Occasional Paper - 24

Capital Fornnation in Indian Agriculture: Trends, Connposition and Innplications for Growth

Occasional Paper - 24

Capital Formation in Indian Agriculture: Trends, Connposition and Implications for Growth

ASHOK GULATI SEEMA BATHLA

\T/ National Banl< for Agriculture and Rural Development

Mumbai

2002

Published by National Bank for Agriculture and Rural Development, Department of Economic Analysis and Research, 4 th floor, ' C Wing, Plot No. C-24, " G " Block, P B. No. 8 1 2 1 , Bandra-Kurla Complex, Bandra (East), Mumbai - 4 0 0 0 5 1 .

Printed at Shubhamkaroti Printer, Ghatkopar (E), Mumbai.

ACKNOWLEDGEMENTS

It would have been di f f icul t to complete th is study w i t hou t the act ive support of Central Stat ist ical Organisat ion (CSO), Minist ry of Planning and Implementat ion. We are extremely grateful to Dr. A.C. Kulshreshtha for having given us free access to his t ime and valuable in format ion. We are especial ly obliged to Dr. V.K. Malhotra, Mr. Ramesh Kolli, Ms. T. Rajeshwari and Mr. Naresh Kumar for providing insights into the methodological details used in the National Accounts Statist ics. We would also like to convey special thanks to Mr. Bodh Raj and Mr. Pritam Singh in the CSO for their ful l support in fu l f i l lment of the task.

Our special thanks are due to Prof. Hanumantha Rao and Prof. B.D. Dhawan w i th w h o m we had st imulat ing discussions on the concept of capital fo rmat ion in agriculture and challenges of empirical ly mapping di f ferent variants of the concept. Needless to say, we remain grateful to them. If there are sti l l some shortcomings in the conceptual f ramework or empirical mapping or tes t ing of hypotheses, responsibil i ty lies squarely w i t h us.

Discussions w i th Dr. V. J . Ravishankar, World Bank, were very construct ive and we are highly appreciative of that . Our appreciation goes to Mr. Rajiv Malhotra and Ms. Kusum Makkar, Planning Commission for extending help at the initial stages of our work. Mr. Negi, Director National Hort iculture Board, Gurgaon was kind enough to provide us informat ion and make us aware of various issues related to hort icultural products. We acknowledge his support .

We also cherish the assistance received f rom Comptrol ler and Audi tor General of India's (CAG) library staff , in particular Mrs. Prahaladan, in col lect ion of data for the study.

ASHOK GULATI SEEMA BATHLA

Author Ashok GulatI Seema Bathia

NABARD Chair Unit Institute of Economic Growth University Enclave Delhi - 110007

The usual disclaimer about the responsibility of the National Bank as to the facts cited and views expressed in the paper is implied.

IV

EXECUTIVE SUMMARY

I. Background and Objectives:

The last t w o decades have witnessed an intense debate in the country that capital formation in Indian agriculture has been stagnat ing. As per the official estimates of Central Statist ical Organization (CSO), the public sector capital formation in agriculture (including forestry and fishery) has been falling in real terms, and any increase in private sector investment in agriculture is not able to make the overall picture very comfortable. Further, amongst many perspectives on deceleration in the public capital format ion, it is also alleged that the macro-economic reforms init iated in the country in 1991-92 have also led to an increasing squeeze on public sector investments in agriculture. All this has resulted in deceleration in the growth of foodgrains in Indian agriculture during 1990s over 1 980s . This obviously does not augur well for the hard earned food securi ty of this country. The situation is sometimes considered alarming, as it is believed to affect adversely the rural masses in particular and overall economy in general. Thus goes the prescript ion: Indian policy makers must correct th is neglect of agr icu l ture by enhancing government allocation for capital format ion in agriculture, or else the nation wi l l have to pay a heavy price in terms of g rowth , food security and poverty alleviation.

In this context , several questions can be raised. First, is capital format ion in agriculture (GCFA) really decelerating? If yes, what is the extent of deceleration, in particular on public sector account? Second, wha t are the factors behind this decline? Especially, is there any complementar i ty or inducement effect between public and private sector capital formation? And finally, has decline in public sector investment in agriculture af fected agricultural growth in any signif icant way? To answer these quest ions, one wi l l have to f irst see what comprises public and private sector investments and how these are defined and est imated in the System of National Accounts (SNA). In view of expanding government act ivi t ies in agricultural sector, it is quite possible that public investment as measured in the SNA may not ful ly represent investment in agriculture. If so, it would be interesting to see whether there is a need to move away f rom the conventional concept of public capital format ion in agriculture and re-estimate it to see its impact on private capital format ion and g rowth in agriculture.

This study at tempts to provide answers to these quest ions by f i rs t examining the temporal behaviour and structure of public and private

GCFA. Thereafter, it dissects different components of capital format ion in agriculture by digging into the very concept, coverage and est imation procedures as fol lowed in the Indian System of National Accounts (ISNA). Since the Indian SNA is largely based on United Nations System of National Accounts (UNSNA), the estimation procedure of capital formation in India is compared w i th the international practice in account ing. The study then re-defines the concept of public capital formation in agriculture and re-estimates it to shed more light on its behaviour f rom 1 9 7 4 to 1999 . Finally, an at tempt is made to analyze the relationship between alternative concepts of public GCFA and private GCFA and their impact on growth in agriculture over the last t w o decades, 1980 to 1999 .

II. Analysis of Public and Private GCFA:

The analysis is based on the revised and updated series on gross capital format ion in agriculture and allied activit ies f rom 1960 to 1999 and gross domestic product in agriculture and allied activit ies (GDPA) f rom 1980 to 1999 w i th base 1993-94. The major f indings can be summarized as fo l lows:

The analysis indicates that the trend rate of growth in GCFA was 5 . 0 5 % per annum during 1960s, accelerated to 8 .7% per annum during 1970s, fell to - 0 . 3 3 1 % per annum during 1980s and marginally recovered to 2 . 8 9 % per annum during 1990s. A bifurcation of this into public and private components reveals that public sector component was at its lowest ebb during 1980s, wh ich perhaps pulled down even private sector component, at least for some time.

During 1980-81 and 1998-99, some dramatic changes took place in the structure of some relevant variables. For example, whi le the share of GDPA in overall GDP of the country fel l f rom 3 6 % to 2 4 . 5 % , share of agriculture in GDCF of the country dropped from 1 4 . 4 % to just 6 . 4 % , perhaps pointing towards 'relative neglect ' of agriculture. In order to have a better understanding of this si tuat ion, it wou ld be prudent to have a deeper probe into what comprises GDCF, especially its public and private sector components. Also, it would be wor th f inding whether the Indian System of National Accounts (ISNA) fo l lows standard UN SNA in estimating GCFA. This comparison may give us an opportuni ty to re­define and re-estimate some other 'appropriate' concept of GCFA. The appropriateness is being adjudged here keeping in mind the objectives of the study, especially in terms of the plausible impact on g row th of agriculture.

VI

The study finds out that public sector investment in agriculture, as defined and mtsasured in Indian SNA, has surely suffered a set back during 1 980s. But it is interesting to f ind that public sector GCFA in Indian SNA basically comprises investments in major and medium irrigation schemes. And, this concept and practice of est imating public sector GCFA in Indian SNA deviated f rom the UN SNA in some important ways. For example, while in the UN SNA, it is only the maintenance expenditure on public irrigation schemes that forms a part of public GCFA, in the Indian SNA it also includes the capital costs of public irrigation schemes. This makes a big difference in the estimates. But, it also indicates that there are no hard and fast rules in this regard. Infact, depending upon the objective at hand, one can re-define and re-estimate the public sector GCFA.

Thus, when one observes a sharp decrease in public sector GCFA during 1980s, based on CSO's estimates, one is primarily looking at the fall in investments in public irrigation. What led to this fall in public sector GCFA? Several factors can be pointed out as probable reasons behind this fal l . Rising subsidies and drying up of resources w i th the government are generally pointed out as the major reasons. But, another important reason could have been the dramatic fall in the world rice prices during 1980s f rom about $400/ ton to about $220/ ton . This upset the entire economics of major rice dominated irrigation systems. The Jjiternal Rate '̂) of Return (IRR) estimated on reduced rice prices turned out to be much lower than what was envisaged earlier. This dissuaded the international ' funding agencies to lend for major irrigation schemes. In response to this reduced funding, as also to the building up of foodgrain stocks (30 m.t. in 1986), domestic investment in public irrigation also seems t o / have gone down. Growing opposition to big dams f rom environmental groups gave a final blow to investments in major irrigation during late 1980s and early 1990s.

As mentioned earlier, there is nothing sancti f ied about the al location procedures being fol lowed in the UN and Indian SNA w i th regard to the concept and coverage of public sector GCFA. It all depends upon the objective that one has at hand. Since our objective in the present study is to explore the nature of public GCFA and its relation w i th private GCFA and growth in agriculture, it is clear that the series needs to be re-defined and re-estimated in the light of various investments carried out by the government for expansion of agriculture and allied activi t ies. Therefore, in this study we have defined three alternative concepts of public GCFA. First concept takes conventional definit ion of public GCFA as given in the SNA on major and medium irrigation works. The second concept relates to investment under concept one plus investment in power, based on the amount of power supplied to agriculture each year. The reason for

vii

taking investment in power is the same as that of irr igation. Both serve as important inputs in the agricultural sector. It may be argued that in view of inter-dependence of investments in manufacturing industries for supply of agricultural inputs, rural development programmes, transport (roads) and railways w i th the agriculture sector, a more comprehensive concept of public GCF in agriculture could have been constructed. But the di f f icul ty is where to draw the line. Also, it is a di f f icul t task to find appropriate norms for apport ionment of investment made in a particular industry between rural and urban areas. Therefore, in the analysis we have restricted only to relevant investments made in the power sector. The third concept of public GCFA covers investments under concept two plus investments made in agriculture and allied activit ies as defined under the budgetary heads of the government accounts. The central and state governments' capital expenditures on agriculture and allied activit ies include expenditure on soil and water conservation, crop and animal husbandry , c o - o p e r a t i o n , f o o d , s to rage and w a r e h o u s i n g , dairy development, investment in f inancial ins t i tu t ions, other agricultural programmes, fisheries, forestry and wildl i fe.

III. Major Results of the Study:

The behaviour of public GCFA under three alternative concepts shows that trend rate of growth of public GCFA under concept I (irrigation investment) is negative at :0 .22 for the t ime period 1974-99 . The same however becomes positive at 0 .60 when investment in relevant power is added. Under concept III, when investments of eleven capital expenditure heads are included, rate of growth of public GCFA is again negative. Even if different t ime periods are taken, the analysis shows that the trend is either stagnating or declining, whichever way one defines public GCFA. Al though the period after 1990 shows positive trend growth rates under concept I and II, these are, however found to be stat ist ical ly insignif icant.

As far as the relationship between public and private GCFA is concerned, we have analyzed the relation using physical and financial variables that represent public GCFA. The physical variables are canal intensity and power supplied to agriculture. The financial explanatory variables, based on capital expenditure on irrigation and power are taken on cumulative basis. This is because investments under irrigation and power projects involve long gestation lags, say upto 3-5 years in case of power projects and 10-12 years in case of irrigation projects. The capital formation in agriculture and all ied'activit ies considered under concept III is taken on annual basis. Besides public GCFA (concept I to III), other explanatory

VIII

variables that are considered to be influencing private GCFA are lagged terms of trade and insti tut ional credit to agriculture. The analysis clearly indicates a 'crowding in effect" ( inducement ef fect or complementar i ty in broad sense of the term) of public investment on private GCFA. All the variables in physical and financial terms are found to be highly signif icant in explaining variations in the private GCFA from 1980 to 1999 . The elasticity of private GCFA w i th respect to cumulative f inancial public investment in irrigation and power relevant for agriculture turns out to be 0.16 and 0 .15 .

What is the impact of public and private GCFA on agricultural GDP? It is explained by cumulative public GCFA and private GCFA (in both physical and financial form), gross cropped area and lagged terms of trade. All these variables are found to have signif icant influence on GDPA for the t ime period undertaken. The analyses, thus , captures the e f fec t of infrastructural investments in irrigation and power to be important in bringing a higher growth rate in the agricultural sector.

As a result of higher investments in the economy during nineties, the annual growth rate in the gross domestic product in agriculture and allied activities has increased from 2 .95% during 1 980s to 3 .5% during 1 990s. But what impact does public investment have in moving agricultural sector on higher growth path? We have tried to explore this through simultaneous equation model in reduced form. The model f irst captures the impact of public GCFA on private GCFA, and then along w i th terms of trade tries to see their impact on GDP in agriculture. We have tested the equations under all the three concepts of public GCFA as def ined. Our analyses show that public investment, after taking into account long lags, has signif icant influence on growth in agriculture. The est imated elast ici ty for cumulative public GCFA in irrigation works, measured in f inancial terms reveals that wi th a 10% increase in these investments, GDPA would increase by 2 . 5 3 % (concept I). Similarly, under concept II of public investment, which also includes financial investments in power supplied to agriculture besides investments in canal irr igation, the percentage increase in GDPA due to 10% change in public investment is est imated to be 2 . 4 3 % . The terms of trade variable when used w i th one-year lag also turned out to be signif icant in influencing GDPA. The elast ici ty of TOT is es t imated to be 1.07. Therefore, a dece lera t ion in publ ic investment, whichever way it is defined, is feared to af fect agricultural growth negatively over a longer period of t ime.

