthan, for which we have the data till , does not support the all India picture. The positive elasticity at the state level indicates a complimentarity or inducement effect of the public investment on private investment. More importantly, as mentioned earlier, the role of public investment in agriculture goes beyond the kind of impact it will have on private investment. While its inducement effect on private investment is well established (for recent estimates see Dhawan, 1996), the repercusions of 49

57 the substitutability argument are not addressed in the literature. In what follows here, we highlight some of the important aspects of public capital formation in agriculture in an attempt to negate the substitutability of public investment with private investment. Two important features of public capital formation are i) creation of public goods, and ii) core investment. As evident from number of studies a large portiori of capital formation in agriculture goes towards irrigation development. While the public capital formation in agriculture goes toward large and medium irrigation, private capital is invested on well irrigation. Of these two the former is community based and equitably distributed than the private capital which is mainly individual based. Similarly, private capital flows as they are guided by profit maximisation, tend to concentrate in better endowed regions leading to regional inequalities. Though these arguments call for an indepth and disaggregate analysis at the regional level, our state level analysis provides some insights in this regard. Of our selected states, agriculturally more developed states like A.P. and T.N. have shown an increase in private capital formation along with the public capital formation. On the other hand, there is no such correspondence in the case of agriculturally backward states like Rajasthan and Kerala. This indicates that private investment is not coming forward even to the extent of inducement effect, let alone substituting the public investment. If one looks at the investment pattern of public and private capital formation, it is glaringly evident that some of the important areas like forestry are totally left out by private sector. While it is irrational to expect private investment in forestry in the existing institutional set up, it is unwise to neglect such important areas under the disguise of minimising public investment. But for the public capital, creation of environmental goods will come to a standstill. On the contrary, ona can observe environmentally unfriendly investments in the private domine such as increasing investments in ground water exploitation with least concern for its development and investments in fisheries which focus on increasing short run yields rather than sustainable yields. This kind of investments not only disturbs the ecological balance but also aggravate inequity. Secondly, the role of private sector is rather limited in case of core investments such as infrastructure development. Most important among these are roads, electrification, communication, market yards, godowns, cold storage facilities, etc. All these are interlinked and depend on one another. Here the availability of roads are vital for the development of other facilities like market yards. In the given conditions only public investment goes towards creating this core infrastructure like roads, and the private investment, if at all, in the construction of market yards, etc., only follows or induced by the availability of the road. While corporate sector can play a vital role in creating the core infrastructure, the entry of corporate sector into agriculture in such a big way is not feasible in the present socio- 50

58 economic context. Indian agriculture which is small farmers dominated is not ready for such a takeover as it will pauperise these small and marginal farmers. Even for freeing the land lease market, that is being debated presently at the central level, it is argued that there has to be a ceiling on the extent of land leased in so that the entry of corporate sector is checked. Even if free entry is allowed to corporate sector, its entry will be limited to potential areas leaving the less endowed regions to their own fate. This has happened even in western agriculture where the subsistence agriculture terrains are protected (subsidised) by the state as it is not lucerative for the corporate sector. Therefore, the role of corporate sector in Indian agriculture in promoting capital formation in agriculture is rather limited in the present context. Even in the event of limited entry of corporate sector into agriculture, it can not substitute public capital formation, especially in terms of its impacts. Thus, the preceding discussion emphasises the need for public capital formation in agriculture in the given socio-economic conditions irrespective of the nature of relationship it has with private capital formation. It is necessary not only to induce or boost the private investment but also due to the fact it can not be substituted in certain areas. In this regard the recent budgetary thrust towaards agriculture is in the right direction. Unless agriculture sector is receives a major boost in terms of productive investments such as irrigation and infrastructure development, it would be highly unlikely to achieve the targeted growth rates in the long run. And it would be rather optimistic to expect such massive investments from the private sector. VII. Factors Influencing the Capital Formation In Indian Agriculture Our above analysis does not provide an evidence of complementarity between public and private sectors. For almost entire duration, there have been movements in capital formation in agriculture indicating a growing role of private sector. Even at the state level, except Rajasthan, the growing prominence of private sector is evident. In A.P., for instance, since GFCFA in private sector began to become prominent. Similar is the case in Kerala since In Tamil Nadu also from 1987 onward the pattern favoured the private GFCFA. In this background, there emerge the following two pertinent questions: (i) what are the factors which influence public as well as private capital formation in Indian agriculture? and (ii) what could be the policy options to strengthen the process of capital formation specifically keeping in view the ongoing process of liberalisation in Indian economy? The answers to second question partly emerge indeed from an analysis of the factors influencing public-private capital formation. In this regard, it is pertinent to 51

59 observe that earlier studies have focussed their attention on explaining various factors that might have led to a decline in public sector capital formation. Thus, at the all-india level, presuming complementarity between public and private sectors, the falling GFCFA in public sector has been explained in terms of : (i) decline in the proportion of expenditure on agriculture and allied sector in the aggregate (plan and non-plan) expenditure of the centre and states and (ii) fast growth of agriculture subsidies or rising proportion of expenditure on revenue account (Shetty, 1990; Rao, 1994). Raising doubts about the presumed complementarity between public and private sectors, the decline in public sector GFCFA at the all-india level has been explained, however, in terms of political economy of agriculture policies which led to public financing of private sector GFCFA (Mishra and Chand, 1995). Therefore, in analysing the factors responsible for decline in the public sector capital formation we proceed with the assumption of an absence of complementarity between public and private capital formation. Since the budgetary outlay forms the basis of public investment in agriculture, firstly we examine whether there has been a considerable decline in this outlay and further proceed in this section to analyse price and non-price factors influencing the process of capital formation in Indian agriculture. VII a. Budgetary Expenditure on Agriculture and Allied Sectors The aggregate disbursement of central and state governments on agriculture and irrigation in the duration are presented in Table 36. There has been a continuous increase in this expenditure both in absolute amounts as well as proportion of total expenditure of the government. Between to , this expenditure increased with an annual increase of percent. In the latter period of to , it recorded almost the same annual increase of percent. Even as a proportion of total expenditure of the government, the budgetary expenditure on agriculture and irrigation increased from around 8 to 13 percent in and remained mostly between percent in In fact, this expenditure recorded an impressive increase as a proportion of GDP originating in agriculture. From around 3 percent in , this ratio increased to 8.6 percent In It further rose from around 9 percent in to more than 12 percent in the years It could also be observed from the Table that agriculture GDP grew at a higher rate in 1980s compared to 1970s and thus the increase in its ratio with the expenditure on agriculture and irrigation reaffirms a real growth in budgetary expenditure on the sector. A similar impression of risingt tr ncl of public expenditure is further confirmed looking into expenditure on the agriculture and allied sectors in different 52

