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Status of Agriculture in India

Status of Agriculture in India

This paper looks at trends in the growth of agricultural production in India over the last one and a half decades, identifies factors that affect agricultural growth and analyses constraints that have affected growth in the sector. On this basis, projections have been made on the future growth of the sector in the medium term, coterminous with the Eleventh Five-Year Plan. All-India level and state-wise analyses highlight the role of public investment/ government expenditure on agriculture as being the crucial determinant in stepping up the rate of growth of agricultural production. Given other factors, a consistent increase in public investment to 15 per cent per annum should lead to agricultural growth of 4 per cent, which is concomitant with the projected growth rate in the Eleventh Plan. The other factors that are important for a higher agricultural growth are fertiliser usage and agricultural prices.

Status of Agriculture in India

Trends and Prospects

This paper looks at trends in the growth of agricultural production in India over the last one and a half decades, identifies factors that affect agricultural growth and analyses constraints that have affected growth in the sector. On this basis, projections have been made on the future growth of the sector in the medium term, coterminous with the Eleventh Five-Year Plan. All-India level and state-wise analyses highlight the role of public investment/ government expenditure on agriculture as being the crucial determinant in stepping up the rate of growth of agricultural production. Given other factors, a consistent increase in public investment to 15 per cent per annum should lead to agricultural growth of 4 per cent, which is concomitant with the projected growth rate in the Eleventh Plan. The other factors that are important for a higher agricultural growth are fertiliser usage and agricultural prices.

ARCHANA S MATHUR, SURAJIT DAS, SUBHALAKSHMI SIRCAR

I Introduction

A
griculture, in most developing economies, is the core sector providing a livelihood to a significant proportion of the population, especially in rural areas. Since this sector faces the largest brunt of underemployment, unemployment and poverty, a growing agriculture and allied sector is expected to contribute vastly to overall growth and poverty alleviation. Increasing the productive capacity of agriculture through higher productivity has been an important goal in developing countries. It has been suggested that due to limited scope for expansion of arable land there is a need to increase yields to their technically highest levels through appropriate investment in basic infrastructure, human development, and research and extension services [Chavas 2006, Zepeda 2006].

Some of these issues are very relevant for a country like India where agriculture continues to be the core sector of the economy, on which over 60 per cent of our population is dependent for their livelihood. There has been a consistent decline in growth of the agriculture sector since 1990 onwards as compared to the 1980s. It was 4 per cent per annum during the 1980s on an average, which came down to 3.2 per cent during the 1990s and 2 per cent in the last five years. Growth in real value of foodgrain production has been an abysmal -3 per cent during the 1990s and -5 per cent during 1999-2000 to 2002-03, with minor improvements estimated during 2003-04. This has serious implications on the nutritional status and food security of our country.

The present study examines trends in growth of agricultural production in India over the last one and a half decades; identifies factors that affect agricultural growth and analyses constraints that have affected growth in the sector. The vast inter-regional variations in growth across the country emanating from area-specific factors have also been examined. On this basis projections have been made on the future growth of this sector in the medium term, co-terminus with the Eleventh Five-Year Plan.

The next section discusses trends in agriculture in the all-India context. Section III focuses on the state-wise trends in agriculture. The following section concentrates on the sources of agricultural growth. Section V discusses trends in government investment and subsidy and their effectiveness in the growth of agriculture; Section VI analyses state-wise government expenditure and its role in agriculture. Section VII focuses on the determinants of agricultural production in India; Section VIII on projected growth in agricultural production followed by Section IX at the level of states. Section X analyses the projected growth rate of agricultural output at constant prices at the state level. Finally, Section XI presents concluding remarks of the study.

II All-India Trends in Agriculture

There has been a decline in the share of the agricultural sector in the overall gross domestic product (GDP), mainly on account of the high growth in services sector. In the last decade, the share of agriculture in GDP was 29.76 per cent during 1993-94 to 1995-96 and this fell to 23.15 per cent during the period 2000-01 to 2002-03. The compound average per annum growth rate of agriculture and allied sector was around 4 per cent during the 1980s as can be seen in Figure 1. During the 1990s, this has come down to three and a half per cent during the first-half and further to 3 per cent during the latter half of 1990s. In the last five years this sector has registered only 2 per cent average growth rate at 1993-94 (constant) prices. If we see the relation between GDP and agriculture during 1993-94 to 2002-03 it is observed that with 1 unit increase in GDP, agriculture grows by only 0.1 units (bivariate regression coefficient). The GDP elasticity of agriculture is only 0.43 during 2000-01 to 2002-03.

As against the above overall trend in the value of agricultural output, it is important to also look at the trend in real value of foodgrains. Using the WPI-based inflation in foodgrains and taking 1993-94 as base year, real values of foodgrain production have been calculated, as may be seen in Figure 2. It may be observed that the value of foodgrain came down consistently from Rs 88,081 crore in 1990-91 to Rs 51,565 crore in 2002-03. However, provisional estimates show some recovery in 2003-04. Balakrishnan (2000) had also shown that during the 1980s the growth rates of both foodgrain as well as non-food crops were

3.54 per cent and 4.84 per cent per annum respectively, which came down to 1.66 per cent and 2.36 per cent during the 1990s.

Figure 1: Compound Average Growth Rate of Agriculture and

Allied Sector in India

Growth Rate (in per cent)

4.5

4.077

3.857

4

3.567

3.5

2.964 3

2.5

2.026 2

1980-81 to 1985-86 to 1990-91 to 1995-96 to 2000-01 to 1984-85 1989-90 1994-95 1999-2000 2004-05

Source:Central Statistical Organisation (CSO).

If we look at the growth of yields per hectare for foodgrain, non-foodgrain and total crops as a whole, as in Figure 3, we see that growth rates have come down during the 1990s and the firsthalf of the current decade as compared to the 1980s. During the second-half of the 1990s, the growth in foodgrain yield revived but, again came down in the recent past. The growth of yield of non-food crops came down drastically during the second-half of the 1990s because of which the growth in the overall agricultural yield fell down. However there has been some improvement in the yield of non-food crops in the recent period with consequent impact on overall agricultural yields.

