The state of capital formation in agriculture has been a subject of debate. Here are some data points: Gross capital formation in agriculture (GCFA) has been decelerating since 2013-14. The GCFA, as a percentage of agriculture and allied sectors’ GDP, has come down from 17.5 per cent in the three years ending 2013-14, to 15.7 per cent in the three years ending 2020-21. Although this is in keeping with the overall trend of deceleration in capital formation in the economy as a whole, the rate of deceleration in agriculture is steeper. The compound annual growth rate (CAGR) of both GCF and GCFA was 9 per cent during the period 2004-05 to 2013-14. But the CAGR of the GCFA has dropped sharply to 3 per cent in the period from 2013-14 to 2020-21 while that of GCF has recorded a slightly higher rate of 5 percent. The GCFA has crucial implications for future growth of agriculture and, therefore, it is imperative to understand the possible reasons for this deceleration.

The GCFA has two components — gross fixed capital formation (GFCF) and changes in inventories and stocks (CIS). In this analysis, we mainly look at the major component, which is GFCF. The GFCF in agriculture is reported for public sector and private sector (private corporate and household sector) separately. The GFCF in the public sector is mainly on account of irrigation projects. Capital formation in the private corporate sector is related mainly to plantation activities and is estimated by collecting the data from Tea, Coffee and Rubber Boards, etc.

In the private (household) sector, capital formation is on account of construction activities such as digging of wells/tube-wells, construction of bunds and farmhouses, etc., which is estimated by using the results of the All India Debt and Investment Survey (AIDIS) conducted every 10 years by the RBI. For the intervening years, the estimates are prepared by projecting the base year AIDIS results by using indices of rural construction, Annual Survey of Industries and Indian Livestock Censuses (ILC), etc. For forestry and fisheries, the capital formation is compiled from the Budget documents and results of ILC (using projections for inter-census years).

There are several features of the current system of compilation of statistics on capital formation in agriculture that are worth noting. The expenditure under the head of public expenditure is predominantly related to irrigation. Over 90 per cent of the reported investments under this head relate to investments by the State governments in major and medium irrigation projects. Expenditures made by the ministries of agriculture and rural development on crop husbandry, soil and water conservation, preservation of forestry and other agricultural programmes leading to tangible or non-tangible assets, is not accounted under capital formation in agriculture,, but included as capital formation under Public Administration.

Public investments in rural electrification and power supplied to agriculture are not included under agriculture but are covered under the power sector. Similarly, investments in rural roads are not included under agriculture but they form a part of the investments in the roads sector. Investments in storage and in agricultural research are also not reflected under agriculture. Most of the industrial sectors contribute directly or indirectly to the development of agriculture. For example, fertiliser production is meant only for use in agriculture. Pesticide is also mostly used in agriculture. However, capital formation in these sectors is categorised under the manufacturing sector.

Supply of electricity in the rural areas, rural roads, godowns, cold storages and agricultural markets facilitate and promote the growth of agriculture. A considerable proportion of the goods traffic on road and rails is on account of transporting agricultural commodities. The rural cooperative banks and commercial banks lend credit to agriculture. Agricultural education and research is exclusively meant for agriculture. Increase in the capital formation in all these activities helps in the growth of agriculture. However, currently the investments made under these heads are not categorised under agriculture or allied sectors.

For example, expenditure under electricity is included in the expenditure on ‘Electricity, gas, water supply & other utility services’. Similarly expenditures on rural roads, godowns, cold storages and agricultural markets (‘Construction’); rail and road infrastructure (‘Transport, storage, communication’) and agricultural credit (‘Financial services’) are included in the expenditures under sectors indicated in the parentheses.

Combination of factors

In this backdrop, the present deceleration in capital formation in agriculture could be due to a combination of factors. First, given the features of the current statistical system discussed above, the deceleration in public investment could be due to a compositional shift away from irrigation.

As already discussed, a predominant part of public investment in agriculture relates to irrigation in major and medium irrigation projects. The investments on these projects may have slowed in the last 10 years with a shift in focus to micro irrigation.

At the same time, the investments in the sectors not included in GCFA but are important for agriculture (such as crop husbandry, soil and water conservation, social forestry and other agricultural programmes; rural electrification and power; rural roads; storage; agricultural research; fertilizer and pesticide industries; agricultural markets; transportation and financial services for agriculture) may have accelerated. This compositional shift in investment needs to be analysed in detail to get a better understanding of the deceleration.

Second, the Rashtriya Krishi Vikas Yojana (RKVY) is an important programme which was instrumental in spurring investments in agriculture by the States since its inception in 2007. Before 2014, since the entire funding was by the Union Government, it was mandatory for the States to maintain a minimum spending on agriculture every year, as a percentage of State’s total spending.

This minimum threshold was equal to the average of the previous three years. However since 2014, as the States were meeting 40 per cent of the expenditure of RKVY, this requirement has been relaxed. This has diluted the incentive structure for States to keep investing in agriculture year after year. This, in turn, may have adversely affected the capital formation in agriculture after 2013-14.

As for private investment, more than 80 per cent of the investment in agriculture is by the private sector (Agricultural Statistics at a Glance, GoI). Terms of trade in agriculture (vis-à-vis non-agriculture, ToT) is an important determinant of the private investment in agriculture. ToT reflect the prices received by farmers and the ToT has decelerated substantially in the recent period. This deceleration in ToT may have also dampened the private investment in agriculture.

The writer is Professor of Economics, AERU, Institute of Economic Growth

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