60 Year Table 36 : Expenditure on Agriculture and Irrigation by Central and State Governments Revenue Account Agri- Irrigation Total culture Aaareoate to Disbursements of Central and State Govemments Capital Account Agri- Inigation Total culture Total Col. 4+7 Total Excluding Interest Payments Subsidies and Defence GDP Originating in Agriculture at Current Prices (4) as percent of (8) (3) as percent of (6) (8) as percent of (10) (Rs. crores) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (8) as percent Of (11) en CO : BO , Source: Shetty, S.L. 1990, "Investment in Agriculture, Brief Review of Recent Trends'. Economic and Political Weekly i, February

61 plan periods. As depicted in Table 37, in the third to fifth plan periods, the expenditure on agriculture and irrigation increased from percent to 22 percent with slightly higher variation in the intervening plans. Since , however, the plan allocations under rural development and special area development programmes have been listed separately and the allocations under the heads of agriculture and irrigation combinedly appears to be reduced. But as Mishra and Chand (1995) have argued, a large proportion of rural development expenditure (nearly 68 percent and 57 percent respectively in sixth and seventh plans) is being spent on IRDP and nearly 55 percent of the latter goes towards asset formation in agriculture and allied sectors and, therefore, combining these separate heads of expenditure in latter periods of sixth and seventh plans, we find that the total plan expenditure on the sector has remained almost of the same magnitude. It, thus, comprised nearly 24 percent and 22 percent in the sixth and seventh plan periods (Table 37). Table 37 Plan Expenditure and Outlay of Development During FIve-Year Plans: Centre, States and UTS Sector of Third Annual Fourth Fifth Annual Development plan plan plan plan plan ( ) ( ) ( ) ( ) ( ) Sixth Plan ( ) Actual Outlay (Rs. crores) Seventh Plan M ) Actual Outlay 1. Agriculture and & allied activities (12.70) (16,70) (14.70) (16.10) (12.30) (6.10) (5.80) (5.80) (5.80) 2. Rural development (6.40) (5.50) (7.00) (4.90) 3. Special area programme (1.40) (1.50) (1.60) (1.50) 4. Irrigation & flood control (7.80) (7.00) (8.60) (9.80) (10.60) (10.00) (12.50) (7.60) (9.40) 5. Total of (1) to (4) (20.50) (23.80) (23.30) (22.10) (27.00) (23.90) (25.30) (22.00) (21.70) 6. Plan total (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00) Plan Exoenditure Vlth Vllth plan plan ( U ) 1. Rural development 2. Of wfiicfi IRDP Share of IRDP in rural development Notes : Figures in parentheses are percent share to the plan total Source : 1. Economic Survey, , Ministry of Finance. 2. Indian Agriculture In Brief, 1990 and 1992, Ministry of Agriculture. 54

62 Therefore, the cause of decline in public sector capital formation does not lie with a reduced budgetary allocation. It is probably due to the fact that this allocation is moving over time more towards current account side. As depicted in Table 36, in the total expenditure by the government, indeed the share of revenue expenditure has been continuously increasing. The latter, in fact, increased from around 44 percent (in ) to 71 percent (in ), implying a lower availability of funds for investment purposes. A similar situation of rising share of revenue expenditure on agriculture and allied activities is depicted for the states of A.P., Kerala, Rajasthan and Tamil Nadu (Appendix Table 4 & 5). Over the years , it increased its share from nearly 91 to 97 percent, 90 to 93 percent, 92 to 94 percent and 89 to 97 percent respectively in the above states. Moreover, in the states of A.P., Kerala and Tamil Nadu, the total budgetary expenditure on the sector as a proportion of GDPA has also declined and fell from 5 to 3 per cent (in ), 7 to 4 percent (in ) and 9 to 7 per cent (in ) respectively. Thus, unlike the all-india trend, the factor of declining proportion of total outlay on agriculture and allied sectors relative to the SDP in these states might have been additionally responsible for the decline in public sector capital formation in agriculture. VII b. Marginal Efficiency of Capital This brings us to another pertinent fact regarding the efficiency of use of capital despite its declining proportion in state budgets and SDP. It is suggested by some researchers that it is not merely the size of GFCFA but its efficient use that may be taken into account while discussing the growth in GFCFA. It is quite likely that the sanrie amount of capital with improved efficiency may lead to higher GDP. We have tried to examine this pertinent question whether the decline in public sector GFCFA at the all- India and state level has been associated with an improved efficiency of capital. Table 38 presents incremental GDP in agriculture as well as incremental capital output ratios and marginal efficiency of capital. The table also provides an estimate of GFCFA as a percentage of sectoral SDP in agriculture. It could be observed that at all-india level the years of earlier five year plans, namely third and fourth plans (respectively and ) were marked by high ICOR. This is owing to initial policy emphasis on development of irrigation facilities as well as low growth in agriculture production in the duration. Between the third and fourth plan, the period of annual plans ( to ) comprises an abnormal phase of severe droughts in two years followed by a pick up in the last year resulting in high growth in sectoral GDP and abnormally low ICOR. However, from fourth plan onwards until the end of seventh plan there has been an increase in the marginal efficiency of capital from 0.12 to This is because sectoral growth in GDP in the successive periods was 55