It is evident from Table 1 that the yield of different crops in our county is below the world average except for wheat and sugarcane. There is, therefore, scope to increase the productivity in our country with the application of the latest available technology.

C H H Rao (2005a) analysed agricultural growth from the first decade of the plan period and suggested the continued need for provision of irrigation facilities, strengthening of extension services, developing biotechnologically improved seeds along with adequate supply of institutional credit to raise farm productivity and profitability.

III State-wise Trends in Agriculture

While there has been decline in overall agricultural growth, as seen above, there are considerable inter-regional variations across the country. With regard to the period 1993 to 2003, the state-wise analysis shows wide variations in growth from 28 per cent to –19 per cent taking the first three years and last three years, viz, 1993-96 and 2000-03. The major 15 states in India comprising all general category states, excluding Goa and including Assam have been considered for the present analysis.

Figure 4 shows that the state of West Bengal registered the maximum growth of 28.28 per cent during this period followed by Bihar (with Jharkhand) 28.19 per cent, seen at 1993-94 (constant) prices. Apart from these two states, Kerala and Andhra Pradesh have shown growth rates higher than all-India average of 16.95 per cent growth in agriculture. If we consider the 15 states’ average then along with four states mentioned above, Punjab, Madhya Pradesh, Uttar Pradesh and Haryana lie above the average of 11.28 per cent growth rate. States like Gujarat, Maharashtra, Orissa and Karnataka have registered negative growth rate in agriculture (at constant 1993-94 prices) during this period.

Looking further at state-wise trends on foodgrain production during the same period, it is interesting to note that while West Bengal again registers high growth rates along with Haryana and some others, more importantly a number of fast growing states have overall recorded declining growth rates in foodgrain production, as may be seen in Figure 5. With the horizontal axis

Figure 2: Trend in Real Value of (93-94 Prices) Foodgrains

(Rs crore)

90000

85000

80000

75000

70000

65000

60000

55000

50000

set at all 12 states’ average growth rate of 2.58 per cent, the five major states, viz, Madhya Pradesh, Tamil Nadu, Gujarat, Karnataka and Maharashtra have not only registered growth rates below average but also have actually registered negative growth rates in foodgrain during this period.

IV Sources of Agricultural Growth

There have been a large number of studies examining the factors that have contributed to the growth of agriculture in India. Bhatia (1999) established a strong relationship between rural infrastructural development and level of per hectare yield of foodgrain as also of the value of output from agriculture. Bhattarai and Narayanamoorthy (2003) have empirically shown that improvement in irrigation and rural literacy are the two most important factors for agricultural growth in India. Mahendra Dev (2002) argued that there is a greater need for public investment in agriculture, irrigation, credit availability, better marketing of agricultural products, research and development (R and D) along with adequate pricing and other incentives for private investment that would help revive agricultural growth. Similarly Sahu and Rajasekhar (2005) emphasised the importance of administered allocation of credit to the priority sector at concessional interest rates for agriculture.

Dhar and Kallumal (2004) suggested that throughout the 1990s, the share of agriculture in gross capital formation (at constant prices) has remained in single digits, which explains the slackening of its growth momentum during the past decade. Gulati and Bathla (2001) observed that there has been an increasing role played by private sector investment in agriculture over time while there is a decline in public sector capital formation in the sector. Public sector investment along with terms of trade has an inducement effect on private sector capital formation. Desai (2002) suggested that government expenditure should be focused on agricultural R and D, education and extension services, rural electricity, roads and marketing, irrigation and watershed development, etc. Reddy and Reddy (2005) emphasised that there is a need for devolution of powers to water users associations (WUAs) for important functions like assessment, collection of water charges, sanctioning of works, etc.

Table 1: Yield of Some Selected Commodities, 2002

=-2 F= –2662t+91373 R2 = 0.8517

1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002-91 92 93 94 95 96 97 98 99 2000 01 02 03

Commodity (Country) Highest World India
Rice/paddy (Egypt) 9135 3916 2915
Wheat (UK) 8043 2720 2770
Maize (Italy) 9560 4343 1705
Sugar cane (Egypt) 119893 65802 68049
Groundnut (China) 2986 1381 794

Source: Economic Survey 2005-06.

Figure 3: Yields of Food, Non-Food and Total Crops: 1980-81 to 2004-05

1980-81 to 1984-85 1985-86 to 1989-90 1990-91 to 1994-95 1995-96 to 1999-2000 2000-01 to 2004-05 Period

0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 Growth (in per cent)

Food

Non-food

Total

Source:Handbook of Statistics 2004-05, RBI.

Figure 4: State-wise Agricultural Growth at 1993-94 Prices during 1993-96 and 2000-03

33.84

28.28 28.19

25.10

19.63

22.56

5.58 2.90 1.48 -6.03 -7.94 -9.40 -18.59 GujaratOrissaKeralaAll 15StatesMadhyaPradesh

Growth (in per cent)

15.82 All 15 States' Average 11.28 per cent

14.29 14.06

11.86 11.28

11.28

0.00

-11.28

-22.56

WestBengalBihar

KarnatakaAndhraPradesh

PunjabMaharashtraUttar

PradeshHaryanaRajasthanAssamTamil Nadu

Source:Central Statistical Organisation (CSO).

C H H Rao (2005b) compared the factors, which gave an impetus to growth of agriculture in some east Asian countries that have achieved higher agricultural growth than India. India is lagging behind them in terms of irrigation, rural electrification, rural roads apart from land reform and redistribution measures as well as human resource development. It is suggested that public policy should focus on development of infrastructure in the relatively less developed regions, support agricultural research and extension and skill formation.

Some empirical studies examining agricultural growth by Velazco (2006) for Peru; Odhiambo and Nzuma (2004) for Kenya and Lezin and WEI Long-bao (2005) in the context of China have explained important determinants that contribute to factor productivity growth in agriculture. It has been suggested that labour, capital, land, technological improvements are the major positive contributors for agricultural growth in China. For Peru, public investment, favourable expected prices, weather conditions are prerequisites for private investment and agricultural growth. For Kenya, it is the government expenditure in the form of expenditure on research and extension, etc, that is the key factor behind growth in total factor productivity growth (TFPG).