It is thus queer to reveal the activit ies fall ing wi th in the realm of GDP in agriculture and allied activit ies that get most affected by the decline in public investment. In an atternpt to explore this, we have adhered to

IX

detailed information on the value of output in the agricultural sector only as given in the National Accounts Stat ist ics w i th base 1993-94 . A bifurcation of the real value of output in the agriculture sector reveals that a major share (75%) is on account of agricultural crop activit ies, such as cereals, pulses, oilseeds, sugars, byproducts, drugs and fruits-vegetab les- f lor icu l ture and k i tchen garden and the balance (25%) emanates f rom livestock activit ies like milk, meat, eggs, wool and honey etc. Within the crop activit ies sector, the share of various crops in the total value of agriculture sector has been fall ing over a period of t ime from 1 980 to 1999. The trend growth rates estimated for major activities, separately during eighties and nineties, indicate that "cereals-pulses' and livestock groups are losing out in nineties over eighties. Hence, the higher growth rate in the GDP in agriculture observed during the nineties is attr ibuted mainly to a significant jump in the value of ' fruits-vegetables-f loriculture-kitchen garden' activit ies together and to some extent to the ' o i l seeds -suga r - f i b res ' and ' d r u g s - c o n d i m e n t s - s p i c e s - i n d i g o - d y e ' act ivi t ies.

This verif ies that w i th in the agriculture sector, the trend is towards diversif ication away from foodgrain crops. The fact is also corroborated by the falling growth rates in the area and production of wheat and rice and a rising trend in same for fruits and vegetables. The deceleration in the growth of foodgrain output and consequent acceleration in fruits and vegetables, among many other factors, may be attr ibuted to falling public investment in irrigation projects during 1980s and early 1990s. And this in turn has dissuaded private investment in cult ivation of cereals along w i th other constraints coming from low expenditure elasticity of cereals. Interest of private investors in cult ivation of frui ts and vegetables and the consequent growth in the value of their output is also related to their response to the market, increase in per capita incomes of the people and changing consumption habits of rural and urban population at large. The expected outcome is slowing down of demand for cereals compared to that of frui ts and vegetables, which is authenticated by the magnitude of their respective expenditure elasticities.

CONTENTS

Page No.

ACKNOWLEDGEMENTS EXECUTIVE SUMMARY

LIST OF TABLES, FIGURES AND FLOW CHARTS

LIST OF ANNEX TABLES AND ANNEXURES

LIST OF TABLES AND FIGURES IN ANNEXURES

LIST OF ABBREVIATIONS

III

V

xiii

xiv

xiv

XV

CHAPTER I CAPITAL FORMATION AND AGRICULTURAL GROWTH IN INDIA: THE DEBATE

CHAPTER II GROSS DOMESTIC CAPITAL FORMATION (GDCF): CONCEPT, COMPOSITION AND ESTIMATION PRACTICES

21

CHAPTER III TOWARDS A NEW CONCEPT OF GCFA 37

CHAPTER IV ALTERNATIVE CONCEPTS OF GCFA AND TESTING THE HYPOTHESES

45

CHAPTER V CONCLUDING REMARKS 63

ANNEX TABLES

ANNEXURES I - VI

REFERENCES

71

81-120

121

XI

LIST OF TABLES, FIGURES AND FLOW CHARTS

Tables Table-1.1 Gross capital fo rmat ion in agr icul ture by type of assets and

inst i tut ions at 1993 -94 prices, Rs. mil l ion Table-1.2 : Annual trend growth rates in gross capital format ion in agriculture

(GCFA) and GDP m agriculture at 1993 -94 prices Table-1.3 GDCF, GDP and Percentage share of GCFA in GDCF and GDPA in

GDP at 1993-94 prices Table-1.4 Percentage share of GCFA in GDPA and incremental capital ou tput

ratios in agriculture (ICOR) at 1993 -94 prices Table-1.5 Percentage distr ibut ion of f ixed capital expenditure of households

in agriculture dur ing 1 9 7 1 , 1981 and 1991 Table-1.6 Percentage share of public sector investments in agriculture by

type of enterprise at 1993 -94 prices Table-IV.1 Public GCFA under alternate concepts and their share in new

GCFA at 1993-94 prices, Rs. bil l ion Table-IV.2 : Physical factors af fect ing private investment in agriculture, 1980 -

81 to 1998 -99 ; regression results Table-IV.3 Financial factors affect ing private investment in agriculture, 1980-

81 to 1998-99 : regression results

Table-IV.4 Determinants of gross domest ic product in agriculture in physical and f inancial terms at 1993 -94 prices: regression results based on reduced form equation

Table-V. 1 : Trend g rowth rates in gross domest ic product and value of ou tpu t in agriculture and allied act ivi t ies at 1 9 9 3 - 9 4 prices

Figures and Flow Charts Figure- I . la Gross capital format ion in agriculture as per t ype of assets

at 1 993 - 94 prices F igure-L ib : Gross cap i ta l f o r m a t i o n in agr icu l tu re as per t y p e of

inst i tut ions at 1993 -94 prices Figure-1.2 Percentage share of GCFA in GDCF and GDPA in GDP at

1993-94 prices Figure-1.3 : Percentage d is t r ibu t ion of f ixed capi ta l expend i tu re of

households in agriculture during 1971 ,1981 and 1991 Figure-IV. 1 : Public sector GCFA under alternate concepts at 1 9 9 3 - 9 4

prices Figure-IV.2 Terms of trade index (TOT) TE (1971-72 base), public and

private sectors GCFA (1993 -94 base). Flow chart 11.1 Structure of gross domest ic capital format ion as per t ype

of assets, inst i tut ions and industr ies of use Flow chart 11.2 : Gross capital format ion in agriculture as per type of assets Flow chart 11.3 : Classif ication, of economic act ivi t ies in the UN and Indian

SNA (GCF): major deviations

XIII

LIST OF ANNEX TABLES AND ANNEXURES

Annex Table-1

Annex Table-2

Annex Table-3

Annex Table-4

Annex Table-5

Annexure I

Annexure II

Annexure III

Annexure IV

Annexure V

Annexure VI

Annex Tables State level percentage share of f ixed capital expenditure of households in total f ixed expenditure in agriculture during 1991 -92 Economic and purpose/ func t iona l c lass i f i ca t ion of publ ic expenditure on administrat ion in the Indian SNA

Value of output f rom agriculture and l ivestock at 1993-94 prices, Rs. billion

Percentage share of value of output of agriculture and l ivestock in total value at 1993-94 prices

Area, productiorv and yield of rice, wheat and fruits-vegetables f rom 1980-99 •

Annexures Revisions in the est imates of GDP and GCF in agriculture

State level analyses of GFCFA at 1980-81 prices

State w ise non-depar tmenta l commerc ia l under tak ings in agricultural and allied activit ies sector

Public and private investment in agriculture- a review of the debate

Industrial classif ication and major act iv i t ies

Empirical mapping of GCFA and its public sector components: concepts I to III

LIST OF TABLES AND FIGURES IN ANNEXURES Annex Table-11.1

Annex Table-11.2

Annex Table-11.3

Annex Table-11.4

Annex Table-11.5

Annex Table-11.6

Annex Table-IV. 1

Annex Table-IV.2

Annex Fig. 11.1

State level Gross Fixed Capi ta l Format ion (GFCF) in agriculture at 1980-81 prices, Rs. mil l ion

Percentage share of public sector GFCF in agriculture in the total GFCF in agriculture at 1980-81 prices

Percentage share o f GFCF in agriculture in GDCF at 1 980 -81 prices

Percentage share of public sector GFCF in agriculture in public sector GDFCF at 1980-81 prices

Percentage share of GFCF in agr icu l tu re to GSDP in agriculture at 1980-81 prices

State level incremental capital ou tput ratios at 1 980-81 prices

Estimates of elast ici ty of private GCFA w.r.t. public GCFA at 1980-81 prices

Rural component of public sector outlays, 1989-90 & 1990-91 Average annual g rowth rate public and private GFCF in agriculture at 1980-81 prices

XIV

LIST OF ABBREVIATIONS

AIDIS All India Debt and Investment Survey

CAG Comptroller and Auditor General of India

CIS Change in Stocks (Inventories)

CSO : Central Statist ical Organisation

DCUs : Departmental Commercial Undertakings

FISIM Financial Intermediation Services Indirectly Measured

GBS : Gross Budgetary Support

GCF : Gross Capital Formation or Gross Investment

GCFA : Gross Capital Formation in Agriculture

GDCF : Gross Domestic Capital Formation

GDFCF : Gross Domestic Fixed Capital Formation

GDP Gross Domestic Product

GDPA Gross Domestic Product in Agriculture

GFCFA : Gross Fixed Capital Formation in Agricul ture

GOI : Government of India

GSDP Gross State Domestic Product

HH : Household

ICOR : Incremental Capital Output Ratio

ISIC : International Standard Industrial Classif ication

ISNA : Indian System of National Accounts

MEC Marginal Efficiency of Capital

NCAER : National Council of Applied Economic Research

NAS National Accounts Stat ist ics

NDCUs Non-Departmental Commercial Undertakings

NIS : Net Investment in Stocks or Financial Assets

RBI Reserve Bank of India

SDP State Domestic Product

SDPA State Domestic Product in Agriculture

TE Triennium Ending

TOT Terms of Trade

UN SNA : United Nations System of National Accounts

XV

CHAPTER - I CAPITAL FORMATION AND AGRICULTURAL

GROWTH IN INDIA: THE DEBATE

1.1 Backdrop:

There is an intense debate in the country, both in academic and policy making circles, that capital format ion in Indian agriculture has been either stagnating or falling since the beginning of 1980s, and it does not auger well for the nation's food security and overall g rowth of agriculture (Rath, 1989; Shetty, 1990; Misra & Hazell, 1996; Rao, 1997 ; Dhawan, 1998) . As per the estimates of Central Statist ical Organization (CSO), the public sector capital formation in agriculture has surely declined in real terms, and any increases in private sector investment in agriculture is not able to make the overall picture very comfortable. Further, it is also alleged that the macro-economic reforms initiated in the country in 1991-92 have led to a further squeeze in public sector investments in agriculture. All this has resulted in deceleration in the growth of foodgrains in Indian agr icul ture dur ing 1990s over 1980s . The s i tua t ion is somet imes considered alarming, as it is believed to affect adversely the rural masses in particular and overall economy in general. Thus goes the prescr ipt ion: Indian policy makers must correct this neglect of agriculture by enhancing government allocation of planned funds to agriculture, or else the nation wil l have to pay a heavy price in terms of g rowth , food securi ty and poverty alleviation.

This study at tempts to cr i t ical ly appraise th is debate by dissect ing different components of capital format ion in agriculture, by digging into the very concept, coverage and est imation procedures. The composi t ion of investment in agriculture has undergone dramatic changes, and so has the structure of growth in agriculture. If one has to understand the picture of capital formation in agriculture clearly, one wi l l have to move away from the CSO's conventional coverage of capital format ion, and look towards theory, international practice in account ing, re-define the coverage of capital in agriculture, and finally re-estimate it to shed more light on the debate. This is precisely what is at tempted in this study.

This study is organized into five chapters. Chapter I presents extensively the behaviour and structure of capital format ion in Indian agriculture over the period 1960-99 at all India level, and for some selected states for the 1980s and early 1990s, depending upon data availability. It also provides different perspectives on the debate relating to the nature of

relationship between public and private sector investments in agriculture, and how it is likely to affect agriculture. This is done as per the defini t ion, coverage and estimation of capital formation by the CSO, also known as the Indian System of National Accounts (ISNA). In chapter II we juxtapose this ISNA against the United Nations System of National Accounts (UNSNA) 1968 and 1993, and delineate the deviations in coverage and practice of estimation of capital formation in agriculture. The study reveals that the ISNA follows a different approach in estimating capital formation in agriculture. Keeping in mind our objective of examining the relation between capital formation and growth in agriculture, we re-define and re-estimate the concept of capital formation in chapter III. In fact , this chapter also proposes some alternative concepts of capital formation that can be tr ied. A methodological f ramework for such an attempt is provided for estimating public investment in agriculture for the years 1974-99 . In chapter IV, we examine the relation between private and public sector investments in agriculture, as also the relation between alternative concepts of investments and growth in agriculture. Based on these results, some concluding observations are presented in chapter V.