63 relatively higher than the sectoral growth in fixed capital Formation. Thus, despite a decline in real capital formation in absolute terms, efficiency in its use has improved in the eighties relative to the period of 1970's. Likewise there has been a rising trend in the ratios of gross fixed capital formation to sectoral GDP in agriculture in percentage terms. The latter increased from 7.5 percent (in fourth plan) in 9.15 percent (in sixth plan). Though there has been a decline in this ratio to 8.02 percent in seventh plan, yet for the entire duration of eighties ( to ) it depicts an improvement over the earlier plan periods. The available information for the sixth and seventh five year plan pertaining to marginal efficiency of capital in agriculture presented in Table 38 for the states with the exception of T.N., however, do not corroborate the improved efficiency of capital depicted at the all-india level. It could be observed that despite the declining GFCFA, its percentage in agriculture sector's SOP has been increasing in all the states. For instance in A.P., this percentage increased from VI plan to VII plan from 6.78 percent to 9.41 percent. Likewise in Kerala it increased from 8.67 percent to 9.84 percent. However in Rajasthan and T.N. it depicted a decline respectively from 8.59 percent to 7.12 percent and 9.25 percent to 5.99 percent. Table 38 : Marginal Efficiency of Capital : Ail India ( ) and States ( ) Period Incremental GFCF ICOR 1/ICOR GFCF as GDP in Agricul- % of GDP ture (Rs. crores) in Agriculture All-India to (Third Plan) to (Annual Plans) , to (Fourth Plan) a) to (Fifth Plan) to : (Sixth Plan) All India A.P Kerala Rajasthan T.N to : (Seventh Plan) All India A.P Kerala Rajasthan S9 T.N to : All India* A.P." Kerala Rajasthan"* T.N Notes * : Period is from to from to Period is from to Period is

64 Generally the ICOR has been increasing for the states. For instance between the Vl and VII plans the ICOR in A.P., Kerala, Rajasthan, has increased respectively from.675 to 1.089, from.615 to and from to By contrast, in T.N. the ICOR declined in the same duration from.791 to.542. Thus, as against all-india trend, the marginal efficiency of capital in agriculture has declined in A.P., Kerala and Rajasthan. This decline in marginal efficiency of capital at the state level needs, in general, a reversal. It is all the more pertinent that the efficient use of capital in agriculture is encouraged by policy measures particularly in the state of Rajasthan which is marked by a negative growth in capital formation. Besides the budgetary expenditure and marginal efficiency of capital, there are other price and non-price factors which influence the process of capital formation in agriculture. Notably among the former of these, terms of trade for agriculture, for instance, have a significant role. The latter of these include the factors like technology, institutional credit and the role of credit institutions, infrastructure and public-private sector linkages. In the following discussion we analyse the role of these factors in detail. VII c. Technology and Terms of Trade in Agriculture As mentioned above, it should be emphasised that the capital formation is significant for agriculture since it adds to productivity and increase in income of farmers. The latter will enable farmers to continue investing in agriculture for raising the agriculture production. It is in this context that the role of above factors in the discussion on capital formation should be analysed. Thus, a favourable terms of trade for agriculture would mean a price rise for agricultural commodities, increased profitability and a high propensity of farmers for investment and adoption of new technology may be enhanced. There is, therefore, an inter-relationship between favourable terms of trade and technology adoption by farmers. However, in order to reflect upon the role of technology and terms of trade we have to bear in mind a synoptic view of agricultural development in the country with a focus on these two parameters. Broadly it could be noted that the process of adoption of new technology basically took off since More particularly, some studies have preferred to designate the period from to as modernisation phase owing to increasing capacity utilisation in Indian agriculture (Dholkias, 1993). The share of modern inputs of intermediate consumption like fertiliser, pesticides, electricity and diesel as well as capital intensity (i.e., net fixed capital stocks per hectare) has been increasing with the increased adoption of technology. 57

65 The former of these, for instance, increased their share from 2.58 percent (in to ), to percent (in to ) and to percent (in to ) (Mishra and Hazell, 1996). Likewise, capital intensity in the above duration increased from Rs per hectare to Rs per hectare and to Rs per hectare. In the wake of adoption of technology, there was also a simultaneous improvement in productivity for all crops. The latter increased from 1.71 per cent per annum to 4.23 per cent and 3.77 per cent per annum in the respective durations. The gains in productivity owing to technology adoption depends upon whether the terms of trade have favoured the agriculture sector. Conceptually the former are either used as barter or gross terms of trade. While recommending support/procurement prices of agricultural commodities, the Commission for Agricultural Costs and Prices (CACP) since 1980 has been taking into account barter terms of trade. These are defined as the ratio between the prices received by the farmers for their produce and the prices paid by them for the commodities purchased from the non-agriculture sector. As against the barter terms of trade which basically represent the prices at which quantities are traded among sectors, the relative valuation of agricultural and non-agricultural products is denoted by gross terms of trade. The latter may be defined as ratio of GDP in agriculture sector (current/constant) prices and GDP in non-agriculture (current/constant) prices (Kahlon and Tyagi, 1980). Measured either in barter or gross terms of trade, thus, the duration of traditional technology ( to ), as well as modern technology ( to ) was marked by an unfavourable terms of trade (Appendix Table 6). The average for barter terms of trade remained respectively as 85.6 and 86.4 in these durations. Likewise the gross terms of trade remained on an average as 87.* wt^ in the same durations. It has been only in the initial period cm technology adoption (i.e., to ), when either of these tera» of trade remained favourable to WQmMme sector. The respective values lor the barter and gross terms of km^ for this tiaration remained as 100 and respectively. In order to e^^mine the relationship between tenurs M trad and capital formation in agriculture, we have regressed gross tenns if ttotte (GTOT) against the share of capital formation in agriculture in fhe total capita! formation in the entire economy (%GCFA). These estirridies are carried out for long and short runs. Further, we have also tried to examine the relationship between gross terms of trade (GTOT) and gross capital formation in agriculture in absolute terms (GCFA) during the decade starting from The estimated equations are as follow : 58