An important factor suggested in these studies which has an impact on demand for agricultural commodities is the prices for agricultural goods. If we look at the overall trend of agricultural deflator, as a proxy of demand for agricultural commodities, it may be observed that the growth in agricultural prices has come down steadily since 1991, although the agricultural deflator has an upward trend (Figure 6). This is expected to have had a consequential positive impact on output.

The above studies emphasise the importance of different factors that have impacted growth of agriculture in India and other developing counties. In this context, it is interesting to look at the contribution of government expenditure on agricultural production in India before attempting to forecast future agricultural growth.

V Government Investment and Subsidy

From the above analysis, it is evident that government expenditure in agriculture, rural development and related areas is very important for agricultural growth in India. Government expenditure primarily in the form of public investment and subsidy for inputs has been varying as per priorities identified by successive plans. Various recent studies have shown that stagnation in government expenditure is one of the reasons for agricultural slow-down in India.

The major components of government expenditure include capital formation in and for agriculture, apart from agricultural subsidies. If we look at the period 1993-94 to 2002-03, it is observed that at the all-India level, if government expenditure is increased by 1 unit, then value of agricultural output increased by 104 units (at 1993-94 prices). The government expenditure

Figure 5: State-wise Growth of Foodgrains at 1993-94 Prices during 1993-96 to 2000-03

18.38

Growth (per cent)

15.00

5.00

-5.00 -15.00 -25.00 -35.00 -45.00

16.89 16.87 14.36 11.57 6.49 3.90 -9.42 -11.31 -24.50 -25.00 -43.97 HaryanaWestBengalPunjabAndhraPradeshRajasthanKeralaTamil NaduGujaratKarnatakaMaharashtraMadhyaPradeshUttarPradesh

Note:Value of foodgrain deflated by respective state agricultural deflators. Source:Central Statistical Organisation (CSO).

Figure 6: Trends in Agricultural Prices since 1990-91

y = -0.8296x + 14.371 R2 = 0.6073 0.00 0.50 1.00 1.50 2.00 Values 0 5 10 15 20

1990-911991-921992-931993-941994-951995-961996-971997-981998-99

1999

20002000-012001-02

2002-03

2003

04RE

200405BE

Agricultural deflator Growth in agricultural prices Linear (growth in agricultural prices)

Source:Calculated from Central Statistical Organisation ( CSO) database.

elasticity of agriculture is almost unitary (0.98) during 2001-03. It has been suggested that there has been decline in growth of government expenditure in agriculture and that has contributed to decline in growth of the sector. During this period there has been limited infrastructure investment while certain subsidies, though not all, have declined. It is important to look at some of these trends.

It may be seen from Table 2 that fertiliser subsidy in nominal terms has come down after 2000-01 by 20.18 per cent. Similarly, the electricity subsidy came down by 21.28 per cent in 2002-03. It is even lower than the nominal electricity subsidy of 1996-97. Irrigation subsidy came down in 2001-02 from 2000-01 level, however it has increased again during 2002-03. Other subsidies were highest during 1996-97 and this has almost halved in the last three years as compared to 1999-2000 level. Total subsidy had also come down during 2002-03.

Rao and Gulati (2005) showed that public sector capital formation in agriculture as a proportion of total capital formation in agriculture declined in the recent past as compared to the 1980s. The authors emphasise the need to reverse this trend and increase public investment in agriculture so as to be able to increase the growth in the sector. In 2003-04, this constitutes only 23.56 per cent of total agricultural investment at constant prices.

The detailed trend of gross fixed capital formation (GFCF) in the agricultural sector in India shows that the proportion of government GFCF has declined steadily over time as compared to private GFCF (Table 3). The proportion of public investment to total investment in agriculture at constant prices was 32.3 per cent during 1993-94, which has come down to 23.6 per cent during 2003-04. During 1999-2000 to 2002-03 both total and private investment in agriculture were stagnant. Public investment in agriculture at constant prices has come down since 1994-95, a trend that continued till 2000-01 although this improved somewhat in subsequent years.

If we compare the gross capital formation in agriculture and allied sector as a proportion of agricultural GDP with that of the whole economy, we see from Table 4 that it is 24.4 per cent on an average during the last four years whereas for agriculture the average GFCF is 7.3 per cent only. Public sector contribution in agricultural investment as a proportion to agricultural GDP is only 1.9 per cent as compared to 5.4 per cent by private sector. Figure 7 depicts the trend in public, private and total GFCF in agriculture at constant prices.

While examining government expenditure for agriculture, it is important to look at the expenditure on agriculture and allied sector along with power irrigation and flood control, rural development and fertiliser subsidy. Expenditure on agriculture and allied services include crop husbandry, soil and water conservation, animal husbandry, dairy development, food storage and warehousing (excluding food subsidy), rural

Figure 7: Gross Fixed Capital Formation for Agriculture atConstant Prices (22.6 per cent in 2001-02, 24.8 per cent in 2002-03 and 26.3 per cent in 2003-04) of GDP. VI Interstate Variation in Agriculture andGovernment Expenditure In order to examine the inter-regional variations in agricultural 0 5000 10000 15000 20000 25000 30000 (Rupees crore) 1993-941994-951995-961996-971997-981998-991999-002000-012001-022002-032003-04*Year

growth, the relation of government expenditure in 15 major states

was examined with the trend of gross state domestic product (GSDP), value of agriculture and foodgrain during 1993-94 to the latest available in 2002-03. The state-wise growth rates of

GFCF Public ----Private

both overall agriculture and foodgrain are seen by taking the

Source: Agricultural Statistics at a Glance, 2005.

three years average of first three years (1993-94 to 1995-96) to

Figure 8: Trend of Government Expenditure at 1993-94Prices for Agriculture the average of last three years (2000-01 to 2002-03) and then estimating the change. The real government expenditure on
Table 2: Structure of Agricultural Subsidy in India(at Current Prices) (Rs crore) Year Fertiliser Electricity Irrigation Others Total Subsidy 1993-94 4562 2400 5872 1235 14069 1994-95 5769 2338 6772 1246 16125 1995-96 6735 1977 7931 1034 17677
0 10000 20000 30000 40000 50000 60000 70000 80000 Expd (Rs crore)

