Getting the Investment-Subsidy Mix Right in Indian Agriculture

Corporate investment in agriculture is only 3% of the total investment. This needs to change in the years ahead.

Investment, rather than subsidies, is the major theme of Budget 2021-22. For the agriculture sector also, there has been a reduction in allocations under several schemes. It is possible that investment in agriculture will also get more attention from the government after the farmers’ protest against farm laws is resolved.

While economists may be divided on key agricultural policies including the three contentious farm laws, the principle of minimum support price (MSP) and input subsidies there is a general consensus on the need to mobilise adequate investment into agriculture and allied sectors for achieving higher growth. This will also help in increasing farmer income.

Economic growth is mainly driven by natural resources, labour, capital formation (investment), technological development and exports. While Indian agriculture has surplus labour, it is short of capital and savings, which in tandem with the erratic weather that constricts its growth.

In the last few years, some states and the centre have provided direct income support to farmers. There is a view that it has come at the cost of investment in the sector. While such support is essential for farmers to meet their input requirements in the short run, investment in the sector is needed to spur growth in the long run.

Also read: Reinventing Agriculture in the Time of COVID-19

Trends in investments 

There has been a nearly nine times increase in real capital formation in agriculture, mainly in major-medium-minor irrigation projects. This has gone from an average annual of Rs 31,400 crore during 1960-69 to Rs 158,300 crore during 2000-09, and then to Rs 263,900 crore during 2010-17 at 2011-12 prices.

The share of public sector investment in total investment has, however, steadily declined. It was as high as 33.6% during the 1960s but has come down to 15% during 2010-17 (average Rs 40,100 crore per annum at 2011-12 price).

However, corporate investment in agriculture is only 3% of the total. Private investment, predominantly by farm households is 82% and it holds the major share of total investment in agriculture and allied activities.

The three farm laws ostensibly seek to correct this imbalance.

Since the 1970s, the agriculture sector recorded the maximum rate of growth in capital formation (7.89% per annum). During the 2000 to 2010, almost every state increased budgetary outlays for this sector, not only for asset creation but also for distribution of input subsidies to farmers.

Concerted efforts have been made in the last decade towards completion of major and medium irrigation projects, construction of rural roads and increased flow of institutional credit to farmers. Public capital formation also recorded the highest growth at 11.28% per annum during 2000-10. Similarly, private capital formation also grew higher at 7.22%, mainly on purchase of tractors, livestock and farm machinery.

A farmer plants rice saplings in a paddy field against the backdrop of pre-monsoon clouds in Amritsar June 13, 2013. Photo: Reuters/Munish Sharma/Files

Higher injection of capital by the government as well as farmers during the 2000s helped trigger growth. However, in the subsequent seven years (2010-17), we again witnessed a slowdown in the growth in public investment to 6.68% and a negative growth in private investment to – 0.76% per annum.

Going forward, it is feared that low investment by the government and its declining share in total investment, may not be fully compensated by corporate investment. Farmers may also be dissuaded from investing, owing to the ‘crowding in’ effect of public investment on private investment in agriculture.

The investment done by the government in ‘agriculture and allied activities’, has been very low at Rs 10,700 crore per year during 2010-17 at 2011-12 prices.

In the Union Budget, there are 12 heads that fall under agriculture. These include crop husbandry, animal husbandry, soil and water conservation, dairy development, food, storage and warehousing, research and education, plantation, fishery, forestry and wildlife, financial institutions, and other agriculture programmes. Among these, government spending is the highest in food storage and warehousing may be due to procurement of food grains and the stock management.

Also read: ‘Empty Budget’: Farmers’ Unions Allege Centre Gave Least Priority to Agriculture

Spending on investments versus subsidies 

As per the National Accounts Statistics, the total investments in irrigation and agriculture (average 2010-17 at Rs. 40,100 crore and 10,700 crore) is almost half of the amount spent by the government on subsidies in agriculture. In the same period, the average annual subsidies given to agriculture and allied activities were Rs 96,400 crore at 2011-12 prices.

This would be on account of subsidies on fertilisers, irrigation and power, though the details are not given in the National Account Statistics. The share of subsidy on agriculture and allied activities out of total subsidy of Rs 3.73 lakh crore, for all economic activities is 25.8%. It is somewhat close to the subsidy provided to mining, manufacturing and construction sectors and lower than that given to ‘other economic activities’ at Rs 1.07 lakh crore.