66 (I) (II) (ill) %GCFA,, = GTOT,* (2.41) (0.036) R=^ = 0.33; N = 30; OF = 28 (Period to ) %GCFA,, = GTOT,* (2.25) (0.20) R2 = 0.32; N =12; DP = 10; (Period to ) TOTGCF,, = GTOT,* (174.88) (15.27) R2 = 0.28; N = 12; DF = 10; (Period to ) Note: Figures in brackets are standard errors. * and ** indicate levels of significance at 1 and 10 percent levels respectively. Our estimates reveal positive and significant relationship between terms of trade and capital formation in agriculture both in short and long runs. In other words, the share of agriculture and allied sectors in the total capital formation and also the gross capital formation tend to increase along with a favourable terms of trade. It may be noted that the impact of terms of trade on total capital formation is stronger than that of on private capital formation (the estimated coefficients are not significant and hence not presented). This may be due to the reason that private capital formation is more dependent on net gains accruing to agriculture and the availability of institutional credit. The combined impact of the technology and favourable or unfavourable terms of trade on the process of capital formation will depend upon whether the productivity gains owing to technology adoption have been able to compensate for the unfavourable terms of trade. This could be viewed, for instance, from the index of income changes which is obtained by deflating the barter terms of trade with ^he productivity index for all crops (Mishra and Hazell, 1996). On an average, this index moved favourably in the latter durations of to and to with its average value being respectively as and 128^:3 (Appendix Table 6). In the earlier duration of to , it remained on an average Based on this index, the annual income growth for the agriculture sector in these three durations works out to be respectively 1 percent, 1.96 percent and 3.75 percent. Taking into account these annual income growths, it is pertinent to observe that the adverse terms of trade had affected the farmers income both in the duration of traditional technology and modernisation phase. However, the higher increases in the farmers income could compensate for adverse terms of trade in the latter phase. As a result, despite a decline in public capital formation at a rate of 1.43 percent (in 19/8-79 to ), the private sector capital formation grew at around 3 percent. The implications of this role of technology and terms of trade are quite pertinent for policy making. In the wake of liberalisation, 59

67 thus, if the self-sustaining growth in farmers income could be maintained either by managing favourable terms of trade or enhancement of productivity through appropriate policy support including subsidised technological know how and institutional credit for adoption of upgraded technology, the compensatory growth in private sector capital formation would also be sustained in future. VII d. Institutional Credit and Role of Credit Institutions Besides technology and terms of trade, however, other important factors which also impinge upon the productive ability of agriculture sector are the flows of institutional credit and the role of credit institutions in this process. Though it is difficult to segregate the impact of institutional credit and new technology, the evidence is more in support of institutional credit (Gandhi, 1996). In the context of the debate on.capital formation and liberalisation in the economy, these aspects gain greater significance. Especially if we look at the fact that despite the declining public capital formation in agriculture, the flow of institutional credit has played a vital role in boosting private investment in agriculture. In fact, during 1980s more than half of private investment has been supported by institutional credit. This could be gauged from the ratio of institutional term loans disbursed to agriculture to private capital formation at current prices presented in Table 39. Over the period , there has been a notable increase in this ratio. Between to this ratio increased from 25 percent to 33 percent. However, since then there has been a sharp rise in this ratio. In fact, in and , it was as much as 46 percent and 58 percent respectively. A similar trend has been maintained in this ratio during the seventh plan ( ) and it remained between 52 to 66 percent in the duration. Moreover, in terms of green revolution and post-green revolution period, this ratio rose from 29 percent to 50 percent. Given this significant magnitude of institutional credit in the private capital formation, it is apparent that the thrust on institutional financing of agriculture should continue. Therefore, the current financial reform measures should not adversely affect the flow of term credit to agriculture. It is in this context that the role of credit institutions serving agriculture especially the cooperative banks, public sector commercial banks, regional rural banks and NABARD has to be viewed. At the moment, the net credit flow to the tune of 18 percent to agriculture arid allied sectors continues on a priority basis. However, some far reaching changes have already taaken place. These include deregulation of interest rates on deposits and advances, restrictions on loan waivers and introduction of norms and closer supervision of financial intermediary institutions to prevent them from losses. The rationalisation and reorganisation of the rural credit institutions are also some of the potential policy reforms measures which are likely to be implemented in due course 60

68 with the increasing spate of reforms. These far reaching changes are likely to adversely affect credit flows to agriculture. Table 39 : Public Financing of Private Investment in Agriculture, to at Current Prices (Rs. Crore) Year Direct Institutional Term Loans to Agriculture (1) Ratio of (1) to Private Capital Formation in Agriculture (Percent) (2) Average of (1) Green revolution Perbd : (169/70 to 1979/80) (ii) Post-green revolution period : (1980/81 to 1991/92) Source: 1. Same as in Table Report on Currency and finance, Vol. 1, Reserve Bank of India, Bomlbay, varfetis issues. At present, of the total lending to agriculture, cooperative banks and commercial banks account of 57.5 percent and 37.5 p&tgmi respeeti^ely Of the short term credits. Their shares in the medium/long term credits remain around 30 percent and 65 percent respectively. At the moment, regional rurl banks have only 5 percent share in either short or long term advances to 61

69 agriculture sector (Economic Survey, , p. 129). Therefore, in order to maintain the lending to agriculture sector at the current level such that the process of private capital formation is not hampered, it is necessary to "put in place an institutional structure by reforming, rationalising and reorganising the existing ones, which is viable, efficient, observes the prudential norms, mobilises rural savings and meets the increasing credit needs of the agriculture and allied activities in a competitive financial market environment" (Mishra, p. A. 21, 1997). VII e. Role of Infrastructure and Lini<ages Between Public and Private Investment Even while refuting the complimentarity between the public and private investment, the role of public investment in terms of infrastructure especially in irrigation cannot be undermined. In fact, public infrastructure provides the necessary support for agrarian development. There have been many empirical studies favouring the positive and promotional impact of public investment on its private counterpart. Most of the studies working within a multiple regression framework estimate the elasticity of private investment with respect to public investment in the range of 0.26 to For instance, earlier studies of Krishnamurthy (1985) and Chakarvarty (1987) estimated this elasticity to be 0.60 and 0.62 respectively. Shetty (1990) for the period found it to be 0.66, whereas Storm (1993) reported it to be for More recently NCAER (1995) for the period and joint research team of Institute of Economic Growth and Delhi School of Economics (1994) estimated it to be 0.26 and 0.98 respectively. Another cross section analysis of 17 states for the year , establishes the elasticity of private investment on canal irrigation to be 0.25 (Dhawan, 1996). By contrast, for the period , Mishra and Chand (1995) find this elasticity as These differences in the magnitude of elasticity are possibly owing to nature of specifications and period coverage. For instance, like Mishra and Chand (1995), not working within a multiple regression framework and regressing private on public investment, Mishra and Hazell (1996) found these estimates for elasticity as 1.551, and for the periods respectively of , and Thus, despite the fact that there is an absence of complementarity between public and private investments in agriculture, all these estimates of elasticity establish that there is a significant relationship between public investment in agriculture and private investment by the farmers. Therefore, while analysing the importance of public investment in infrastructure we should re-emphasise that it is not simply the complementarity and substitutability between public and private capital formation which is all important. Indian agriculture still continues to be small 62