1990-91

1991-92

1992-93

1993-941994-951995-96

1996-97

1997-981998-99

1999-2000

2000-012001-022002-03

2003-04RE

2004-05BE

1996-97 7578 8356 4937 3819 26050
1997-98 9918 4937 10318 983 26156
1998-99 11596 3819 11827 1182 28424
1999-00 13244 4276 11487 1937 30944
2000-01 13800 6056 13756 835 34447
2001-02 12595 9342 13309 978 36224
2002-03 11015 7354 15401 1259 35029

Year

Total (Revenue+Capital) Expenditure Expenditure less Rural Devt & Pwr Expenditure less Rural Devt

Source: Indian Public Finance Statistics – various issues, Ministry of Finance, GoI.

development, etc. Figure 8 shows that while the total government expenditure for agriculture and allied services, rural development, irrigation, etc, in real terms has been quite steady up to 2001-02, there has been a decline in 2004-05 after an increase in the previous year. However, if the expenditure on rural development and power, irrigation and flood control is discounted, there is not much change in expenditure by the government on agricultural activities.

In order to examine the relative effects of government and private capital formation in agriculture and compare the different forms of agricultural subsidies, respective elasticities were calculated with the help of bivariate regressions of log value of agricultural output at current prices on log of different investments and subsidies at current prices for the period 1993-94 to 2002-03. The results have been summarised in Table 5.

It may be observed from Table 5 that expenditure on gross fixed capital formation (GFCF) is comparatively more effective in enhancing the value of agricultural production. In addition, investment has a longer term and sustained impact on agricultural growth rate. On the other hand the impact of subsidies is restricted to the short-run. The output elasticity of total GFCF in agriculture is 0.86 whereas that of total subsidy is 0.75. Within total GFCF, government investment with elasticity 1.12 is more effective than private investment with elasticity 0.77. As far as the major agricultural subsidies are concerned, among others, fertiliser, irrigation and electricity subsidies are effective with elasticities of 0.65, 0.55 and 0.36 respectively. It is interesting to note that the total GFCF in agriculture, including public and private investment, has been only 7 per cent of its output, whereas the overall GFCF in India is around 25 per cent

Source: Agricultural Statistics at a Glance, 2005, Ministry of Agriculture.

Table 3: Gross Fixed Capital Formation in Agriculture andAllied Sector

(Rs crore)

Year GFCF Government GFCF Private GFCF Current Constant Current Constant Current Constant

1993-94 15249 15249 4918 4918 10331 10331 1994-95 18383 16785 6002 5369 12381 11416 1995-96 21367 17689 6762 5322 14605 12367 1996-97 24415 18326 7296 5150 17119 13176 1997-98 26008 18294 6921 4503 19087 13791 1998-99 26714 17470 7583 4444 19131 13026 1999-00 32308 20024 8662 4756 23646 15268 2000-01 32798 19809 8170 4435 24628 15374 2001-02 35486 20360 10348 5488 25138 14872 2002-03 37972 21500 9476 4760 28496 16740 2003-04* 43907 24186 11739 5699 32168 18487

Note: 2003-04 based on quick estimates. Source: Agricultural Statistics at a Glance, 2005, Ministry of Agriculture.

Table 4: GFCF in Agriculture as Compared to Overall GFCF

(Per cent)

Year Overall GFCF/GDP GFCF/GDP in Agriculture
at Current Prices at Current Prices
Public Private Total Public Private Total*

1993-94 8 13.4 21.4 2.03 4.27 6.30 1998-99 6.5 15.1 21.6 1.71 4.32 6.04 2000-01 6.9 16.7 23.6 1.74 5.26 7.00 2001-02 6.9 16.8 23.7 2.03 4.92 6.95 2002-03 6.2 18.5 24.7 1.87 5.61 7.48 2003-04* 6.5 18.9 25.4 2.04 5.59 7.63

Note: * Total calculated by adding public and private investments.

Sources: Economic Survey 2005-06 and Agricultural Statistics at a Glance 2005.

agriculture has been calculated taking the price deflator for agriculture sector.

Table 6 shows that the size of the agriculture sector as a percentage of GSDP (both at constant prices) in the recent period during 2000-03 ranges from 13.8 per cent for Gujarat to

38.7 per cent for Punjab, with an average of 22 per cent of GSDP for major 15 states. Using the relationship between agricultural growth and GSDP and government spending, an index of performance of different states is arrived at. It may be seen that although the agriculture to government expenditure ratio for all major 15 states is 22.3 at constant prices, it varies widely across states with 46.11 for Punjab to 10.93 for Madhya Pradesh. States, endowed with more government expenditure, have shown better performance in agricultural growth in general.

Further, in order to see the effectiveness of government expenditure on agriculture, time series values of GSDP from agriculture have been regressed with respect to government expenditure (both at current prices) and it is found that the slope varies from 3.57 for Madhya Pradesh to 51.98 for Rajasthan and the elasticity varies from a 0.09 for Punjab to 1.42 for Rajasthan. This indicates that the effectiveness of government expenditure varies widely from state to state. If these elasticities are divided

Table 5: Effectiveness of GFCF and Different Subsidies in Agriculture

Explanatory Variable Elasticity R2 t F
GFCF 0.86 0.96 13.88 192.69
Public investment 1.12 0.90 8.37 70.05
Private investment 0.77 0.96 13.50 182.12
Total subsidy 0.75 0.98 18.18 330.46
Fertiliser subsidy 0.65 0.93 10.21 104.28
Irrigation subsidy 0.55 0.69 4.23 17.92
Electricity subsidy 0.36 0.61 3.52 12.42

Note: Dependent variable is log-value of agriculture at current prices. All the explanatory variables are also in current prices. All the elasticities are significant at 1 per cent level.

Source:Calculated from database of Agricultural Statistics at a Glance, 2005.