1.2 Behaviour and Structure of GCFA:

This section provides in detail the behaviour and structure of gross capital formation in agriculture, forestry and fishery sectors (GCFA) on public, private and household accounts at the all India level. The analysis is based on the revised set of data computed by Central Stat is t ica l Organisation (CSO) w i th 1993-94 as base. A separate analysis of the behaviour of gross capital formation at the household level is given for three decennial years viz. 1971-72, 1981-82 and 1991-92, when All India debt and Investment Surveys (AIDIS) were carried out. In particular, we focus on four basic aspects:

(a) tempora l behaviour of GCFA, gross f ixed capital fo rmat ion in agriculture (GFCFA) and changes in stocks (CIS), which would give us an overall picture of the trends in capital formation in agriculture over 1960-99;

(b) behaviour of public and private components of GCFA from 1980-99 and their changing relative shares in GCFA. This would give us an idea of the changing role of government vis-a-vis private sector in GCFA;

(c) changing share of GCFA in the overall gross capital formation (GDCF) of the economy to see what is happening to agriculture in relation

to the rest of the economy as far as capital format ion is concerned. We may like to compare this w i th the changing share of GDP in agriculture to overall GDP.of the economy to get a relative sense of 'neglect ' or otherwise of agriculture vis-a-vis the rest of economy;

(d) changing behaviour of capital intensity in agriculture by examining GFGFA as a ratio of incremental GDP in agriculture.

(e) to look into the structure of household investments in agriculture in greater details.

This multi-dimensional study of the behaviour and structure of capital formation in agriculture would hopefully equip us to respond to our basic question whether the situation on capital formation front is really alarming or not.

1.2,1 All India Picture: 1960-99

CSO has long been in the process of making revisions in the est imates of macro-economic aggregates. The revisions have been guided by three main considerations: (1) shift ing of the base year f rom 1 980-81 to 1 993 -94 , (2) complete review of the existing data base and methodology employed in the estimates, and (3) implementation of recommendations given in the UN 1 993 Systems of National Accounts (UNSNA) (GOI 1 999) . The revisions in the agriculture sector (details given in Annexure I) relate to (a) coverage of agricultural production in the foreyard/backyard farming, fruits and vegetables, f loriculture, deep sea f ishing, prawns and shrimps separately and valuation of their output , (b) use of revised prices of inputs and outputs for compilat ion of income aggregates and use of latest available data on gross capital formation (GCF) f rom AIDIS 1 9 9 1 -92 , and (c) provision of estimates of costs of f inancial interemediat ion services (FISIM), revisions in the market charges, cur rent repairs, maintenance of fixed assets and consumption of diesel oi l , based on AIDIS 1991-92. Based on these, new series on a few macro-economic aggregates are estimated from 1951 onwards, using 1993-94 as the base year and are given in NAS 2000 . Sector wise detailed est imates are proposed to be published in a separate document by the CSO. The provisional revised series on GCF in the agricultural sector, however, is estimated f rom 1 960 onwards and GCFA as per type of inst i tut ion (public and private) and GDP in agriculture are available f rom 1980 onwards. These are analysed in the subsequent sect ion.

The behaviour of GCFA, inclusive of fishery and forestry at constant (1 993-94) prices, reveals a steady increase over the years 1 960 -78 from

a meager level of Rs. 62 .79 billion in 1960-61 to Rs. 1 81 .96 billion in 1978-79 . It declined upto 1986-87 touching Rs 137.08 bi l l ion, and gradually recovered thereafter touching Rs 190.12 billion in 1998-99 . Thus, over a twenty year period, 1978-98 , the story of GCFA appears to be that of stagnation. But a closer look into this reveals, that peaking of GCFA in 1978-79 was largely due to changes in inventory Stocks. More realistic would be to look at the GCFA for the TE 1982-83 (Rs. 142.8 billion), wh ich remained stagnant all through 1980s w i th TE 1989-90 value at Rs. 1 41.6 bil l ion. It started improving during 1 990s reaching Rs. 188.1 billion during TE 1998-99 (Table 1.1; F ig . I . la ) .

The behaviour of GCFA is somewhat interesting when decomposed by the type of inst i tut ion viz. public and private. Since the beginning of 1980s GCFA in public sector started coming down gradually and continued falling almost ti l l early 1 990s, while that under private sector fol lowed this declining trend only up to 1 986 -87 , but thereafter started increasing (F ig . I . lb) . Thus, the recovery in GCFA during late eighties and early nineties was attr ibuted mainly to acceleration in private investment in agriculture after mid 1980s. The share of private sector, households and corporate, in GCFA was 4 8 . 7 % in 1 9 8 0 - 8 1 , went up to 6 3 % by the end of 1980s, touching a peak of 7 4 . 6 6 % in 1998-99 (Table-1.1). Thus, in 1990s, the role of private sector in GCFA seems to be overwhelming and that of public sector seems to be gett ing marginalized, as far as CSO's revised data on capital formation is concerned.

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Fig.-I.1 b: Gross Capital Fomation in AgricuHure as per Type of Institution at 1993-94 Prices

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This behaviour of GGFA, arid its components in terms of public and private sector are also corroborated by their respective growth rates during different periods. During 1980-99, compared to GCFA in the public sector, GCFA in the private sector grew at a higher average annual rate. When decomposed into different t ime periods, the GCFA in public sector fell at a rate of 3 . 8 9 % in the decade 1980-89 fol lowed by a recovery in the 1 990s (Table-1.2). The g rowth of GCFA in the private sector also slowed down during the 1 980s but showed a significant improvement thereafter. It is interesting to observe that during 1970-79, the average annual growth in public sector GCFA (at 1980-81 prices) was highest (9 ,5%) per annum.

but growth in gross domestic product in agriculture (GDPA) at 1980-81 prices was only 1.74% per annum. However, g rowth rate in GDPA increased to 2 .95% in 1 980-89 . But during this decade the public sector GCFA was negative. This presumably suggests long lags in public sector GCFA and its impact on GOPA. We shall test this hypothesis in a later chapter.

Table-1.2: Annual Trend Growth Rates in Gross Capital Formation in Agriculture (GCFA) and GDP

in Agriculture at 1993-94 Prices

Years 1S60/G1-69J70 1970/71-79/80 1980/81-89/90 1990/91-98/99

GCF Agriculture -0.861** 2.44*

GCF Forestry 2.65 -0.413

GCF Fishery 9.51* 9.51*

GCFA Aggregate 5.05* 8.7* -0.331 2.89*

GCFA Public Account 2.61* 9.5* -3.89* 0.74

GCFA Private Account 8.35* 6.59* 2.62* 3.73*

GDPA Aggregate 1.43** 1.74** 2.95* 3.5*

Notes: The trend growth rates during 1960-69 and 1970-79 for GCFA on public and private accounts and

GDPA are at 1980-81 prices.

Trend growth rate is estimated using equation Ln Y = a •*- b (Time)

* and ** significant at 1 % and 5% level of significance

The downfal l in GCFA, particularly since early 1980s, is also observed in relation to gross domestic capital formation (GDCF) in the whole economy. The share of agriculture GCF in GDCF was about 1 4 . 4 2 % in 1 9 6 0 - 6 1 , touched a peak of 18 .16% in 1979-80, but fell thereafter touching a trough of 6 .39% in 1998-99. Two things are wor th noting here, wh ich are often interpreted to indicate 'relative neglect ' of agriculture: f i rst , in comparison to the share of agricultural GDP in overall GDP (about 2 5 % in second half of 1 990s), its share in GDCF is much lower (between 6 to 7%); and second, the fall in the share of GCFA in total GDCF (from 14 .5% to 6.49%) from early 1980s to late 1990s, is much faster than the fall in the share of agriculture in GDP of the economy (from 3 6 % to 25%) , over the same period (Table-1.3 & Fig. 1.2). Many a t imes this is interpreted as indicating increasing 'relative neglect ' of agriculture since early 1980s. This increasing relative neglect of agriculture in terms of investments can presumably affect agricultural growth in due course.

Table-1.3: GDCF, GDP and Percentage Share of GCFA in GDCF and GDPA in GDP at 1993-94 Prices

Years GDCF GDP GCFA/GDCF GDPA/GDP GDCF/GDP Rs. billion Rs. billion

1960-61 0435.49 2221.61 14.42 40.53 19.60 1961-62 0409.96 2305.72 13.39 39.61 17.78 1962-63 0465.05 2375.20 12.97 37.61 19.58 1963-64 0489.12 2519.79 13.39 38.52 19.41 1964-65 0540.61 2707.27 12.82 40.36 19.97 1965-66 0616.79 2638.64 12.00 38.14 23.38 1966-67 0641.01 2634.41 11.61 39.21 24.33 1967-68 0600.68 2839.76 13.32 41.92 21.15 1968-69 0588.05 2938.17 14.58 40.79 20.01 1969-70 0666.26 3130.39 13.36 40.51 21.28 1970-71 0689.71 3292.27 12.56 39.09 20.95 1971-72 0709.78 3348.42 12.92 37.28 21.20 1972-73 0697.14 3329.12 14.79 37.19 20.94 1973-74 0816.64 3434.73 12.70 40.30 23.78 1974-75 0724.58 3475.53 13.75 37.39 20.85 1975-76 0759.45 3794.04 15.33 34.48 20.02 1976-77 0853.06 3858.69 16.94 32.69 22.11 1977-78 0966.00 4137.81 13.77 34.18 23.35 1978-79 1112.50 4375.04 16.36 32.41 25.43 1979-80 0981.59 4145.71 18.16 30.56 23.68 1980-81 0981.91 4423.19 14.50 36.02 22.20 1981-82 0991.98 4717.09 14.19 35.56 21.03 1982-83 0991.99 4880.89 14.65 34.13 20.32 1983-84 1025.14 5216.87 14.36 34.98 19.65 1984-85 1112.26 5453.49 13.44 33.96 20.40 1985-86 1217.57 5766.54 11.61 32.35 21.11 1986-87 1219.78 6031.39 11.24 30.73 20.22 1987-88 1398.91 6265.59 10.22 29.19 22.33 1988-89 1584.54 6895.41 09.32 30.63 22.98 1989-90 1699.65 7325.78 ^ 07.90 29.25 23.20 1990-91 1956.50 7733.49 08.39 28.85 25.30 1991-92 1715.53 7815.75 Q8.72 28.10 21.95 1992-93 1874.77 8185.44 08.61 28.39 22.90 1993-94 1984.12 8592.20 07.69 28.16 23.09 1994-95 2421.13 9222.89 06.96 27.55 26.25 1995-96 2692.19 9928.77 06.64 25.37 27.12 1996-97 2638.83 10619.02 07.11 26.00 24.85 1997-98 2985.68 11103.84 06.25 24.39 26.89 1998-99 2975.18 11853.99 06.39 24.48 25.10

Source: NAS, 2000 and unpublished data from CSO Notes: GDPA before 1980 is deflated using GDP deflator obtained from NAS 2000. GOP for the economy is at market price.

8

Fig.-I.2: Percertage Share of OCFA in GDCF and GDPA in GDP at 199:^34 Prices

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Yeas 1960-99

If one compares capital format ion in agriculture w i th GDP in agriculture, one can obtain an idea of the average rate at which investment is ploughed back into agriculture. From a minimum level of 6 .97 in 1 9 6 0 - 6 1 , the ratio of GCFA to GDP in agriculture reached a high level of 14 .07 in 1 9 7 9 - 8 0 and then rolled back to 6.55 in 1 998 -99 (Table-1.4). This rate of investment for the economy as a whole varies between 1 8 % to 2 7 % . One noteworthy point is that f rom 1980 onwards there has not been much change in the rate of investment in Indian agriculture, w i t h some minimal f luctuat ions annually.

On the other hand, incremental capital output ratio (ICOR), wh ich captures the relationship between investment and addit ional output and is also a measure of capital intensity indicates large variations annually. To minimize variations, ICOR is estimated on the basis of three yearly moving averages of GDPA and GFCFA . Looking at the ratios in Table-1.4, one f inds that there has been a definite pattern in the behaviour of ICOR over the f ive-year plan periods from 1 969 to 1 9 9 7 . ICOR was at a level of 1 5 .0 dur ing third plan, 1961-66, decreased to 4 .82 during the IV plan (1969-74) and to 2.15 during seventh plan (1985-90) . The eight plan (1 992 -97 )

Incremental capital output ratio (ICOR) is estimated as the ratio of gross fixed capital formation at 1993-94 prices to incremental gross domestic product in agriculture at 1993-94 prices for the beginning and end of the same period. For instance, ICOR during the year 1995-96 is derived by dividing GFCF of that year with GDP of the year 1995-96 minus 1994-95 (incremental). In the present study, three yearly moving averages of GFCFA and GDPA, centered at the mid-point of triennia are worked out. The ICOR, is then estimated by taking the ratio of annual averages for five years period (corresponding to the five years plan periods) of GFCFA and incremental GDPA, derived from three yearly moving averages. In the absence of revised GDPA from 1 960 onwards, the ICOR before 1980 is estimated at 1980-81 prices and after 1980 at 1993-94 prices.

again witnessed a marginal decrease in ICOR to 1.95. Even though there is reduction in the ratio of GFCFA to incremental GDPA f rom mid eighties to mid nineties, the analysis indicates an improvement in the eff iciency of investment during the eight plan.