70 farmer dominant. In fact the proportion of small farmers is on the rise. Liberalisation is resulting in a rise in input costs. Though output prices are also on the rise, small and marginal farmers with their limited marketable surplus are not in a position to share the price gains. As a result these farmers are increasingly becoming non-viable. As long as enough alternative sources of income (employment) are not available, this large majority of people will tend to join the ranks of unemployed and under-employed. And liberalisation does not seem to result in creation of such massive employment in the near future (Reddy, 1996). These farmers are not in a position to make productive investments in agriculture. This is more so in arid and semi-arid regions which account for two third of the cropped area. This is the reason why we get a different picture from Rajasthan. The only way to protect them is through productive public investment. Irrigation should continue to be the major thrust area of public investment. In fact, any public investment in, say canal irrigation, has the potential to raise the farm incomes over a period of time. The subsequent rise in comes, savings and farm investments in the wake of such public irrigation systems as well as crop diversification taking place following the development of irrigated area will span over a time horizon. By contrast, excessive private investment in irrigation (ground water exploitation) is not only aggravating the existing inequalities but also leading to environmental problems such as drying up of aquifers and desertification. Role of public sector in the arid and semi-arid regions has been marginal. Increased role of public sector in providing irrigation to these regions may imply higher outlays for agriculture. The common argument that the objective of raising resources for agriculture could be served by cutting or abolishing all input and food subsidies which are cornered by well to do regions and farmers is empirically untenable (Acharya, 1997a, b). As a matter of fact the policy of agricultural subsidy helped in achieving self sufficiency in food grains, fair sharing of gains of technology and public investment between the farmers and the consumers, improved economic access to food and development of backward and dryland regions. The increased economic access to food in turn helped the industry and government to keep their wage bills low as the wages in the organised sector are linked to prices of consumer goods and good grain prices have a considerable weightage in the price index. Further the input subsidies also helped the government in keeping the food subsidy bill low. Thus, the benefits of input and food subsidies have been shared by "all sections of the society, i.e., surplus producing farmers, other farmers who are net purchasers of fooad grains, landless labourers, urban consumers and the industry" (Acharya, 1997a, b). Therefore, in exploring for budgetary resources to raise agricultural outlays, it may be desirable to look at the avenues in other sectors where explicit/hidden subsidies and duty evasions 63

71 may be prevalent and the repercussions of withdrawal are not against the interest of poor (Acharya, 1997a, b). The main purpose or objective of public investment is not to induce or attract complementary private investment. Its objective is to enhance the productive capacity of the resources for the society as a whole in an equitable manner. Given this objective of public investment, private investment can not be a substitute for it. Public capital formation leads to increased social welfare while private capital formation leads to individual welfare. As long as we have economic dualism in the society they cannot be substitutes. And as long as we have 'equity' as one of the main policy objectives we can not leave a majority of vulnerable population to tend themselves or to the mercy of market. VIM Policy Implications The policy implication of our analysis pertaining to capital formation in Indian agriculture are closely linked to the ongoing economic reform programmes in the country. Some of the developments following the reforms are noteworthy. In fact in the last five years of economic reform programmes in the country agriculture has been playing a major supportive role. The exports of the sector have risen in this period. From the 12 percent in pre-reform period, the agricultural exports now comprise over 14 percent of the total exports of the country. This has helped to contain balance of payment deficit. With the successive good performance of agriculture and comfortable food grain supply, there has been a success In containing the inflation below two digit level. Moreover a trend growth rate of food production of 2.6 percent per annum during 1980s which supersedes the population growth rate in the country. Further, by employing nearly two-thirds of the country's labour force it serves a major social objective in. helping to reduce poverty and regional disparity. In view of the significance of agriculture sector it has been argued that the ongoing reforms should bring about a parity between agricultural and industrial sectors. It has been suggested that policy reforms should be aimed at removing existing restrictions on agricultural exports, withdrawal of input subsidies and priority sector treatment to agricultural sector, and removal of ceilings on land ownership to create conditions for corporate agriculture. It has been argued that more market freedom created by these potential reform measures may induce more private investment and boost private capital formation through higher growth in production, income and exports. Keeping in view these potential reform measures and our above analysis there emerge a number of critical priority areas of concern. 64