Table 6: Agricultural Growth and Government Expenditure

Sl State 2000-01 to Slopes (1993-94 Elasticity 2002-03 to 2002-03) (dAGR/ (dAGR/ AGR/ AGR/GE dAGR/ dAGR/ dGE) dGSDP) GSDP dGE dGSDP (GE/ (GSDP/ (Per Cent) AGR) AGR)

1 Andhra

Pradesh 23.38 42.03 37.72 11.88 0.9 0.51

2 Assam 29.64 21.56 14.59 7.16 0.68 0.24

3 Bihar* 29.25 33.07 15.82 20.03 0.48 0.68

4 Gujarat 13.78 18.2 5.86 1.19 0.32 0.09

5 Haryana 30.44 20.51 7.43 9.31 0.36 0.31

6 Kerala 14.66 15.72 11.62 -9.84 0.74 -0.67

7 Karnataka 23.97 20.79 19.3 13.01 0.93 0.54

8 Maharashtra 14.02 12.11 8.89 6 0.73 0.43

9 Madhya

Pradesh* 18.85 10.93 3.57 3.39 0.33 0.18 10 Orissa 22.89 18.53 12.14 -4.82 0.66 -0.21 11 Punjab 38.72 46.11 4.34 20.09 0.09 0.52 12 Rajasthan 23.91 36.5 51.98 11.75 1.42 0.49 13 Tamil Nadu 14.83 14.42 5.82 1.59 0.4 0.11 14 Uttar

Pradesh* 32.09 27.9 13.64 16.46 0.49 0.51 15 West Bengal 22.08 40.3 38.01 12.26 0.94 0.56 16 All 15 states 22.04 22.3 17.35 7.17 0.78 0.33

Note: * States are old states after combining their new sub-parts.

Sources: Computed from CSO data and Agricultural Statistics at a Glance – 2005.

by all 15 states’ elasticity, the resultant index shows the relative position of individual states that varies from 0.12 in Punjab to

1.83 for Rajasthan and 1.3 for Kerala.

The government expenditure elasticities of agriculture vary from –0.67 for Karnataka to 0.68 for Bihar during the same time period. The other state with negative elasticity is Orissa at –0.21. This seems to suggest that the GSDP growth does not necessarily have equally positive effect on agriculture for all states mainly because of non-agriculture (particularly service sector)-led growth in these states.

VII Determinants of Agricultural Production

It may be seen that several factors have been identified to increase agricultural production. Apart from government expenditure, agricultural growth is determined by many other variables in India. In order to analyse the factors that have an impact on its growth a number of plausible relationships were examined. The factors which are selected are based on the studies discussed above. We first look at the correlation between selected variables during 1990-91 to 2003-04. The simple pair-wise correlation results are listed below along with their level of significance for the period 1993-94 to 2003-04. Here, the variables examined are agricultural deflator (Agrdef), total government expenditure including plan and non-plan centre and state taken together (GovtExpd), population, public and total investment (PubInv, TotInv), credit, electricity and fertiliser usage, tractors, pump sets, rainfall and gross irrigated area (GirgA).

It may be observed that there is no significant correlation between public investment and rainfall. Similarly, there is no significant relationship of public investment with fertiliser or prices. Also, rainfall is uncorrelated with fertiliser and prices etc. In fact, almost all variables are uncorrelated with rainfall and public investment (the shaded zone in Table 7). This would broadly suggest that public investment has followed its own pattern and is not concomitant with years of good or bad rainfall conditions in the country. Similarly, fertiliser usage would be expected to increase during years of higher rainfall but it does not hold in a vast country with varying conditions of drought or floods in different regions. Similarly, changes in agricultural prices are evened out and not related to rainfall conditions or years of higher or lower public investment.

If we examine the bivariate relationship of value of agricultural production with the above factors, it is seen that the partial elasticity of gross irrigated area is as high as 1.52, followed by fertiliser usage (0.72), number of pumpsets (0.62) and usage of electricity (0.50) for agricultural purpose. The agricultural credit elasticity is 0.15 per cent; that of government expenditure is 0.28, public investment is 0.29 and private investment is 0.24. It may be mentioned here that barely 40 per cent of gross sown area is irrigated in India and even though its increase contributes significantly to agricultural growth, rainfall continues to be a crucial factor in determining agricultural output. Amongst the inputs, fertiliser and the pumpsets are more important while credit and other input subsidies have met with constraints despite being given substantial emphasis over the years.

A number of studies for various countries have used different flexible forms of Cobb-Douglas production functions for agriculture. The most widely used among these forms is the transcendental logarithmic production function [Odhiambo (2004), Velazco (2006), Lezin and Long-bao (2005) etc]. The following general trans-log equation was estimated in order to establish the effect of various factors on growth in agricultural production.

Ln(Y) = α + Σβi Ln(Xi) + μ where, Y is agricultural output, Xis are different inputs with βithe respective coefficients, α is the intercept and μ is the error term. Based on the above analysis, the following Cobb-Douglas production function for the value of agricultural output at constant prices in India has been framed:

Y = α.Pβ. Iγ.Rδ.Fλ

g or, Ln(Y) = α + βLn(P) + γLn(Ig) + δLn(R) + λLn(F) where, Y is value of agricultural output at current prices, P is agricultural price, Ig is government investment in agriculture, R is rainfall, F is consumption of fertiliser and α is constant representing the technological change, β, γ, δ and λ are the respective elasticities. Agricultural deflator represents the average price for the crops and works as an indicator of profitability over average input prices. Therefore, it is expected that with an increase in agricultural deflator the value of real output will increase and vice versa. Similarly, if the public investment in agriculture rises, it will have twofold effect on growth. Apart from its direct impact on growth, it “crowds in” private investment and causes real output to grow further. Rainfall is expected to have a positive and significant effect on output because most agricultural land in India remains unirrigated and irrigation is also directly or indirectly dependent on rainfall. Aggregate fertiliser consumption represents both the biotechnological aspects of increasing yields and constitutes a large proportion of agricultural subsidies. So this is also supposed to have a positive impact on aggregate agricultural output. On this basis, multivariate regressions for value of agricultural production and foodgrains were examined taking different independent variables. The best fit model for value of agricultural output, taking the period as 1990-91 to 2003-04, was taken and the results are as shown in Figure 9.