Table-1.4: Percentage Share of GCFA in GDPA and Incremental Capital Output Ratio (ICOR) at 1993-94 Prices

Years GCFAfGDPA Years GCFAIGDPA

1960-61 6.973 1980-81 8.934

1961-62 6.013 1981-82 8.393

1962-63 6.753 1982-83 8.721

1963-64 6.746 1983-84 8.068

1964-65 6.341 1984-85 8.072

1965-66 7.357 1985-86 7.575

1966-67 7.205 1986-87 7.395

1967-68 6.724 1987-88 7.815

1968-69 7.156 1988-89 6.990

1969-70 7.019 .1989-90 0.264

1970-71 6.732 1990-91 7.358

1971-72 7.346 1991-92 6.813

1972-73 8.326 1992-93 6.946

1973-74 7.492 1993-94 6.302

1974-75 7.668 1994-95 6.629

1975-76 8.901 1995-96 7.100

1976-77 11.450 199697 6.796

1977-78 9.407 1997-98 6.891

1978-79 12.832 1998-99 6.552

1979-80 14.069

Plan wise ICOR Plan Years ICOR MEC

illrdPlan 1961-66 15.01 0.066

Annual Plan 1966-69 2.13 0.468

IVrth Plan 1969-74 4.81 0.207

Vth Plan 1974-78 3.09 0.323

Vlth plan 1980-85 1.64 0.60O

Vllnth Plan 1985-90 2.14 0.465

Annual Plan 1990-91 3.35 0.298

Vlllth Plan 1992-97 1.95 0.511

Notes: ICOR for third to fifth five year plans are based at 1980-81 prices.

GDPA before 1980 is deflated using GDP deflator obtained from MAS 2000.

10

f. 2.2 State Level Picture: 1980-99

Unlike the all India picture, the data on GCFA at the state level is not available since 1960 but is estimated f rom 1980 onwards. Also, the data is un-revised and that too is available at 1980-81 prices. The estimates, which are computed f rom 1980 onwards are given only for seven states. However, special effort was made by CSO to est imate GFCFA for 12 states. For one state, viz. Himachal Pradesh, the data is only for a very few years. Thus, essentially one can talk only w i th context to 11 states. Further, unlike the all India data, estimates at the state level are for GFCFA and not GCFA, and are exclusive of capital format ion in forestry and f ishing. A detailed analysis of GFCFA for the eleven states is given in Annexure II. In brief, one can say that the state level picture is somewhat di f fused, but is not very different f rom the all India picture. The public investment in 'only agriculture' in most of the states has been fall ing since 1980 and that in private investment is r ising. However, it may be noted that the state level estimates of capital format ion are not str ict ly comparable w i th the all India estimates because of dif ference in the methodology fol lowed to estimate public sector capital format ion at the state and at the all India level. One of the major dif ferences in estimation of public sector capital formation is inclusion of administrat ive expenditures of any department as a part of capital format ion in the state level es t imat ion , wh ich is not included at the nat ional level estimation by CSO (GOI, 1987) . Thus, at the state level, share of public sector in capital formation in agriculture is likely to be higher than wha t is revealed in the all India estimates .

f.2.3 Structure of Private (Househiold) Investment in Agriculture:

The analysis carried out in the preceding sect ions reveals t ha t the component of private sector in overall capital format ion in agricultural sector has been overwhelming; and increasing over time. If past trends are any indication, role of private sector in capital format ion in agriculture is likely to increase further in the years to come. Given its pre-dominance, it is wor th asking at this stage what is the structure of th is private investment in agriculture, and how has it changed over the years?

Private sector investment in agriculture comprises primarily investments in the corporate sector and household sector. Corporate sector in India is normally categorized into organized and unorganized segments. The

2 The share of public sector GCFA in GCFA all India has ranged from a lowest level of 18.37% to a highest level of 41.9% from 1980-81 to 1995-96 at 1980-81 prices. The same at the state level (averaged over seven states for which data is available) has varied from a minimum of 42.7% to a maximum of 55.6% over the same period (Annexure II Table-11.1).

11

organized segment contains big f irms primarily in the plantation sector, and their estimates of capital formation are available in their accounting books. The unorganized sector, however, does not have any such systematic information. They are basically private co-operatives like sugar, milk, poultry etc. and other very small and cottage agricultural enterprises (like dairy, agricultural implements, etc.) and not industries. Information on their contr ibut ion to capital formation in agriculture is diverse and dif fused. It is accounted through some bench mark surveys conducted by the CSO. Similarly, for households' component, CSO along w i th RBI has to conduct surveys (All India Debt and Investment surveys, popularly known as AIDIS) once in ten years to estimate their contr ibution to capital f o rma t ion in agr icu l ture. For the in terven ing years, es t imates are interpolated .

Within the private sector, the organized corporate component accounts for less than five per cent of the capital formation in agriculture at all India level during 1 990s. The overwhelming share is that of the household sector, which may partially include the share of unorganized corporate sector and private co-operatives as wel l . Thus, our interest in this section is basically to examine the structure of this household component of the private sector.

As pointed out earlier, National Accounts Statistics do not provide detailed information on the type of investment undertaken or the assets created in the agriculture sector on public and private accounts. However, wi th in private account such information at the household level is given in the All India Debt and Investment Survey (AIDIS). This section analyses investment behaviour of the households w i th respect to the types of assets purchased for three benchmark years viz. 1971 -72 , 1 981 -82 and 1991-92, when AIDIS were carried out. In all, household fixed capital formation in agriculture is categorized into eight components:

1. Land reclamation

2. Bunding and other land improvements

3. Orchards and plantations

4 . Wells

5. Other irrigation sources

3 The estimates of construction are interpolated using the combined index of agricultural production and industrial production superimposed by cost index of rural/urban non-residential buildings and other construction works. The bench mark year estimates of machinery and equipment are moved backward and forward to other years using value of products of industry group 'manufacture of agricultural machinery and equipment and parts'. Additions to livestock, which are treated as fixed assets are extracted from data on number of livestock given in the Indian Livestock Census. Their interpolation on annual basis is done with the help of geometric rate of growth estimated frorr the given quantitative data (GDI 1989).

12

6. Agricultural implements, machinery and transport equipment etc.

7. Farm houses, barns and animal sheds,

8. Other capital expenditure.

The dfstr ibution and share of these f ixed expenditure heads by the rural and urban agriculture households together in total fixed capital expenditure at the all India level for three reference periods is given in Table-!.5 and Fig. 1.3. The state wise share of expenditure on these assets in total f ixed expenditure in agriculture for the year 1991-92 is presented in Annex Table-1.

Table-1.5: Percentage Distribution of Fixed Capital Expenditure of Households In Agriculture during 1971-72,1981-82 and 1991-92 in India

1971-72 1981-82 1991-92

1 Machinery, equipment & transport 43.30 51.95 47.80

2 Wells and other irrigation sources 26.80 20.45 24.70

3 Land improvements 16.50 15.25 12.91

4 Farm houses & animal sheds 10.50 4.55 3.67

5 Orchards and plantations 1.80 2.80 5.08

6 Other capital expenditure 1.20 5.00 6.26

Notes: In the 1991-92 survey, land reclamation and bunding and land improvement are combined together and expenditure on transport equipment is taken separately as one of the components of private fixed capital formation. In order to make a comparative analysis of the share of investment of each component in total for three reference points, we have made six categories of expenditures. The expenditure on reclamation of land and bunding and other land improvements are clubbed together. Similarly expenditure on transport equipment in 1991-92 is added to agricultural implements and machinery head. Expenditures on wells and other irrigation sources are also combined together.

Fig.-I.3: Percentage Distribution of Fixed Capital /tesefs of hf l in Agriculture in India

60

50

40 *^ c o O30 Q.

20

10

0

• • ! [ — ™ — ^ R 1.20

• 5m

^0^*chinery, eqLjiprrBnt&

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0 Farmhouses & arinrBl sheds

• Ochrdsand plantations

^Qher capital -expendtire

1971-72 1981-82 1991-92

13

Household informat ion clearly shows that of all the assets created, agricultural implements, machinery and transport equipment const i tutes the most impor tan t i tem of f ixed capital fo rmat ion in agr icul ture, accounting for nearly half of the total capital format ion in farm business in both rural and urban households at all India level as well as across

4

states . The share of this head of expenditure showed eight percentage point increase from 1970-71 to 1981-82 and a four percentage point decrease in 1991-92. Next to investment on agricultural implements and machinery is investment on wells and other irr igation works, wh ich accounted for a high share of 20 to 27 percent in the total investment. Private investment on irrigation had improved by at least four percentage points over a period of three decades w i th an equivalent fall during 1971 -72 to 1 981 -82 . Wi th a fall in the share of investment in wells and other irrigation sources during 1981-82, there was a corresponding increase in the share of orchards and plantations and other investments in total investment.

Across selected states, investment in wells and other irrigation sources combined was highest in agr icul ture dominated states like Andhra Pradesh, Gujarat, Haryana, Madhya Pradesh, Karnataka, Maharashtra, Rajasthan and Tamil Nadu, except for Punjab, where there has already been maximum exploitation of irrigation potential . The percentage share of expenditure on improvement and reclamation of land/buildings in total f ixed expenditure in agriculture in 1991-92 was highest in Andhra Pradesh, Assam, Bihar, Kerala, Orissa, West Bengal. The share of this category in the total f ixed capital format ion in agriculture varied f rom 27 % to 61.5 %. The share of agricultural machinery and transport in total investment was high in almost all the major states, except in Kerala and Maharashtra. The latter states, along w i th Jammu and Kashmir, however, had more investment in orchards and plantations. Household's investment in farm houses was relatively more in Haryana, Himachal Pradesh, Jammu and Kashmir, Assam and West Bengal.

1.2.4 Structure of Public Sector Investments in Agriculture:

We saw earlier in the preceding sections that as far as behaviour of public sector investments in agriculture is concerned, both at all India level as well as for selected states, the trend has been declining in most cases since 1980s. There is a variation across states in these trends.

4 It needs to be mentioned that data on repairs and maintenance were mixed up in year 1971-72 (RBI 1971-72). A recalculation of expenditure exclusive of repairs and maintenance would show a higher share of this component of expenditure in total fixed investment.

14

but the fact remains that public sector investment in agriculture has been declining since early 1980s, continued to do so almost t i l l 1993-94 , and thereafter there are some signs of marginal recovery. Before one ventures into the reasons behind this fall ing behaviour, and its likely consequences for agricultural g rowth , it may be wor th looking into the structure of public sector investments in agriculture.

Public sector investment in agriculture is est imated through investments by Departmental Commercial Undertakings (DCU) and Non-Departmental Commercial Undertakings (NDCU). Further, public sector investment in agriculture is also decomposed into three sub-sectors: agriculture proper, forestry and fishery. Investments by the public sector in fisheries have been almost negligible, less than half a per cent of the investment in agriculture as a whole. It is agriculture proper, which accounted for almost 9 4 % of the investments in agriculture and allied activit ies during 1 980s. Its share marginally came down to about 8 8 % by the mid 1990s, but rose to 9 0 . 5 % during TE 1995-97 . Accordingly, the share of forestry, which hovered around 5% in 1980 's , increased to about 9 % by late 1 990s. In both cases of agriculture proper and forestry, the overwhelming share is that of DCU. Also, wi th in the forestry sector, plantations and orchards occupy bulk of share in the total GCF. In the total public sector investments in agriculture and allied activit ies, the share of irr igation (basically on major, medium and minor schemes) investment being incurred through DCU is the most dominant, accounting for as much as almost 9 0 % (Table-!.6). The NDCUs, such as agriculture, irr igation and water resource development corporations (like tubewell corporat ions), meat and poultry corporations/boards, forestry and f ishery corporat ions, tea corporations and plantation and development corporations etc. owned by the central and the respective state governments , account for only about 9 to 10%.

This conveys an important f inding that is wor th reiterating at this stage. And that is: when one talks of declining public sector investment in agriculture and its likely consequences on agricultural g rowth , one is basically referring to the decline in investments in irr igation and that too basically in major and medium irr igat ion schemes. This is because investments in minor irrigation come largely through the private household sector, and there are no alarming signs of its deceleration. If any, it is on the contrary, i.e., investment in minor irrigation through the household sector has improved over the years.

5 List of all the corporation is given in Annexure III.

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Table-1.6: Percentage Share of Public Investment in Agriculture by Type of Enterprises 1993-94 Prices

Years Agr.l Forestry! FishingI Agr.DCU Agr. Forestry Forestry Fishing Aggre. Aggre. Aggre. Irriga.l NDCUf DCU NDCUI NDCUI

Aggre. Aggre. Aggre. Aggre. Aggre.