72 It is important to recognise that despite more and more liberal policy environment for private investment in agriculture, the public investment need to be stepped up in certain areas. Especially the major and medium irrigation in the country need to be enhanced. As suggested by the Committee on Pricing of irrigation Water (1994), about 90 percent of the ultimate groundwater potential had been utilised by 1990 and this source of irrigation, in fact, formed the basis of private minor irrigation investment in the past. The area of major and minor irrigation solely falls on public sector and hence supports our non-substitutability argument. Our attempt to address the issues relating to Capital Formation in Indian agriculture using all-india as well as state level information pertaining to the states of Andhra Pradesh, Kerala, Rajasthan and Tamil Nadu suggest the need for fresh thinking at policy level. It is pertinent to note that at the all- India level and in most of the states covered by us, there has been a decline in the share of public sector in gross fixed capital formation in agriculture. However, the statistical evidence does not indicate the existence of substituability between public and private capital formation at the state level, though it holds good at the all India level. It is relevant to note that our state level findings do not corroborate with the all India level analysis. The state level results are in support of the complementarity or inducement effect hypothesis propounded by many other researchers. Therefore, it is not correct to generalise the all India picture. Though our study is only a pointer it emphasises the need for disaggregate analysis at the state level as the generalisation of all India level picture would result in erroneous policy formulations. In the light of our findings it is worth pointing out that the state government's policies in regard to expenditure on agriculture sector does not have an important role to influence the public sector capital formation in agriculture. It is evident that in the states covered by us there has been a declining trend in budgetary outlay on agriculture. The latter has declined both as a proportion of total revenue and capital budgets. Similarly the public expenditure as a proportion of total GDP has also declined. The falling share of sate government expenditures on agriculture and allied activities seems to be a dominant factor in determining the currently declining shares of public sectors in capital formation in these states. Partly the declining marginal efficiency of capital has also been responsible. There is, therefore, a need to step up public expenditure on agriculture and allied sectors in these states. At the same time, the decline in marginal efficiency of capital at the state level needs, in general, a reversal. It is, therefore, necessary to encourage efficient use of capital in agriculture by policy measures that help the farmers to adopt a better technology. It is in this context that the rise in prices of fertilisers and user charges for electricity 65

73 and canal water should be seen as steps in the right direction. Reducing price distortions through cost based pricing not only results in efficient use of resources but also helps in achieving more equitable distribution of resources such as water. Further, as indicated by above analysis, technology has played a major role in enhancing the productivity, income and private investment in agriculture. Moreover, in the post-reform era the agriculture sector has to compete in an Integrated world economy. To maintain a favourable terms of trade for agriculture a renewed impetus on agricultural research and development is necessary. This would require an increased public expenditure to encourage innovative research in the areas of dry farming and diversification of agriculture in rainfed areas to plantations, horticulture and dairy. This might help in boosting employment and income through fetching better international markets of Indian agricultural products (Mishra, 1997, Chand, 1995, Salethy, 1995). Thus, the private sector has been growing despite the above factors, namely, the decline in public sector capital formation and falling efficiency of capital. However, this does not suggest that entire onus can be left to private sector alone. Even with liberalisation in order to maintain selfsustaining growth in farmers' income as suggested by our analysis, it is necessary to manage favourable terms of trade for agriculture or provide policy support to enhance productivity by means of physical infrastructure and yield increasing technical knowhow and institutional credit for technology upgradation. Institutional credit has played and continues to play a significant role in private capital formation despite the financial reforms in the recent years. It is pertinent that the financial reform measures should not adversely affect the flow of term credit to agriculture. The rationalisation and recognisation of the existing agricultural financing institutions should thus aim at improving efficiency of the existing institutional structure which could mobilise rural savings to meet increasing credit needs of the agricultural and allied sectors in a competitive financial environment. In this regard, it may be pointed out that in order to promote capital formation institutional credit should be more targeted. In fact it was observed in a recent study (Mani, et. al, 1996) that despite the substantial increase in institutional credit in the recent years, the share of long term credit that is vital for capital formation, has remained low at percent. Besides, the availability of investment per hectare is much lower than the prescribed norms. Setting of enhanced targets in this regard would further augment the capital formation in agriculture. Despite an increased role and encouragement to private sector with liberalisation, the role of public investment has to be that of enhancing the 66

74 productive capacity of the resources for the society as a whole in an equitable manner. As long as equity remains one of the main policy objectives, the onus of majority of vulnerable population cannot be left to market forces. The increased social welfare cannot be achieved by leaving the responsibility entirely to private sector and therefore private investment cannot be a substitute for public investment. References Acharya, S.S. (1997a), "Input Subsidies in Indian Agriculture: Some Issues" in Vyas, V.S. and Bhagava, P. (eds.) Policies for Agricultural Development Rawat publications, Jaipur. Acharya, S.S. (1997b), "Agricultural Price Policy and Development: Some Facts and Emerging Issues" Presidential Address, 57th Annual Conference of Indian Society of Agricultural Economics, January 2-4, Thrissur. Banerjee, A (1996), "Dynamic Capital Formation in Agriculture and Financial Reform", Indian Journal of Agriculture Economics. Vol. 51, No. 4, pp Bhattacharya, B.B. and C.H. Hanumantha Rao (1988), "Agriculture-Industry Integration : Issues of Relative Prices and Growth in the Context of Public Investment", Presented in the Eighth World Economic Congress. New Delhi, December 1-5. Chakravarty, S. (1987) Development Planning: the Indian Experience. Clarendon Press, Oxford. Chand, R. (1995) Agricultural Diversification in Himachal Pradesh: Potentials and Prospects (mimeo). Institute of Economic Growth, New Delhi. Dhawan B.D. (1996) "Relationship between Public and Private Investments in Indian Agriculture with Special Reference to Public Canals", Indian Journal of Agricultural Economics. Vol. 51, No. 1-2, June, Dholakia, R.H. and Dholakia, B.H. (1993) "Growth of Total Factor Productivity in Indian Agriculture", Indian Economic Review. Vol XXVIII, No. 1. Gandhi, V.P. (1996), "Investment Behaviour in Indian Agriculture", Indian Journal Agricultural Economics. Vol. 51, No. 4, pp of Government of Andhra Pradesh (1992), Estimates of Gross Capital Formation in Andhra Pradesh to Directorate of Economics and Statistics, Hyderabad. Government of Kerala (1990), A Brochure on Gross Fixed Capital Formation in Kerala to Directorate of Economics and Statistics, Thiruvananthapuram. Government of Rajasthan ( ), Economic Review. Directorate of Economics and Statistics, Jaipur. Government of Rajasthan (1994), Estimates of Gross Fixed Capital Formation. Directorate of Economics and Statistics, Jaipur. Government of Rajasthan (1992), Statistical Abstract Directorate of Economics and Statistics, Jaipur. 67