Hence from Figure 9, the estimated agricultural output as the function of agricultural deflator (P), public investment (I), rainfall (R) and fertiliser usage (F) is given by: g

0.25.R0.08.F0.23

Y = e7.41.P0.95.I

g

The results indicate that at all-India level the value of agricultural output at 1993-94 prices is (significantly) positively dependent on the public investment in agriculture, fertiliser consumption and agricultural deflator. The model is a good fit with 0.98 adjusted R2 and a stationary residual. The value of F-statistic is very high and value of root mean squired estimator is fairly low at 0.02. The intercept term would stand for the technological change. The coefficient of rainfall is positive but insignificant.

The most crucial factors affecting agricultural performance in our country appear to be public investment and support for fertiliser usage. The importance of irrigation as a substitute for dependence on the exogenous natural rainfall is obvious. Further, public investment in agriculture including irrigation, marketing, food processing and storage has a significant impact on agricultural production in India for this period. Fertiliser consumption or its usage also plays a very crucial role. The agricultural output depends positively on agricultural prices which reflect the dominant role of supply vis-à-vis demand factors

Here agricultural deflator is estimated from the current and constant agriculture GDP. Public investment comprises

Figure 9: Dependent Variable – (Log) Value of Agricultural Output

(at current prices)

Independent Variable Parameter Estimated Coefficients t-Ratio SE
Agricultural deflator Public investment Rainfall Fertiliser usage 7.41 0.95 0.25 0.08 0.23 10.40* 3.77* 1.22 3.32* 0.09 0.07 0.06 0.07

Notes: F = 3782.23, R2 = 0.99, AdjR2 = 0.99, RMSE = 0.02 The residual is stationary, MacKinnon approximate P-value for Z(t)=0.00.

* = significant at 5 per cent.

Table 7: Correlation Matrix of Explanatory Variables

Agrdef GovtExpd Population cPubInv cTotInv Credit Electricity Fertiliser Rainfall Tractors Pumpets GIrgA
Agrdef GovtExpd 1.00 0.97 0.00 1.00
Population 0.99 0.00 0.97 0.00 1.00
cPubInv 0.20 0.22 0.24 1.00
0.50 0.45 0.42
cTotInv Credit Electricity Fertiliser Rainfall Tractors Pumpets GlrgA 0.89 0.00 0.91 0.00 0.83 0.00 0.92 0.00 0.25 0.39 0.98 0.00 0.93 0.00 0.99 0.00 0.91 0.00 0.93 0.00 0.76 0.00 0.93 0.00 0.26 0.38 0.96 0.00 0.88 0.00 0.95 0.00 0.91 0.00 0.94 0.00 0.77 0.00 0.91 0.00 0.19 0.51 0.99 0.00 0.94 0.00 0.97 0.00 0.43 0.13 0.34 0.24 0.10 0.74 0.07 0.82 0.32 0.27 0.02 0.94 -0.02 0.96 0.06 0.86 1.00 0.96 0.00 0.58 0.03 0.78 0.00 0.12 0.67 0.94 0.00 0.88 0.00 0.87 0.00 1.00 0.56 0.04 0.79 0.00 0.07 0.81 0.97 0.00 0.95 0.00 0.88 0.00 1.00 0.79 0.00 0.60 0.02 0.74 0.00 0.65 0.02 0.88 0.00 1.00 0.26 0.37 0.89 0.00 0.81 0.00 0.90 0.00 1.00 -0.03 0.92 -0.12 0.71 0.23 0.46 1.00 0.96 0.00 0.95 0.00 1.00 0.91 0.00 1.00
Notes:(i) Figures in italics are the levels of significance P(t). (ii) Shaded areas signify the uncorrelated (insignificant) zones.
Economic and Political Weekly December 30, 2006 5333

government expenditure in irrigation and water management and provision for other facilities like processing, storage, etc. Fertiliser usage is total fertiliser consumed in thousand tonnes and rainfall is actual figure during each of these years in millimetres.

Further, a simple analysis taking a three-year moving average to examine the effect of fluctuation in public investment, rainfall and fertiliser usage apart from their trends on non-trend variability

(V) of value of agricultural production at constant prices, showed the following:

V(Agrcnst) = 446.0 + 12.6 V(PubInv) + 86.1 V(Rainfall) – 12.1V(Fertiliser) + μ

(0.51) (5.09) (3.97) (-4.60) F(3, 8) = 27.4 R2 = 0.91 Adj R2 = 0.88

This indicates that for each unit deviation in public investment leads to 13 units variation in value of agriculture and similarly for other variables. With variations in rainfall being exogenous, fluctuations in fertiliser have a major adverse impact on agricultural growth.

A similar exercise for value of foodgrain production in India during 1990-91 and 2002-03 shows the results of the chosen model as in Figure 10.

Here rainfall is actual rainfall as seen before, and electricity is usage of electricity in agriculture in mkw. Population is as per estimates by registrar general of India.

From the above, the estimated real foodgrain (FG) as a function of rainfall (R), population (P) and electricity (E) is:

FG = e-1.22.R0.59.POP0.66.E0.35 This analysis shows that government expenditure in agriculture, public and private investment, fertiliser usage and electricity consumption for agriculture are the main factors determining value of agriculture and foodgrain. Exogenous variables like rainfall and population also significant. The price deflator has a positive impact on value of agricultural production. It may be mentioned that public and private investment as well as agricultural credit have negative coefficient on the value of foodgrain production that seems to indicate that investment and credit flows are increasingly directed towards non-foodgrain production. It is suggested that there is need to increase government expenditure in the agriculture sector, with particular emphasis on investment in rural infrastructure comprising irrigation, processing, storage and marketing, apart from improved and timely supplies of inputs and credit. Investment on agricultural research and extension services are also essential. Declining provision of inputs and other subsidies also needs to be addressed.

VIII Projected Growth in Agricultural Production

On the basis of above analysis, projections for Eleventh Five-Year Plan period have been made for values of agriculture production along with that for foodgrain at the all-India level using the equations as obtained, viz,

0.25.R0.08.F0.23 and

Y = e7.41.P0.95.I

g

FG = e-1.22.R0.59.POP0.66.E0.35 respectively.