1980-81 94.93 5.02 0.05 92.44 2.48 4.86 0.16 0.05

1981-82 94.77 5.18 0.05 90.90 3.87 4.84 0.34 0.05

1982-83 92.97 6.99 0.04 90.95 2.02 5.36 1.63 0.04

1983-84 91.30 8.62 0.08 89.26 2.04 6.29 2.32 0.08

1984-85 91.98 7.91 0.11 89.47 2.51 6.28 1.63 0.11

1985-86 92.93 6.93 0.14 . 90:75 2.18 5.70 1.23 0.14

1986-87 92.00 7.83 0.17 90.46 1.53 7.25 • 0.58 0.14

1987-88 92.40 7.48 0.12 90.80 1.60 6.71 0.77 0.17

1988-89 91.87 8.08 0.06 90.27 1.60 7.61 0.46 0.12

1989-90 89.11 10.80 0.09 87.74 1.37 9.66 1.13 0.06

1990-91 88.01 11.93 0.06 86.52 1.49 10.58 1.35 0.09

1991-92 88.42 11.50 0.08 87.49 0.93 10.92 0.57 0.06

1992-93 89.82 10.13 0.05 88.65 1.17 9.84 0.29 0.08

1993-94 90.83 9.11 0.06 90.00 0.83 8.87 0.24 0.05

1994-95 92.11 7.89 0.00 90.37 1.74 7.50 0.39 0.06

1995-96 91.14 8.84 0.02 72.09 19.05 8.23 0.61 0.02

1996-97 90.70 9.28 0.02 83.23 7.47 8.78 0.50 0.02

1997-98 89.68 10.30 0.02 82.09 7.59 9.69 0.61 0.02

Average Share over the TE

TE 1983 94.22 5.73 0.05 91.43 2.79 5.02 0.71 0.05

TE 1993 88.75 11.19 0.06 87.55 1.20 10.45 0.74 0.06

TE1998 90.51 9.48 0.02 79.14 11.37 8.90 0.58 0.02

1.3 Perspectives on Deceleration in Agricultural Investment:

From the preceding section, it is apparent that there has been a slow down in the rate of public sector investment in agriculture especially during 1980-91, and some marginal improvement thereafter. The private

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F sector investment in agriculture also decelerated during 1980-86, but started recovering thereafter. In fact, in the latter half of 1980s and early 1990s, private sector investment showed not only remarkable improvement, but rising behaviour even when public sector investment in agriculture was either going down or stagnating. This raised several questions in the Indian literature on the subject in late 1980s through 1990s, and debate is still on. The questions being posed were/are: why is public sector investment in agriculture declining so fast? Is there any relation between the public and private sector investments in agriculture? Do they complement or compete with each other? How is deceleration of investment in agriculture likely to affect growth in agriculture? And so on.

Several scholars have attempted to respond to these questions with support of empirical analysis of data. Rath (1989) opined that private sector investment in agriculture was dependent on public sector investment and support from institutional credit. Neglect of public sector investment in agriculture is likely to affect growth of agriculture in due course. Rao (1994 & 1997) also pointed out the complementary nature of public and private investment. However, in Rao (1997) there was an attempt to re-define the concept of public sector investment in agriculture by including power supplied to agriculture, quite different from the way CSO defines public sector investment in agriculture. Dhawan (1996 & 1998) also talked of inducement effect (complementarity) of public investment on private investment in agriculture, as also the role of institutional credit and rural electrif ication in influencing private investments in agriculture. Mishra and Chand (1995), however, challenged the complementarity hypothesis and in fact argued for re-examination of the nature of public and private investments in agriculture, which created a debate in literature. Chand (2000) reviewed the issue by re-defining public investment in agriculture by including various other heads of capital expenditure in the existing series estimated by CSO. A more detailed review of this debate and other studies on the subject are carried out in Annexure IV.

Various factors have been put forth behind the observed declining trend in the public gross capital formation in agriculture since early 1980s, as also on the nature of relationship between public and private sector investments in agriculture. As shown in summary chart in Annexure IV, nearly all the factors revolve around the issue of increase in subsidies to agricultural sector, adverse terms of trade, reduction in resource flows from centre to states and decline in the capital outlays (expenditure) by the states. One factor that has not been highlighted in this debate so far, but is mentioned in some other work (Gulati, et.al, 1995) is the fact

17

that declining international prices of rice may have triggered decline in public sector investment in agriculture. One may rightly ask how the t w o are related. Our argument is the fo l lowing: we know that the largest chunk (about 90%) of public sector investment in agriculture is actually the expenditure on major and medium irrigation schemes. The largest share of area in these schemes goes to rice cul t ivat ion, which is often much larger than even planned in these irrigation projects. The level of world rice prices, therefore, has a strong influence on the economic viabil i ty of the project. During 1980s, there was a sharp decline in world prices of rice f rom above $400/ tonne to about $220/tonne. This upset the entire economics of these rice dominated major irrigation schemes. The Internal Rate of Return (IRR) on the basis of these reduced rice prices turned out to be much lower. The international lending agencies like the World Bank or Asian Development Bank did not find it economically just i f ied to lend for these irrigation projects. The funding, therefore, got reduced and so did the domestic investments in these schemes. Since India was doing fine on foodgrain f ront during 1980s (India had a buffer stock of more than 30 million tonnes in 1986), priority for investment in big canal irrigation schemes got reduced. It also became a v ic t im of opposit ion f rom environmental groups, especially anti-dam groups, as also f rom rising subsidies and drying up financial resources w i th the state governments. The net result was a steep fall in real investments in major and medium irrigation schemes, resulting in reduced public sector investments in agriculture.

Suffice to say here that this debate generated an interest in looking at the very concept of public sector investment in agriculture as defined and estimated by CSO vis-a-vis what theory or standard international practice would suggest otherwise. It is f rom this angle that study by Rao (1997) sheds a somewhat new l ight. This study is also an at tempt to extend the same line of thinking by digging deeper into the very concept of public sector investment, re-define and re-estimate it and then test the relationship between public and private investments in agriculture as also between investments and growth in agriculture.

1.4 Issues to Explore:

As noted above, there is another perspective to the whole discussion, wh ich needs to be highl ighted. It relates to the under-est imation of inves tment in agr icu l ture, par t icu lar ly on the publ ic accoun t . The deceleration in the public investment, which refers to mainly irrigation projects cannot necessarily be interpreted as a downfal l in the entire public investment in the agriculture sector, if the concept of public

18

1

investment is taken in a broader sense. This is because, against the low rate of public expenditure on construct ion of dams, government over the years has been trying to expand the irrigation base by providing increasing amount of electricity for irrigation pumping in rural areas, by specif ically investing in rural electr i f icat ion, by init iating investments in watershed schemes, million wells schemes etc. under rural development programmes. Further, government has initiated and carried out various programmes and activit ies, like rural credit programmes for private households to buy water extracting machines, and rural development programmes for an over all development of agricultural sector in the country.

Similarly, under private investment, horticulture, f loriculture, sericulture, dairy, milk supply and other related activit ies are not presently fu l ly accounted for in the estimates of private sector investments in agriculture, as given by CSO. In view of the limited number of categories of investment that form part of GCF in agriculture, the magnitude of GCF in agriculture, as estimated by the NAS can not be taken as per its face value. It can be questioned for being non-comprehensive in its coverage of investments in a large number of activit ies mentioned above.

it is in this wider context of 'appropriate' coverage of the concept of capital formation in agriculture, as also its public and private components, that a number of issues can be raised:

Firstly, what comprises gross capital formation in agriculture and other defined sectors in the economy?

Secondly, how capital accruing f rom each act iv i ty funct ion ing in an economy is categorized in the National Income Accounts? What activi t ies/ investments are considered as part of agriculture?

Thirdly, if investment in agriculture is 'under-covered' in the NAS, then what all activit ies should be included in the agriculture sector, and on what basis? Would it mean changing the definit ion of agriculture sector as such?

Fourthly, in view of inter-sectoral linkages in the economy, how and where one can draw a line on the coverage of activit ies fall ing w i th in the agriculture and allied sector?

Fifthly, if the line is drawn, what would be the basis of account ing these activit ies in agriculture, given the System of National Accounts being adopted in India?

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All these issues merit attent ion and deserve to be analyzed in depth. A few are very basic in nature, which point to a re-examination of the concept of GCFA as fol lowed in the system of National Income Accounts. However, it is wor thwhi le to analyze each in view of the enormous expansion in agricultural activit ies over the years and rise in investment in agriculture by the private household sector. Any kind of under-coverage and under-estimation of the activit ies in this sector, therefore, has strong impl icat ions for proper understanding of the debate and the policy implications thereof. This study attempts to explore some of these issues. To start w i th , in the next chapter, it examines the concept and composit ion of capital format ion in agriculture and the way it is measured in the UN and Indian System of National Accounts.

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CHAPTER - II

GROSS DOMESTIC CAPITAL FORMATION (GDCF): CONCEPT, COMPOSITION AND ESTIMATION

PRACTICES

In the previous chapter, we had a detailed examination of the trends and structure of the Gross Capital Fojmation in Agriculture (GCFA) over the last four decades, 1960-99 . A decomposit ion by the type of inst i tu t ion, i.e., public and private sector, was also carried out for the period 1980-99. The data used for this analysis came from CSO, as given in its series of GCFA w i th 1993-94 as the base year. The concept and composi t ion of this data, therefore, is the one as adopted by CSO in the Indian System of N a t i o n a l A c c o u n t s ( ISNA) . To see w h e t h e r t h i s c o n c e p t is comprehensive enough to reflect the true picture of capital format ion in the agricultural sector, it may be wor th looking at the internat ional pract ices in th is regard. This in ternat ional pract ices are general ly standardized by the UN System of National Accounts (UN SNA), wh ich do get revised f rom t ime to t ime, w i t h bet ter unders tand ing and improvement in the techniques of data col lect ion. India is said to broadly fol low the UN SNA, but there could be some minor deviations at sector-specific level. And that is the main objective of this chapter, i.e, to highlight the deviations in the ISNA and UN SNA, and underlying basis of that . This would help us to see whether the concept and coverage of GCFA, as adopted by the CSO, is comprehensive enough and whether there is any f lexibi l i ty in delineating its coverage depending upon one's objective. But before one can respond to these questions, one would have to examine the UN SNA and ISNA in detai l , sector by sector, including agriculture. This is w h a t exact ly fo l lows in th is chapter. But all t h r o u g h th is examination and comparison, it would be wor th keeping an eye on our basic objective of this study, i.e., to f ind out a proper concept of GCFA, empirically map it, and examine its impact on growth of agricultural GDP.

II. 1 GDCF in the UN System of National Accounts (SNA) :

The standardized System of National Accounts, set up by the United Nations has long been implemented by a large number of countr ies. The guidelines, released first in 1953, revised in 1968 and then in 1993 have facil i tated many countries to adopt a similar system of est imat ing national income. While nearly all the nations have adopted the system as given by the United Nations, there do exist variations across the countr ies in fo l lowing a sl ight ly d i f ferent methodology in compi l ing

estimates suitable to the economy of their own country. The departure emerges due to differences in organizational funct ioning of services in many sectors classified, such as provision of machinery w i th driver and irrigation faci l i ty by the government free of charge, allocation of services among various items of disposit ion, treatment of repairs and maintenance w o r k , d i f f i c u l t y in genera t ing appropr ia te data sets and so on . Nonetheless, the methodology has been gradually coming closer to the United Nations standards as set forth in the SNA 1968 (OECD, 1958; NPCS, 1 9 8 4 ; UN, 1 9 5 3 , 1968 & 1993) . This chapter provides a description of how under the system of national income accounts, one component of national income viz. Gross Domestic Capital Formation (GDCF) is defined and presented and the way it has been implemented in the Indian context as well as in other countries. It summarizes the manner in which each act ivi ty related to asset formation is incorporated into the present system of national accounts. Wi th a view to set up a new framework for capital formation in the agriculture and allied sector, the existing framework for capital and production accounts of this sector as well as other industries of use is reviewed in detai l . The discussion serves to il lustrate the steps that need to be taken in order to arrive at comprehensive estimates of capital formation in agriculture.

11.1.1 Current Practice in Capital and Income Accounting: The UN SNA 1968 and 1993

For framing a comprehensive accounting system, the UN SNA records various economic transactions fol lowing a three way classif ication:

First, t ransact ions are grouped into dif ferent sectors viz. enterprise, households and general government.

Second, different forms of act ivi ty are distinguished, such as production, appropriation, capital and external account.

Third, d i f ferent types of t ransact ions are kept d ist inct to provide a meaningful picture of the structure of the economy.