75 Government of Kerala (1994), A Brochure on Gross Fixed Capital Formation in Kerala to Directorate of Economics and Statistics, Thiruvananthapuram. Gulati, A. and Bhide S. (1993) "Structural Adjustments and Agriculture", NCAER Working Paper No. 44, National Council of Applied Economic Research, New Delhi. Institute of Economic Growth - Delhi School of Economics Research Team (1994) "A New Econometric Model of India", Institute of Economic Growth, New Delhi. Johl, S.S. (undated), Restructuring Agricultural Sector for Growth and Productivity under New Economic Policy. A report prepared for the f\/linistry of Finance Government of India, New Delhi. Johl, S.S. (1995) "Agriculture Sector and New Economic Policy". Indian Journal of Agricultural Economics. Vol. L, No. 3 (Conference Number), July-September. Kahlon, A.S. and D.S. Tyagi (1980) "Inter-sectoral Terms of Trade in India" Economic and Political Weekly. (Review of Agriculture), December. Krishnamurthy, K. (1985), "Inflation and Growth: A Model for India" in K. Krishnamurthy and V.N. Pandit (eds.) f^acro Economic t^odelling of the Indian Economy: Studies in Inflation and Growth. Hindustan Publishing Corporation, Delhi. Krishnamurthy, K. (1992) "Inflation and Growth: A Model fof India", in K. Krishnamurthy and V.N. Pandit (eds.). Macro Economic Modelling of the Indian Economy: Studies in Inflation and Growth. Hindustan Publishing Corporation, Delhi. Kumar, A. Ganesh (1992), "Falling Agricultural Investments and its Consequences", Economic and Political Weekly. Vol. XXVII, No. 42, October 17. Kurien, N.J. (1987), "IRDP: How Relevant Is It?" Economic and Political Weekly. (Review of Agriculture). Vol. 22, No. 52, December 26. Mani, K.P., et. al. (1996), "Some Reflections on Capital Formation in Indian Agricuiture", Indian Journal of Agricultural Economics. Vol.. 51, No. 4, pp Mishra, V.N. and Hazell P.B.R. (1996) "Terms of Trade, Rural Poverty, Technology and Investment: The Indian Experience, to ", Economic and Political Weekly. Vol. XXXI, March 30, p. A-2-A.12. Mishra S.N. and Chand Ramesh (1995), "Public and Private Capital Formation in Indian Agriculture - Comments on Complimentarity Hypothesis", Economic and Political Weekly. Vol. XXX, No. 25, June 24. Mishra, S.N. (1997) "Agricultural Liberalisation and Development Strategy in Ninth Plan", Economic and Political Weekly. Vol. XXXII, March 29, A.19-A.25. Narayanan, N.S.S., K.S. Parikh and T.N. Srinivasan (1991), Agriculturf. Redistribution of Income Model. Allied Publishers, North Holland. Growth and National Council of Applied Economic Research (NCAER) (1995) "Development of Trade and Investment Blocks, the NCAER Macro Model for India", paper presented at the Conference on Research and Public Policy Contributions from India - Canada and Conference Board of Canada Joint Studies, February 23-24, Rajiv Gandhi Foundation, New Delhi. 68

76 Patnaik, Prabhat (1987), "Recent Growth Experience of the Indian Economy: Some Comments", Economic and Political Weeklv. Vol. L, No. 3 (Conference Number), July- September. Rao, H.C.H. (1995), "Liberalisation of Agriculture in India : Some Major Issues", Indian Journal of Agricultural Economics. Vol. L, No. 3 (Conference Number), July - September. Rao C.H. Hanumantha (1994), Agricultural Growth. Rural Povertv and Environmental Degradation in India. Oxford University Press, Delhi. Rath, Nilakantha (1989), "Agricultural Growth and Investment in India", Journal of Indian School of Political Economy. Vol. I, No. 1, January-June. Reddy, V.R. (1996) "Liberalisation and the Poor: Impact, Opportunities and Barriers", IDSJ Working Paper No. 65. Institute of Development Studies, Jaipur, April. Roy, Bunker (1996), "Right to information: Profile of Grass-root Struggle", Vol. XXXIV, No. 23, May 11. Mainstream. Saleth, R.M. (1995) Rural Non-farm Employment and Income in Tamil Nadu: A Quantitative Analysis at the Household Level, (mimeo), Institute of Economic Growth, New Delhi. Shetty, S.L. (1990), "Investment in Agriculture. Brief Review of Recent Trends", Economic and Political Weekly. Vol. XXV, Nos. 7 and 8, February Storm, S. (1993) f^acro Economic Considerations in the Choice of Agricultural Policy: A Study into Sectoral Independence with Reference to India. Avenbury, Aldershot, England. Vyas, V.S. (1994), "Agricultural Policies for the Nineties: Issues and Approaches", Economic and Political Weekly. Vol. 29, No. 26, June 25. World Bank (1991), India : 1991 Country Economic Memorandum. Vol. II. Agriculture: Challenges and Oooortunities. Agriculture Operation Division, India Department, Asia Region, Washington, D.C. U.S.A. 69

77 Appendix Table 1 : Capital Formation in Indian Economy Agriculture and Allied Sectors (Rs. Crores) GFCF CHST GCF GCFPUB GCFPVT a Contd... 70

78 Appendix Table 1 : Capital Formation in Indian Economy Mining, Manufacturing and Construction Sector (Rs. Crores) GFCF CHST GCF GCFPUB GCFPVT Contd 71

79 Appendix Table 1 Capital Formation in Indian Economy Services Sector, ^ (Rs. Crores) GFCF CHST GCF GCFPUB GCFPVT Contd 72

80 Appendix Table 1 Capital Formation in Indian Economy All Sectors, ^ (Rs. Crores) GFCF CHST GCF GCFPUB GCFPVT 19e Notes: GFCF = Gross Fixed Capital Formation, CHSTK = Change in Stocl<, GCF = Gross Capital Formation, GCFPUB = GCF in Public Sector, GCFPVT = GCF in Private Sector. Source: C.S.O., Various publications. 73

81 Appendix Table 2 : GDP by sectors (Absolute Values) (Rs. Crores) Agriculture Mining Mfg. & Construction Service Total GDP Source: C.S.O., Various Publications^ 74