In order to do the projections a number of assumptions have been made on the future trend of each of the determining variables. These include:

(i) The agricultural prices are assumed to grow by the average growth rate of last three years’ (2001-02 to 2003-04) by 4.47

per cent. The foodgrain price deflator which has been lower is taken separately, and taking the same three-year average, is assumed to grow at 1.3 per cent.

(ii) Public investment (Ig) has been assumed to grow consistently taking two scenarios for annual growth rates of 10 and 15 per cent respectively. The CAGR for public investment in nominal terms during 1990-91 to 2003-04 is 9.45 per cent though fluctuating over the years.

(iii) Usage of fertiliser (F) has been projected on the basis of linear trend of the log series for the period 1990-91 to 200001 and its equation is F = 0.04.t + 9.3316 (with R2 = 0.87), where t is the time period. The years 2001-02 to 2003-04 have not been considered for the calculation of the trend equation because of abnormal decrease of fertiliser consumption during this period and expectation of a turnaround of this trend in the recent period.

  • (iv) Level of rainfall has been kept constant at the simple average of 1990-91 to 2003-04 at 1145 mm.
  • (v) Projected population figures are based on the estimates of the registrar general of India.
  • (vi) Electricity in agriculture is assumed to follow the fitted equation E = 10.819 + 0.0787t (with R2 = 0.95) for the period 1990-91 to 1998-99. This particular period has been chosen since after 1998-99 there has been with change in accounting methodology taking electricity for agriculture as a residual and reflecting an apparent downward shift of usage of electricity in agriculture.
  • Table 8 summarises the projection results for value of agriculture production, foodgrain and non-foodgrain during the Eleventh Plan. The information for 2003-04 is also indicated as that is the year for which latest data is available. The projected value for non-foodgrain at current prices is derived as a residual of value of agriculture at current prices less the value of foodgrain at current prices and then deflated by the agricultural deflator to obtain the projected values of non-foodgrain at constant prices.

    From Table 8, it may be said that as per present trends, the projected value of foodgrain (at constant 1993-94 prices) would have an annual average growth rate (CAGR) of 2.38 per cent during the Eleventh Plan period. The overall agricultural growth

    Figure 10: Dependent Variable: Value of Foodgrain Outputat Current Prices

    Independent Variable Parameter Estimated Coefficients t-Ratio SE
    Rainfall Population Electricity -1.22 0.59 0.66 0.35 2.41* 1.56** 1.68** 0.25 0.42 0.21

    Notes: F = 26.68, R2 = 0.89, AdjR2 = 0.86, RMSE = 0.06 MacKinnon approximate P-value for the residual Z(t)=0.0078.

    * = significant at 5 per cent. ** = significant at 15 per cent.

    Figure 11: Dependent Variable: (Log) Value of AgriculturalOutput (at Current Prices)

    Independent Variable (Log) Parameter Estimated Coefficients z-Ratio SE
    Agricultural deflator Government expenditure on agriculture Rainfall 7.13 0.75* 0.12* 0.17* 11.54* 3.64* 4.21 0.06 0.03 0.40
    Population Fertiliser usage 0.21* 0.24* 2.35 5.81 0.09 0.04

    R2: overall = 0.81, R2: between = 0.84, R2: within = 0.29, Wald chi2(5) = 154.43 Notes:Random-effects GLS panel regression.

    * = significant at 1 per cent.

    would be 3.04 per cent per annum in scenario I and 4.19 per cent per annum in scenario II if public investment is raised by 15 per cent. The value of non-foodgrain production will grow at a faster rate of 3.22 per cent per annum in scenario I and 4.37 per cent per annum in scenario II. It may be mentioned that average growth of value of foodgrain and non-foodgrain would not add up to that of agriculture since the share of non-foodgrain to foodgrain is more than 4:1. The price deflators are also different for foodgrain and non-foodgrain as mentioned above. It is important to note that in order to raise the overall agricultural growth to around 4 per cent annual average, it would be necessary to raise public investment consistently by around 15 per cent respectively.

    IX State-wise Agricultural Growth Determining Factors

    In order to see the effects of different factors on state-wise agricultural performance for major 15 states (all general category states including Assam and excluding Goa) for the period 199394 to 2002-03, a generalised least square (GLS) random effect panel data regression has been used. The Hausman specification test suggests that the random variable model rather than the fixed effect one is appropriate and differences in coefficients are significantly systematic. Based on different studies, as discussed in the Section IV, the determining variables taken are agricultural deflator, rainfall, population, fertiliser usage and total government expenditure on agriculture (including expenditure on agriculture and allied activities, rural development, special area programme and irrigation and flood control) as factors affecting the agricultural performance of the different states. Comparable state-wise information on public investment is not available; hence total government expenditure by states on agriculture is taken. All the variables are taken in log and the selected result has been shown in Figure 11.

    The generalised panel data model for these 15 states over the 10-year period suggests that the agricultural output at current prices is significantly positively dependent on total government expenditure on agriculture, fertiliser usage, rainfall and population. The coefficient of agricultural deflator is positive and significant showing that the supply of agricultural output depends positively on its price. An increased total government expenditure on agriculture leads to a substantial rise in agricultural output. Similarly, a rise in fertiliser usage and rainfall (although it is exogenous) also has a positive impact on agricultural output. Further, it is observed that states with higher population growth rate are greater contributors to agricultural output.

    X State-wise Agricultural Growth Projections

    Based on the above panel results (Figure 11), projections for growth in agricultural output at current prices (Y) have been made for the selected 15 states for the Eleventh Plan period. A number of assumptions have been made on the future trend of each of the determining variables for the projections. The generalised equation, as obtained from above, used is:

    Y = e7.13.P0.75. Pop0.21.GE0.12.R0.17.F0.24

    The assumptions for the projections are as follows:

    (i) Since total government expenditure has been growing at an average annual growth of 20 per cent in the selected 15 states, ranging from around 79 per cent in Maharashtra to -5 per cent in Kerala, government expenditure on agriculture (GE) is assumed to grow at an average rate of 10 per cent and 15 per cent respectively for the projected years.1

    (ii) Level of rainfall (R) has been kept constant at the simple average of 1993-94 to 2002-03 in each state.