The characteristics of the system also embody further classif ication of the major f lows included in the set of standard accounts. The major being subdivision of gross domestic product at factor cost by the industrial origin. In all, as per the UN SNA, the economy is divided into eleven industries (see industrial classification under composit ion of GDCF), all of w h i c h fa l l under the pr imary, secondary and te r t i a ry sec tors . Classification of these industries closely follows the International Standard

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Industrial Classif ication of all Economic Act iv i t ies (ISIC) as given in UN 1953 and UN 1971 and later revised in UN 1993 .

From the point of v iew of product ion, the contr ibut ion of an industry to gross domestic product is equal to sales, plus the value of goods and services produced by such producers for own consumpt ion or capital format ion, plus the value of the increase in stocks, plus subsidies, less current business purchases and indirect taxes. Apparent ly , capi ta l formation is one of the important components for est imat ing GDP.

Gross domestic capital format ion, according to the UN SNA 1993 is measured by the total value of a producer's acquisit ions, less disposals of f ixed assets during the account ing period, plus certain addit ions to the value of non-produced assets realized by the productive act iv i ty of the inst i tut ional units . In valuing Gross Capital Formation (GCF), only expenditures directly related to its production or acquisitions are included . This component also includes the value of the change in work in progress on domestic account in dwell ings and non-residential buildings.

As mentioned above, the est imates of GCF are classif ied into three categories. In each of the categories, separate account is presented for f ixed asset format ion (GFCF) and change in stock. The est imates are set in as per the, (a) types of capital goods, wh ich are acquired, (b) industrial uses to wh ich these capital goods are put, and, (c) inst i tut ions that have undertaken the capital outlay. Detai ls of p roducts , indust r ies and inst i tut ions classified under capital format ion are given below:

The concept of GCF in the UN SNA confines only to physical capital formation and hence excludes human capital formation that is created through education, research and vocational skills. The UN 1968 as well as UN 1993 SNA treat investment on research and education as a service provided by the government, individual and non-profit institutions serving households. In due course, any produced asset by the government is treated as expenditure on 'merit good', which aims to provide indicators of national welfare. From research point of view, treatment of expenditure on education and research seems to be narrowly defined in the UN SNA. The total expenditure incurred is generally treated as consumption expenditure and the buildings and equipment purchased are classified under the estimates of GCF of public administration on education in the social services sector. Since education aims to build human capital formation and research indirectly promotes economic growth over extended periods of time, in an ideal situation, expenditure on these ought to be categorized under reproducible assets.

These expenditures comprise the purchase prices of t^e capital good, including custom and other taxes plus transportation, delivery and installation charges, costs of ownership transfer incurred as well as all direct preliminary outlays connected within the capital formation, such as site clearance, fees paid to architects, legal costs. Indirect expenses like advertising campaigns are excluded from the capital formations and are accounted for in the current accounts.

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Composition of GDCF

A. PRODUCT CLASSIFICATION

Fixed Asset Formation

1. Reproducible Tangible fixed assets (a to e were given in UN SNA 1953, 1968, and f to j were added in the UN SNA 1993)

a. Residential Buildings: Expenditure on new construction and major alteration to residential buildings inclusive of garages, caravans, mobile homes, boat houses. It excludes the value of land before improvement.

b. Non-Residential Buildings: Value of work put in place on non­residential bu i ld ings such as f ac to r y premises , ho te ls and restaurants, new historic monuments and improvements to them, transfer and other costs in respect of purchases of existing non­residential buildings are classified in this.

c. Other Cons t ruc t ion Works except Land Improvement : This includes construction of roads, irrigation dams, bridges, sanitation projects, oil wells, airports and commun ica t ion systems and other non-military works etc.

d. Land Improvement and Plantation and Orchard Development, Breeding Stock and the Like: Cultivated assets-trees and livestock that are used repeatedly or continuously to produce products such as f ru i t , rubber and milk etc. are included under this classif ication of GDCF.

e. Machinery and Equipment and Transport Equipment: Classified in this category are new and imported agricultural and industrial machinery, outlays on their major alterations and improvements, power generating machinery, equipment for research, schools and hospitals etc., transport equipment such as motor cars used for commercial purposes, vehicles for public transport systems, railways, tractors for road haulage etc.

f. Computer software

g. Mineral exploration

h. Entertainment, literary or artistic originals

i. Other intangible f ixed assets such as new in format ion and specialized knowledge etc. not elsewhere classif ied.

j . Mil i tary structures and equipment, except weapons

2. Non-reproducible tangible assets (a & b as given in UN SNA 1953, 1968 and c & d added in the UN SNA 1993)

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a. Land underlying buildings and works, cult ivated land, t imber tracts and forests, extraction sites, mineral reserves, fisheries etc. and major improvements to these tangible non-produced assets.

b. Historical monuments

c. Tangible Assets , such as land, subsoi l assets, non cu l t i va ted b io log ica l resources and w a t e r resources under c o n t r o l of institut ional units

d. Intangible assets like patented entities, leases and other transferable contracts

3. Costs associated with the transfers of ownership of non-produced assets

4. Change in stocl<s

a. Raw materials

b. Work in progress on livestock and other f ixed assets

c. Finished goods held for sale

B. INDUSTRIAL CLASSIFICATION

7. Fixed Asset formation

a. Agriculture, forestry and fishing

b. Mining and quarrying

c. Manufactur ing

d. Construction

e. Electricity, gas and water works

f. Transportation, storage and communicat ion

g. Wholesale and retail trade, hotels and restaurants

h. Banking, insurance and real estate

i. Ownership of dwell ings

j . Public administration and defence

k. Other service industries like social, communi ty and personal services

2. Change in Stocl<s

a. Agriculture forestry and f ishing: Livestock and other

b. Wholesale trade : stock of foodgrains

c. Retail trade

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d. Mining, manufacturing and construct ion

e. Public administration and defence

f. Other

C. INSTITUTIONAL CLASSIFICATION

7. Fixed Asset Formation

a. Private enterprises: incorporated and unincorporated

b. Public corporations: Incorporated and unincorporated

c. Government enterprises

d. General government

2. Change in Stocks

a. Private enterprises: incorporated and unincorporated

b. Public enterprises: incorporated and unincorporated

c. Government enterprises

d. General government

So(y/-ce: UN SNA (1968 & 1993)

In format ion furn ished above makes it apparent tha t gross capital formation as per the type of good includes only those durable items (products), which have an expected life t ime of more than a year. The 1968 UN SNA, besides providing meager information on the coverage of assets, included only a few produced tangible and non-produced tangible and intangible assets. Lately, in the UN SNA 1993 , expenditure on produced intangible assets was also included along w i th a detailed listing of the assets. The expenditure on computer software, mineral exploration, entertainment, literary or artistic originals, military equipment except weapons and other produced tangible and intangible and non produced intangible assets are now treated as capital assets. The expenditures on repair and maintenance works, required to keep the capital goods in working condit ions are also considered as part of fixed capital formation ,

As per the type of industries, which is the main focus of the study, capita! goods are categorized according to the industries of use. The

3 As a principle, the expenditure on repairs, and maintenance should be counted as current expenses, but in many cases it becomes difficult to draw a line between new investments and the major repairs and maintenance works, such as in case of damaged buildings.

26

unit of classif ication is the establishments that are engaged in similar type of activit ies . The estimates of the contr ibut ion of di f ferent trades are drawn up according to the classif ication of industries. The industrial classif ication adopted corresponds in most respects to that shown in the International Standard Industrial Classif ication (ISIC) . The details of the type of act ivi ty undertaken in each one of these broad eleven industry groups are described in Annexure V.

Since composit ion of public administration industry of use is very broad and also reflects economic and purpose/functional classif ication of the expenditure of government, being utilized for achieving social objectives, it is desirable to elaborate it a bit further. Public administrat ion industry of use broadly falls wi th in the domain of administrative act ivi t ies of the public sector, comprising central and the state government accounts . A two way classif ication of public expenditure based on the economic and purpose ca tegor ies are proposed in the UN SNA for c l ass i f y i ng transactions of the government in the economy as well as providing specific and need based information of these for analytical purposes. The expenditure of the government of administrative nature is classified in accordance w i th its economic character, viz. current and capital expenditures, acquisition of financial assets by the government and its sub-sectors, capital transfers, loans and subsidies etc. and the purpose or funct ion it is likely to serve. As per the SNA recommendat ion, the funct ional categories comprise general public services, defence, law courts, police, social services, education and research, housing roads and other traff ic installations. Along w i th these services, expenditure on economic services such as agriculture, min ing, gas-e lectr ic i ty-water supply, heal th, cu l tura l , recreational and religious services are also included. In all, these major categories are split into 30 minor heads.

UN SNA 1993 defines establishment as an enterprise or part of an enterprise that is situated in a single location and in which only a single (non-ancillary) productive activity is carried out or in which the principal productive activity accounts for most of the value added.

The only difference between the ISIC and UN SNA 1 968 classifications concerns the treatn-ent of owner occupied dwellings, ownership of dwellings and activities undertaken in the public administration industry of use. While ISIC does not show explicitly the first two categories and narrowly defines the third one. UN SNA has made a specific entry of establishments engaged in business of owner occupied dwellings in the real estate, ownership of dwellings is trade a separate industry of use and the range of activities of government in the public administration industry of use are broadened (UN 1964).

Administrative department comprises all departments, offices and establishments of the central government, state governments and union territories, district boards, municipal corporations, village panchayats, local bodies and union and state public service commissions.

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11.2 GDCF in the Indian SNA:

To this end, it is clear that for purposes of income account ing, the UN SNA has provided a very elaborate and comprehensive classif ication of economic ac t iv i t ies accord ing to the indust r ies of use and other inst i tu t ional categories. Nearly all the countr ies viz. Canada, OECD countries and the countries that are part of United Nations, India and Nepal have broadly adopted the UN SNA. The revisions suggested in the UN SNA (1993) and the extension of the type of f ixed assets, such as c o m p u t e r s o f t w a r e , e n t e r t a i n m e n t , m i l i t a r y s t r u c t u r e s , m inera l explorations etc. have not yet been fully implemented in many countries, including India. Of late, in India, new est imates of macro-economic aggregates are generated in view of some of the revisions suggested in the UN SNA 1993 as well as improvements in the production boundary wi th in a few sectors, including agriculture (GOI 1999, NAS 2000) .

A collation of information in the context of asset format ion reveals that almost all the countries have categorized their assets as classified in the system. The classification is based on the major industrial groups proposed by the ISIC and adopted in the UN SNA 1968 and 1993. However, a few deviations from the UN system are observed in the coverage of activit ies in each of the industrial groups, in particular in India and Nepal. Within the system also, categorization of activit ies under the various industrial groups seems to be dif ferent. The departures are more visible in the public sector account of agriculture, construct ion and electricity, gas and water supply industries of use. In particular, the way capital assets are aggregated and allocated across different industries of use, has strong implications for estimates of capital format ion in agriculture. This is somewhat elaborated below.

11.2.1 Current Practice in Capital Accounting in tiie Indian SNA:

In India, capital formation in the SNA is defined as investment in physical goods that result in creation of income over a longer period of t ime. Construction and machinery-equipment are the two physical assets that are considered to be capital in nature. Generating statist ics on capital formation is a joint effort of two organizations, CSO and RBI. At the first instance, estimates are made for the whole economy according to the assets viz. construct ion and machinery and equipment and change in stocks/inventories using commodity f low approach, except for change in stock. These are, then, categorized into t w o institut ional categories viz. public and private, where the latter encompasses the corporate and the household sectors. The estimates by industry of use are derived by

28

using expenditure approach for each of the inst i tut ional sectors (Flow chart-1).

In the Indian SNA, nine industriiBs of use are defined. While ownership of dwell ings' industry of use is included in the banking, insurance and real estate industry of use, the last t w o industrial categories viz. public administrat ion, defence and other services are combined into one and is named as communi ty social and personal services industry of use. The estimates of capital assets are used to arrive at capital account and the GDP or iginat ing f rom the industry or establ ishment engaged in the production of goods and services under consideration. The classif ication or grouping of industries into nine groups in the system is independent of whether the activi ty is carried out by the households, private or public enterprise sectors as defined in the economy . The capital assets are valued at market price. The transacted assets are then allocated as per the industry of use and the sectors of purchase. The value of the capitalized item in the year of purchase and its apport ionment according to the capital consumption allowance or depreciation allowance over the life of the asset is done in the accounts of each of the industries. The allocation of physical capital produced in an industry of use is carried out as per the designated role of a part icular industry. The capital format ion as a result of construct ion activit ies is allocated as per the establ ishment approach. For example, if const ruct ion is for creat ing irrigation dam, then, it is considered as part of agriculture sector on public account. Similarly, if construct ion is towards creation of ferti l izer plant, then, it is accounted for in the manufactur ing sector. In the case of machinery and equipment purchased by the households, end use or service approach is the criterion for allocating that asset into a particular sector. For example, thresher and tractor used for cult ivat ion of land and generator purchased for running an irrigation well by a household are considered as part of agriculture sector, irrespective of the fact that their productions take place in the manufactur ing sector. In some cases, instead of direct consumptive use approach, establishment approach as based on industry of use is fo l lowed. The final output , thus, obtained w i t h the use of inputs from dif ferent industries is a result of combined effort of all the capital assets used in the process (Flow chart-2).