82 Appendix Table 3 : Capital Formation In Agriculture (Three Yearly Moving Averages) Gross fixed Capital Change in Stocks Gross Capital Formation Gross Capital Formation Public Gross Capital Formation Private S l' Source: C.S.O., Various Publications. 75

83 Appendix Table 4 : Revenue Expenditure on Agriculture and Allied Activities in A.P., Rajasthan, Kerala and T.N. Years 1 Revenue Exp. on AAA A.P. Kerala Raj. T.N. Revenue A.P. Exp. as % to Total Govt. Exp. on AAA Kerala Raj. T.N , ,00 Source: RBI Bulletin on Cun-ency and Finance; Various Issues. Appendix Table 5 : Capital Expenditure on Agriculture and Allied Activities in A.P., Rajasthan, Kerala and T.N. Years A.P. Capital Exp. Kerala on AAA Raj. T.N. Capital Exp. as % to Total Exp. on AAA A.P. Kerala Raj. Govt. T.N , ^ > , , : iQ ,K sm , ^ Source: Same as Appendix Table 5. 76

84 Appendix Table 6 : Index Numbers for Various Measures of Terms of Trade, Public and Private Investment and Rural Poverty Year Barter Terms Gross Terms Index of of Trade of Trade Income Cfiange , i9s , , t : \9ez-B , Source: Mishra and Hazell (1996). 77

85 Annexure I : Methodology of Estimation of Gross Fixed Capital Formation at State Level 1. METHODOLOGY OF ESTIMATION: KERALA' Tfie commodities wfiicfi constitute fixed capital formation value at purchasers price wfiich covers all costs connected with the acquisition and installation of the items of assets. Indirect outlays for acquisition of the assets in the form of advertising etc., are excluded. In the case of fixed assets produced on, own account, these are valued at production cost including imputed values in respect of own account labour employed. Estimates of gross fixed capital formation can be prepared (1) by type of assets, (2) by industry of use. i) Type of assets: Type of assets consists of (a) construction (b) machinery and equipment and change in stock. The commodity flow approach is followed for construction works undertaken with the use of specified construction material and also for machinery and equipment. (a) Construction: The value at site in the accounting year of five basic construction input materials, viz., cement, iron and steel products, timber and round wood, bricks and tiles and permanent fixtures and fittings are considered under construction. (b) Machinery and equipment: The various items of machinery and equipment are classified into (i) (ii) (iii) (iv) Capital goods Parts of capital goods Partly capital goods Parts of partly capital goods The total of (1) and specified percentage of (ii) to (iv) on the basis of ASI, data, are taken as capital formation. The estimates of gross domestic fixed capital formation in consiruction and machinery and equipment are aggregated to arrive at the estimates of gross domestic fixed capital formation by type of assets. However, due to paucity of data, estimation of gross fixed capital formation by type of assets is attempted only in the public (State Government) sector in this report. 1. Source: Directorate of Economics and Statistics, Thiruvananthapuram. 78

86 ii) Industry of use: The expenditure approach is primarily followed for estimation of gross fixed capital formation (GFCF) by industry of use. The whole economy is classified by user Industries broadly in terms of the industrial classification used for measurement of net domestic product. Each industrial activity is further divided into public and private sectors whenever relevant. The private sector under each activity has been further divided into organised and unorganised sectors whenever data are available. The public sector is divided into administrative departments of central and state Government and enterprises, both departmental and non departmental. iii) Agriculture including livestock: (a) Agriculture proper: The expenditure of GFCF in State Government Departmental enterprises have been culled out from the state government budget document and of the non-departmental enterprises from the balance sheet or annual reports of the enterprises. The source of information of GFCF in the house hold sector of agriculture is based on the expenditure on farm business available in AIDIS. The base year estimates of gross fixed capital formation on the reporting households in respect of rural and urban sectors are obtained separately from this report. The latest two census provide the number of rural and urban households separately using the geometric growth rate. The number of households during the year to have been estimated. The per household gross fixed capital formation for the base year has been arrived at by using the total gross fixed capital formation and the number of households, as estimated from the survey results separately for rural and urban sectors. By making use of the per household gross fixed capital formation thus obtained and the projected numbers of households from the census results, gross fixed capital formation in farm business has been estimated both for rural and urban sectors for the years from to at constant prices. The GFCF at current price has been obtained by using the index of average daily wages of unskilled labour in construction sector. The GFCF at current price, thus obtained for rural and urban sectors have been finally aggregated to obtain the GFCF from farm business. 79

87 b) Livestock: For the estimates of agriculture proper the value of breeding stock, drought animals, dairy cattle etc. which form part of capital formation has been added. As the annual data on livestock population are not available, the different categories of livestock as given in the quinquennial livestock census have been considered and the number of each category estimated using geometric growth rates. The data regarding bullocks and bulls over three years not in use, cows over 3 years not in use, female goats of one year and above not in milk etc., are excluded from the purview of capital formation. The cattle, male over three years, cows in milk, buffaloes, male over three years, she buffaloes in milk, goats-female of one year and over in milk, males one year and over (breeding) as provided in the census have been considered to form part of capital formation of livestock component. The increment of each category every year is estimated and then evaluated using the average price of the category each year. Only 4% of the male goats have been considered to be the capital formation component of this category. iv) Forestry and Logging : The government of Kerala have taken over the private forests, of the state by an Act. Therefore, the capital expenditure on forest preservation, extension etc., of the state is the contribution of the public sector only. The capital formation component of this sub-sector is obtained from the analysis of the State Government Budget. v) Fishing : The livestock census of 1982 and 1987 provide information on the number of different categories of mechanized and non-mechanized boats and other major fishing boats and equipment like fishing gears and catamarans engaged in fishing activity. The number of fishing boats and equipments during the years to has been estimated using the geometric growth rate of the inter census years and then the increment during each year, is worked out. The average price of the different categories of boats and equipments each year collected from the state department of fisheries have been used to evaluate the increment of boats each year. The gross fixed capital formation in Fisheries sector is obtained at current prices. 80