    (iii) Usage of fertiliser (F) and population (Pop) in each state has been projected on the basis of trend of the log series for the period 1993-94 to 2002-03.

    (iv) Projections for agricultural deflator are based on time trends in each state.

    It is evident from Table 9 that the total government expenditure on agriculture will lead to a rise in agricultural output depending on the level of increase. Moreover, the assumption of a 10 or 15 per cent rise in government expenditure is quite reasonable as can be seen from the table that the average of CAGR in government expenditure for all 15 states taken together is 20 per cent for the period of 2002-03 to 2004-05.

    During 1993-2003, states like West Bengal, Bihar and Karnataka registered a very high rate of growth in agriculture as seen in Section III, whereas Gujarat, Madhya Pradesh, Orissa and Kerala had negative growth rates. From Table 9, it is evident that with an increased government expenditure of about 10 and

    Table 8: Projected Values of Agriculture, Foodgrain and Non-Foodgrain at Constant (1993-94) Prices

    (Rupees crore)

    Year Agriculture Non-foodgrain
    Scenario I Scenario II Foodgrain Scenario I Scenario II
    2003-04* 283311 283311 61814 230292 230292
    2006-07 314657 721059 69136 245521 651923
    2007-08 324371 751626 70818 253553 680808
    2008-09 334310 783315 72522 261788 710793
    2009-10 344472 816144 74249 270223 741895
    2010-11 354851 850129 76000 278851 774129
    2011-12 365439 885279 77762 287677 807517
    CAGR** 3.04 4.19 2.38 3.22 4.37

    Notes:(1) * 2003-04 figures are actual figures.

  • (2) ** Scenarios I and II: CAGR with 10 per cent and 15 per cent increase in total public investment respectively.
  • (3) Calculated for Eleventh Plan Period. 2006-07 is taken to be the base year.
  • (4) Agriculture and non-food values at current prices are deflated by agricultural deflator and food values are deflated by food whole sale price deflators.
  • Table 9: Projected Agricultural Growth for Select States

    (at constant 1993-94 prices)

    States Scenario I Scenario II
    Andhra Pradesh 2.96 2.47
    Assam 6.11 5.60
    Bihar 4.42 3.93
    Gujarat 3.96 3.47
    Haryana 3.60 3.11
    Kerala 1.84 1.36
    Karnataka 3.80 3.31
    Maharashtra 3.55 3.06
    Madhya Pradesh 3.86 3.37
    Orissa 3.68 3.19
    Punjab 2.56 2.07
    Rajasthan 4.30 3.81
    Tamil Nadu 2.75 2.26
    Uttar Pradesh 3.56 3.07
    West Bengal 3.35 2.86
    All 15 States 3.60 3.11

    Note: Scenarios I and II: CAGR with15 per cent and 10 per cent respectively increase in total government expenditure on agriculture.

    15 per cent respectively, the states with high growth rates will perform better; the states with negative growth rates will be able to achieve significantly higher growth rates.

    There is need to direct the enhanced government expenditure on irrigation and water management, processing, storage and marketing apart from the provision of credit and other inputs. It is also essential to focus on a wider extension system so that the farmers can reap the benefits of new and improved developments in R and D as suitable to the particular soil and agroclimatic conditions.

    XI Conclusions

    There has been a decline in the growth of the agriculture sector during the 1990s till the recent past. This is accompanied with recent decline in yields per hectare for a number of food crops. There are vast inter-state differences in growth rate of agriculture and even more so for foodgrains.

    The analysis at the all-India level for the period 1990-91 to 2003-04 suggests that government expenditure in agriculture including public investment and subsidy for fertiliser usage and electricity consumption for agriculture are the main factors affecting agricultural production in India. Agricultural prices have a positive (significant) impact on its production. Exogenous variables like rainfall and population are also important.

    At the same time, the state-wise analysis from the panel regression result shows that the agricultural output at current prices is significantly and positively dependent on government expenditure on agriculture, fertiliser usage, rainfall and population. The agricultural price is positively (and significantly) related showing that the supply vis-à-vis demand side is the dominant factor for agricultural output.

    Projections made for growth in agriculture (food and non-food items) sector at the all-India level, based on a number of assumptions pertaining to government expenditure, price behaviour, inputs used, growth in population and rainfall suggest that there is need for an increase in average growth of 10 to 15 per cent per annum in government expenditure with appropriate stepping up in public investment and subsidy for usage of inputs, fertiliser and electricity, etc, given the exogenous variables. This should be accompanied with positive price signals with an improved information network.

    The importance of government expenditure in the agricultural sector is borne out by the state level analysis too. The average of CAGR in total government expenditure on agriculture by all select major 15 states taken together is 20 per cent for the period of 2002-03 to 2004-05. And this trend not only needs to be sustained but in fact has to be stepped up to achieve desired growth rates. This is expected to have greater impact on value of foodgrain production and consequent implications for food security.

    It is important that the growth rate of public investment should be steady and not fluctuating as was observed during the past decade. There is a need to avoid stop and go kind of government intervention in this sector. The focus should be on enhanced government expenditure particularly on investment in rural infrastructure comprising irrigation and water management, processing, storage and marketing, apart from timely supplies of improved inputs, credit, research and extension services. Further, the declining provision of inputs and other subsidies needs to be addressed. There have been recent initiatives for increasing public investment in the sector and the upward trend in this direction is required to continue.

    m

    Email: archana.mathur@nic.in

    Note

    [The authors are extremely grateful to Pronab Sen, principal adviser (Perspective Planning Division), Planning Commission for his very useful suggestions given over several rounds of discussions and constant encouragement in bringing out this paper. Assistance in compilation and analysis of data by Shyamla and Jyoti is also acknowledged.]

    1 Andhra Pradesh (43 per cent), Assam (14 per cent), Bihar (7 per cent), Gujarat (10 per cent), Haryana (7 per cent), Kerala (-5 per cent), Karnataka (13 per cent), Maharashtra (79 per cent), Madhya Pradesh (25 per cent), Orissa (16 per cent), Punjab (10 per cent), Rajasthan (35 per cent), Tamil Nadu (21 per cent), Uttar Pradesh (8 per cent), West Bengal (14 per cent).

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