Representative image of farming in Assam. Credit: PTI

Reputed economist Ashok Gulati and others in the book titled Supporting Indian Farms the Smart Way have estimated that the subsidy on fertilisers, credit, crop insurance, irrigation and power in 2013-14 was Rs 1.36 lakh crore at 2011-12 prices. This is higher than the estimates of National Accounts Statistics.

If the government is serious about doubling farm income in the next few years, it must increase investment in the agriculture sector, as recommended by the Committee on Doubling Farmers’ Income. In spite of recent farm legislations, growth in the sector is critical for the following reasons:

(a) agriculture employs approximately 42% of workforce,

(b) about 70% of rural households depend directly or indirectly on agriculture for their livelihood,

(c) there are growing risks in farming due to climate change and market volatility,

(d) foodgrain yield levels have been stagnating in original green revolution states of Uttar Pradesh, Punjab and Haryana. The open market prices at the time of major arrival of crops in markets have mostly been unremunerative.

It is clear that public investment in agriculture and irrigation is low and higher expenditure on subsidies is not quite a substitute. Low capital formation in irrigation and agriculture sectors will certainly affect agriculture growth in future. So, the government has to decide which of the two investment through higher government spending or subsidies will facilitate higher agricultural growth.

It is true that there are several studies which confirm that input subsidies have supported farmers and enabled them to increase productivity of crops. Yet, in due course, the marginal returns from additional public expenditure on various types of input subsidies (though positive) show lower returns than that from various investments in rural areas.

So, what should the road map for agriculture look like?

First, public investment in agriculture and irrigation must increase at 14% per annum as proposed by the Ashok Dalwai Committee. In addition, the capital use efficiency of the existing major-medium irrigation projects must improve.

Also read: Budget 2021: The Winners, Losers and the Largely Unaffected

Second, each state must prioritise public expenditure, keeping in view the type of investment and the subsidy that will enable higher productivity gains. Research shows that the low per capita income states, largely lagging in agricultural growth and having dominance of small holders, will get higher payoffs from additional public investment in irrigation and in power and irrigation subsidies.

In contrast, higher per capita states may benefit more from additional investments in education, energy and health sectors. There is only one type of investment, research and development (R&D), which can fetch higher returns from additional spending across the states, rather more in the poorer states, and hence, be accorded the high priority. India spends barely 0.5% of national income on R&D in agriculture, which is very low compared to about 3% in the developed countries.

Third, R&D in agriculture and allied sectors has largely been in the public domain. The government must increase the outlay of agriculture R&D, but it also must encourage private R&D to inject adequate capital. Private capital can also be encouraged in certain rural projects such as in solar power, weather stations, digital information on rainfall, soil moisture and irrigation requirements, etc.

A farmer uses cattle to till his land. Photo: Ananth BS/Wikimedia Commons CC BY 2.0

Fourth, there is also a critical need to intensify research on yield augmenting and water conserving technologies. As is clear from the ongoing protest, farmers in Punjab, Haryana and Uttar Pradesh are hesitant to diversify from cultivation of paddy as the return from alternative crops are lower. Wheat-paddy rotation along with sugarcane has put enormous stress on the groundwater resources in northwest India. Investment in research in alternative crops and water saving technologies is urgently required.

Lastly, the Punjab government has started a scheme – ‘paani bachao paisa kamao’ –under which monetary benefit is given for using less energy. This initiative can incentivise energy conservation and help in restricting depletion of groundwater. Haryana is also giving a grant of Rs 7,000 per acre to paddy farmers for diversifying to maize.

The Union Budget of 2021-22 has levied a cess on several items for creation of Agriculture Infrastructure and Development Cess (AIDC). It is estimated that an amount of Rs 30,000 crore will be collected every year as the cess. If the government actually invests this amount in agricultural infrastructure, the ratio of investment to subsidies is likely to improve.

Seema Bathla is a professor at the Centre for the Study of Regional Development, Jawaharlal Nehru University. Siraj Hussain, former Union secretary of the Ministry of Food Processing Industries, is currently a visiting senior fellow at the Indian Council for Research on International Economic Relations (ICRIER), New Delhi.