Estimates of capi tal assets, wh ich form gross capi ta l fo rmat ion in agriculture and allied activit ies as welt as other sectors, are also made separately for three ins t i tu t ions , v iz. public, pr ivate corporate and households under the capital account . The publ ic sector comprises

7 However, a separate account of public sector for each industry of use is given in the NAS. This is deducted from the total GCF to get GCF on private account.

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Departmenta l Commercia l Undertakings (DCUs), Non-Depar tmenta l Commercial Undertakings (NDCUs) and administration (Flow chart-1). VVhile estimating GCF all the commercial activit ies carried out in the economy are categorized under the DCUs. An act iv i ty is considered commercial , if there is production of some good/service in the process. For example, irrigation, electricity, communicat ion, railways, currency and coinage, civil aviation, manufactur ing, radio and television broadcasting, road and water transport etc. Of these activities, irrigation works, forestry/ plantations are two such activities that are charged for and form part of the DCUs under the agriculture sector. The non-departmental commercial undertakings Comprise financial and non-financial enterprises, in which the Central or the State government companies have not less than 51 percent of the paid up capital. Other agencies falling under NDCUs are statutory corporations or co-operatives set up under special enactment of parliament or state legislatures. Unlike DCUs, these corporations viz. Food Corporat ion of India, e lect r ic i ty boards, oil and natural gas, nationalized banks and LIC and many others listed in Annexure III (within agriculture), hold and manage financial and tangible assets and liabilities involved in their business. The administrative departments are designated only w i th the role of providing and organizing common services and not the sale of those services. It covers fiscal services like col lect ion of taxes and servicing of debt, police and defence services etc. Within the purview of agriculture, activities related to agriculture like crop husbandry, soil and water conservation, regulation of markets, animal husbandry etc., wi ldl i fe under forestry and fishery are taken to be falling in the government administration. GCF of these is given separately under the economic services category of economic and purpose classification under the public administrat ion, defence and other services industry of use also called community, social and personal services industry of use. Against 30 minor heads introduced in UN SNA, the Indian SNA however, has divided community, social and personal service categories into 19 minor heads only w i th atomic energy introduced as a new minor head (Annex Table 2). A separate account of public administration and defence is obtained by deducting five heads of expenditures viz. (a) water supply (b) sanitary services, (c) construct ion - real estate and business services, (d) educat ion, and (e) medical and public health.

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Flowchart l!.1

Gross Capita! Formation

\ 1 As per Type of Institutions

As per Industries of Use

(GFCF + Change in stocks}

Public

Sector

Private Corporate &

Household Sector

Construction Machinery &

Equipment Change in

Stocks Agriculture &

Allied

activities (a)

Other sectors/

industries of use

!b to k)

Public Sector;

DCUs, NDCUs

Private Corporate

Sector

Major, medium & minor irrigation

works, state farm corporation,

orchards & plantations, forest

development corporations etc.

Private Household &

Unorganised Sector

Plantations

& rubber

' tea, coffee Farm buildings, orchards and

plantations, animal sheds, land

improvement and reclamation of

land, field bunding and other

improvements, machinery and

equipment, construction of

embankments, transport, private

co-operatives like sugar and milk

cooperatives.

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Flow Chart 11.2

Gross Capital Formation in Agriculture

Construction

Industry of Use

Agticuiture

Manufacturing

Mining & quarrying

Trade, hotels

& restaurants

Electricity, gas &

water supply

Construction

Banking,

insurance, real

estate.

ownership of

dwellings

Transport, storage

& communication

Community, social & personal

servicesfPublic administration &

other services

Output as input in

agriculture & allied

activities

Power Water Seedsl

fertilizers

Indirect use

Infrastructure

Machinery &

Equipment

Direct consumptive use

Agriculture & Allied

Activities

Final Output: agricultural products,

dairy products, livestock, fishery,

wood etc.

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11.3 Deviations in the Indian and the UN SNA and their Implications:

In the national income estimates, allocation of capital assets into various industries of use can be subject to cri t icism in view of f i rst , the industrial classif ication as done in the UN system of accounts and the way it is fol lowed in the Indian system and second, apport ionment of capital assets between administration, DCU and NDCU departments wi th in public sector accounts. These points are elaborated below:

11.3.1 Apportioning Capital Assets as per the Industrial classification in the UN and Indian SNA:

As mentioned earlier, the ISIC criteria to delineate activit ies into various industrial groups was based mainly on the nature of goods or services that are produced as the principal product of the act iv i ty in question (UN SNA, 1993). The producer units or the enterprises or establ ishments were classif ied according to their principal act iv i t ies. The group of establ ishments or industries engaged in similar types of product ive activit ies was then grouped together to form eleven industries of use in the economy. In India, however, nine industries of use are classif ied. Within each, further classif ication of these industries of use is done depending upon again the type and nature of activity. The major deviations in the Indian SNA from UN SNA are il lustrated below.

First, wi th in the Indian SNA, there is a divergence f rom UN SNA w i t h respect to the allocation of investment on major, medium and minor irrigation works. As per the UN system, whi le operation of i rr igat ion systems is under 'agr icul ture and allied ac t iv i t ies ' indust ry of use, construct ion work on the same is accounted for in the ' cons t ruc t ion ' industry of use (Flow chart-3). However, in India as well as in Nepal, all expenditures on irrigation (maintenance and capital) are considered to be a part of agriculture industry only. This deviation was found to be useful because firstly, expenditure on irr igat ion is considered to be earmarked mainly for agriculture development, the same way it is carried out for land reclamation, soil conservation and drainage works.

Second, like irrigation works, the UN SNA considers construct ion of power plants in the 'construct ion ' industry of use. Other investments in power, such as investments on generation, transmission and distribution of power are taken in the 'electricity, gas and water supply' industry of use. In India, however, all such capital expenditures related to construct ion, power generat ion and supply by the publ ic sector are appor t ioned in t he 'electricity, gas and water supply' industry of use only.

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Within electricity, gas and water supply sector, a divergence that has emerged recently is on account of production and distribution of Liquefied Petroleum Gas (LPG). The revised series on National Accounts Statistics has included output of Liquefied Petroleum Gas (LPG) in the manufacturing sector and the distr ibution of LPG in the t rade sector (GOI 1 9 9 9 ) . Accord ing ly , t h e G C F in t h e s e ac t i v i t i es is a c c o u n t e d for in the manufacturing and trade industries of use. However, supply of gas through pipelines continues to be part of electricity, gas and water supply sector. This is different from the UN SNA where the production and distribution of LPG is taken as an integral part of the 'electricity, gas and water supply' industry of use.

Flow Chart M.3 Classification of Economic Activities in the SI\IA (GCF)

Major Deviations

Agriculture Agriculture proper Livestock Fishing Forestry Operation of system

Mining and quarrying Manufacturing

4. Construction

© Irrigation projects (Construction work)

® Power projects (Construction work)

Electricity, gas and water supply Supply of gas through pipelines

• Production of LPG

1. Agriculture * Agriculture proper * Livestock * Fishing * Forestry * Operation & capital Irrigation

expenditures on irrigation projects

2. Mining and quarrying 3. Manufacturing

4. Construction

5. Electricity, gas and water supply * Supply of gas through pipelines

Production

Distribution of LPG.

Distribution 6. Trade, hotels & restaurants 7. Transport, storage & communications 8. Banking, insurance & real estate

9. Ownership of dwellings 10. Public administration & defence 11. Other services

' 6 . Trade, hotels & restaurants 7. Transport, storage & communications 8. Banking, insurance, and real estate,

ownership of dwellings 9. Community, social & personal services

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As such, these deviat ions in the Indian SNA f rom the UN SNA of classif ication of industries may not have serious implications for the estimates of GCF or GDP at a macro level. However, the departures are arguable on conceptual grounds as well as for planning purposes at the sectoral level, in particular by the Central and State governments. An issue pertaining to agriculture sector is raised below:

Under the UN system, only operation of irrigation system is considered as part of agricultural services. Whereas, in India, owing to the importance of irrigation for agriculture, and the agriculture sector being defined in a much broader way, all i nves tment on i r r igat ion is inc luded under agriculture. On the other hand, the Indian SNA puts the investment on construct ion of power plant, generation, transmission and distr ibut ion of electricity under the 'electricity, gas and water supply ' industry of use. The same, however, is not adopted by the UN SNA. Needless to say, a substantial part of electricity produced is used by the agriculture sector for pumping irrigation water. It is, therefore, queer to note that Indian SNA does not apportion any investment in power sector to agriculture. It may be argued that conceptually this is not a very sound practice. This is because given the way investments are being apport ioned at present, the Indian SNA would under-estimate capital format ion in 'const ruc t ion ' and over-estimate in the 'agriculture' and 'electr ici ty, gas and water supply' sectors, compared to what the UN SNA would provide.

The above example reveals that these variations in the al locat ion of investments under different heads under the UN and Indian SNA appear to be somewhat arbitrary. There is nothing sacrosanct about these allocation procedures. It depends upon the objective func t ion , and one may have to re-group many of these heads to work out a 'relevant' series of capital formation depending upon the hypothesis at hand. If one is t ry ing to test the hypothesis that neglect of public se t te r investment in agriculture would adversely affect the growth in agriculture, one should be prepared to re-define the concept of capital format ion relevant for the growth of agriculture. Looking at investment in power sector f rom this point of view, i.e., to the extent it helps to supply power to agriculture for irrigation pumping, it is surely an important element of public sector investment that needs to be apport ioned to agriculture. Besides, there may also be several types of public sector investments (apportioned under administrat ion) in watersheds, rural roads, rural markets, etc. , tha t government may be undertaking under several other rural development schemes, that are as relevant as the investments in major and medium irrigation projects for the growth of agriculture. The lesson of this is that we need to re-estimate the public sector investments in agriculture if we

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have to test the hypothesis of growth in agriculture being affected by public sector investments in agriculture.

Similarly, estimates of capital formation in agriculture on private account, comprising corporate companies and households, are also found to be somewhat less comprehensive in their coverage. This is because the present Indian SNA does not take full account of the capital format ion carried out in horticulture, f loriculture, dairying, beekeeping, poultry and other related activit ies . Also, old indices are used to blow up household investment for years other than that given in the AIDIS , which may introduce an element of under-est imat ion of private investments in agriculture. Yet another drawback relates to the absence of information on the capital format ion that takes place in the unorganized household sector and by the private co-operative societies. Some of the estimates under these sectors are made and updated on the basis of surveys undertaken in the past, Overall, capital account of households is di f f icul t to be made more authentic in view of the use of decennial data and under reporting of information in the unorganized sector. On the other hand, in the context of GCF in the public sector account, shortcomings are visible despite the fact that there is no constraint of access to data/

10 information in any of the industries of use

In conclusion, one can say that at sector-specific level, Indian SNA has deviated f rom the UN SNA in estimating GCF. And this is particularly true w i th respect to agriculture. Whatever the reasons underlying this deviat ion, one thing is clear: there is nothing sacrosanct in adhering to the UN guidelines on a water-t ight basis for each sector. Countries have deviated f rom the UN guidelines for est imating GCF at sector level, depending upon what they considered appropriate either in view of the objectives they were looking at or due to convenience of data being available in one form or the other. Given our objective of looking at what is happening to capital formation in agriculture, especially by the public sector, and its consequent impact on agricultural GDP, one must f irst at tempt to have an "appropriate" concept of public sector GCFA. And this is the subject matter of next chapter.

8 The capital formation in agriculture and non-agriculture business in the household sector is estimated on the basis of All India Debt and Investment Survey (AIDIS) carried out by RBI and CSO after every ten years.

9 See report of the Expert group on Savings and Capital Formation in India (1982) and (1996) for more details on limitations of data.

10 Detailed budget documents and annual reports are assessed by the CSO to determine the extent of capital formation in the public sector in each of the defined sectors at the central and state levels. The major constraint is weak and irregular information/data on GCFA at a lower level of governnr ent and by the NDCUs.

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CHAPTER - III

TOWARDS A NEW CONCEPT OF GCFA

III.1 Backdrop:

It is evident f rom the discussion in the previous chapter that the nature and scope of new concept of GCFA, and its empirical est imat ion, depends upon the purpose at hand. In this chapter, we at tempt to basically re­define and re-estimate some alternative concepts of GCFA. As was noted in the previous chapters, GCFA is decomposed into public and private sectors, based on inst i tut ional classif ication. In this chapter, our ef for t is to re-construct the series of GCFA only on public account at current and constant prices w i th base 1993-94 . This is because the main thrust of this study is to measure the impact of declining public sector investment in agriculture on agricultural GDP. The likely amendments in the private GCFA could be a subject matter for another study.

We would like to basically test three hypotheses: f i rs t , is the public sector investment in agriculture really declining in real terms since early 1980s? Second, what is the relation between private and public sector investments in agr icu l ture ; and th i rd , is the g r o w t h in agr icu l tu re dependent on GCFA? If yes, what influence public and private sector components of GCFA have on growth in agriculture?

Keeping these hypotheses in the background, we would like to f i rst delineate the contours of agricultural sector as such. This is important as the very definition or classification of the agriculture and allied activities is not the same in the national accounting system and in the government 's b u d g e t i n g and p l ann ing p r o c e s s e s . S ince t h e r e e x i s t s a c l o s e cor respondence be tween the plan and budget ca tego r i es of t he expenditure on agriculture and allied activit ies, we consider only t w o definit ions of agriculture: one as given in the National Income Accounts and other in the budget documents. The national income accounts define agriculture sector as the one, which comprises agriculture proper, livestock and livestock products, forestry and logging, f ishery and irrigation system. As per the budgetary classif icat ion, 'agriculture and allied sector ' covers all those activit ies that are included under the primary sector in the national income accounts w i th only exception of investment in major, medium and minor irrigation works. This broadly covers almost all the activit ies listed above and other activit ies like crop and animal husbandry, horticulture, f loriculture, dairy and milk supply, communi ty development, food, storage and warehousing, so i l and water conservat ion, watershed

37

management, agricultural research and education and forestry and fishery. This latter defini t ion of agriculture and allied sector as given in the budgetary documents gives eleven heads of expenditure. It, however, excludes some public expenditure, which acts as a kind of support to agriculture, like power subsidies and agricultural credit subsidy (both of which are outside the government budget), but includes some other expenditures, which are indirectly related to this sector, like subsidies on fertilizer, imputed irrigation subsidy etc. (Ravishankar, 1990).

A few variations in these classifications may also be observed. Budgetary expenditures on (a) procurement of food and its trade are apportioned in the trade industry of use defined in NAS, (b) warehousing is included under NDCUs, and (c) milk supply schemes and food processing are covered in the manufacturing industries of use. Also, expenditure on storage and warehousing, crop engineering, animal husbandry, fishery, communi ty part icipation, research and education, etc. classified in the agricultural sector are apportioned in the "other economic services' , 'agr icul ture, forestry, hunt ing and f ishery services' and 'educat ion ' categories of public administration wi th in the community, social and personal industries of use in the National Income Accounts. Further, in the absence of complete information on public capital format ion of administrative departments at the local level, say municipal corporations and panchayats, the estimates for agriculture as well as other industries of use are apportioned together in the public administration services wi th in the ninth industry of use (community, social and personal services) in NAS. In view of such variations in these classif ications, it is di f f icul t to arrive at a single consistent defini t ion of capital format ion in the agricultural sector. Therefore, we have defined basically three concepts of capital formation in agriculture, w i th increasing coverage of its scope. These concepts are largely related to the coverage of public sector investments in agriculture and allied activities. These are delineated below.

III.2 Concept I: Business as Usual

This is the conventional concept of capital formation in agriculture that has been in usage in the Indian SNA (CSO). The public sector capital fo rmat ion in agr icul ture, as per th is concep t , basical ly compr ises government investments in major, medium and minor irrigation schemes and plantations in the forestry sector. Major, medium and minor irrigation schemes const i tu te more than 9 0 % of public sector investments in agr icu l ture. The pr ivate sector componen t of capi ta l f o rma t i on in agr icu l tu re relates to corpora t ions and househo lds , t he share of households being overwhelming (see chapter-l). It may be mentioned

38

here that this conventional concept is at variance w i th the UN SNA as far as the treatment of investment in major, medium and minor irr igation schemes is concerned. In the UN SNA, investment in major and medium irrigation schemes remains under the 'construct ion ' industry of use. It is only in the Indian SNA that irrigation investment has been taken out of 'construct ion ' and put in the 'agriculture and allied act iv i t ies ' .

Mi.3 Concept 11: Concept i plus Investment in Power for Agriculture

This concept of capital formation extends the coverage of public sector component to include a part of investment in power sector that goes to agriculture. The rationale is very simple: if investment in major, medium and minor irrigation schemes helps supply water to agriculture, so does the investment in power sector, including rural electr i f icat ion. The only difference is that while largest part of investment in irr igation schemes is the easily identifiable benefit going to agriculture, in case of power investments , the benef i ts are d is t r ibuted across var ious consumer categories like industries, agriculture, households and commercial (trade). A logical way would be to apportion the investment in power sector across these consumer categories in the ratio of their relative shares in consumpt ion. Since these shares have been changing over t ime, one wi l l have to take care of this whi le apportioning power sector investment to any particular sector. This is precisely what is done in this concept II of public sector investments in agriculture. Power supplied to agriculture has ranged from 14% in 1974-75 to about 3 0 % in 1998-99 of the total power being consumed in the economy . Accordingly, these varying ratios of each year are applied to apportion power sector investment relevant for agriculture.

It may be mentioned here that this t reatment of apport ioning power sector investment across different sectors has been accorded keeping our object ive funct ion in mind, namely t ry ing to see whether these investments affect private sector investments in agriculture or not, and whether these investments have any impact on the growth of agriculture. Needless to say, this is not very standard practice either in the UN or Indian SNA. In the UNSNA, power sector investments on construct ion works remain w i th 'construct ion ' industry of use and in Indian SNA w i th 'electricity, gas and water supply' industry of use. But, as ment ioned

1 There Is reason to believe that these ratios are somewhat inflated. It is well known that power consumption in agriculture is not metered, and that there are large non-technical losses of pov< er, which sometimes are shown as going to agriculture, at least in part. We have elaborated this point elsewhere. But in this exercise, we have used the same ratios of power consumption by agriculture as given by the Central Electricity Authority/Planning Commission.

39

above, it may be wor th reiterating that Indian SNA had deviated from the UN SNA in the treatment of investments in major, medium and minor irrigation schemes by taking it out of the 'construct ion ' and putt ing it under 'agriculture and allied act iv i t ies' . Since a part of investment in power sector performs the same funct ion in agriculture as investments in major, medium and minor irrigation schemes, i.e., bringing irrigation water to agriculture, we have gone by the same logic to apportion a part of power sector investment to agriculture.

Thus, this concept defines capital format ion in agriculture as concept I plus an apportioned part of power investments relevant for agriculture. The power investments (capital expenditures) made by the centre (union), states and developmental loans given by states for power projects are taken for construct ing the series.

III.4 Concept III: Concept II plus Investment in 'Agriculture' as defined in Government Budget

As ment ioned earlier also, the practice of def ining 'agr icu l ture ' for al locating government expenditures differs in the budget documents of the central and state governments, and the Indian SNA. The budget documents cover 'agriculture and allied act iv i t ies' in its broad sense and include various expenditures like crop husbandry, animal husbandry, food, storage and warehousing, soil and water conservation, dairy development, f isheries, forestry and wildl i fe, cooperat ion, agricultural research and educat ion, investment in financial inst i tut ions and other investments in agricultural programmes under this category. The Indian SNA considers capital expenditure on many of these as administrative in nature by the centre and states and treats them as GCF in the agriculture and other categor ies of economic services under the economic and purpose classif ication statement.

Under concept III, we have considered capital expenditure on agriculture and allied activit ies by the central and state governments, including loans given by the state governments. It may be mentioned that apart from direct capital spending, the centre also'creates capital assets through centrally sponsored schemes on crop, animal husbandry etc. and through specific purpose grants (tied grants) or subsidies given to the states and to a lower level of government. These expenditures are given mainly under the revenue accounts of the centre and state f inances. Further, there is some capital spending on agriculture and minor irr igation wi th in the revenue accounts of the budget, especially when the amount is not more than Rs. 20 ,000 . It is dif f icult to account for these expenditures in

40

view of f i rst , inaccessibil i ty to details on the extent of capital assets created by the states out of these expenditures and second, the assets purchased through grants are primarily for rural employment and ant i -poverty schemes under the rural development programme. It is an arduous job to separate out expenditures being spent on only agriculture act ivi t ies out of the tota l . Therefore, we have not considered these expenditures in concept III.

The capital expenditures on power and agriculture and allied act iv i t ies by the central (union) government are extracted f rom the Finance Accounts, published by CAG. State level data is taken from Finances of State Governments (total of 25 states), issued by the RBI. The loans given in the capital account for agriculture and allied activit ies and power are of developmental nature. These developmental loans of capital nature are given by the central government to enterprises falling under the centre and to the state governments, who in turn advance to a lower level of government, say panchayats and district level local bodies etc., individuals, private co-operatives and public sector undertakings. Since most of the loans given by the centre are channeled through state governments, we have taken loans advanced by the state government only.

In the case of power, it is often pointed out that some of the developmental loans advanced by the states for power projects are uti l ised by the state electr icity boards for coverage of their losses (Ravishankar 1 990) . A lso , there is no information on the extent of capital format ion created out of these loans. In this s i tuat ion, the series constructed on GCF in power or may be agriculture could be on the higher side. The f igures, however, wi l l not be inflated much because some amount of capital transfers and grants under revenue accoun t , advanced d i rec t l y by the cen t ra l government and state governments to agriculture and power sector could not be taken due to d i f f icul ty in segregating such information f rom the f inance accounts and state f inances of the RBI . From the total capital expenditure in agriculture, forestry, f ishing and relevant power, f inancial investments (net investments in stocks) in these sectors, given in NAS are deducted to arrive at physical capital format ion. Details on empir ical mapping of the three concepts on public GCFA are provided in Annexure VI.

Detailed information at the union level and for each state is available with CSO. Based on it, grants are classified into current and capital transfers as given to local and non-local bodies under various economic services, including agriculture and power. The series is given in one of the statements in NAS. Also, a separate column on subsidies given to the agriculture sector is made. We have not considered these because of definitional problem of 'agriculture' as taken in NAS and in the Finance accounts. Capital transfers in the case of power are clubbed with other sectors viz. gas, steam and water supply.

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III.5 Other Concepts:

While the above three concepts of capital format ion in agriculture are estimated and used in test ing various hypotheses in this study, one may also define and empirically estimate a few more concepts of capital format ion in agriculture. It is well known that government has been spend ing qu i te a large sum in several schemes re la t ing to rural development programmes under 'rural development' and 'MP local area deve lopment schemes ' heads of expendi ture. One very impor tan t expenditure amongst these schemes is under the ' Jawahar Rojgar Yojana'. Under this, and many other similar schemes for rural development, many capital assets are created in the rural areas ranging f rom residential buildings to roads, and soil conservation to watersheds. Al though the main objective of these schemes is normally to provide employment and alleviate poverty, they do create some public assets that help growth of agriculture. Logically, one should include these created capital assets also as a part of public sector capital formation in agriculture, but the problem is that there is not enough information available that can help one to segregate the capital expenditures from these schemes and how much of that is relevant for agriculture .

Sometimes, one may like to take the argument a l itt le further. One may argue that growth in agriculture does not depend only on investments in irr igation or power or some such expenditures direct ly al located to agriculture, but also on several expenditures that target at post-harvest act iv i t ies . For example, investments in rural roads, in storage and warehousing, transportat ion and even processing helps agriculture to grow. Thus, one may like to construct still more comprehensive series of capital formation relevant to explain growth in agriculture. Al though the argument is logical, the dif f iculty is where to draw the line, and one is reminded of Dantwala's famous d ic tum: ' investment in agriculture' and ' investment for agriculture'. We have not at tempted these concepts of capital format ion in/for agriculture in this study. But there have been some similar attempts by the Planning Commission in the past to allocate government expenditure between rural and urban areas, especially when the debate that "there is an urban bias in government policies' raged in the country and questions were raised in the parliament. It is in response to these questions that Planning Commission had at tempted to apportion various expenditures under several heads, including railways, between rural and urban areas by using some norms. Generally these norms are

3 We did collate information on many of these aspects, which we could not use for this study due to lack of critical information on 'allocation coefficients' that could be used to apportion these expenditures between agriculture and rural development. It may be a subject matter of another study.

42

of consumption nature. For example, how much rural vis-a-vis urban load is there on railways, on ports, and so on. Obviously, it is not a very easy exercise. Given the paucity of information on many of these norms, very crude guess work is applied to apportion these expenditures between rural and urban areas. And that is the reason that such exercises remain confined to the fi les of Planning Commission marked 'only for internal use'. We have highlighted some of the ways for improvising on that system along w i th the public and private corporate sector investments that can be considered to be falling under agriculture in Annexure IV, but have not used in this study for test ing the main hypotheses.

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CHAPTER - IV

ALTERNATIVE CONCEPTS OF GCFA AND TESTING THE HYPOTHESES

Having defined and estimated alternative concepts of public investment in agriculture, one can now test the various hypotheses relating to capital format ion in agriculture and its impact on agricultural g rowth . To recall, the three main hypotheses in this regard are:

•^ Capital formation in agriculture has been fall ing since 1980s. The fall is more severe in public sector component than in private sector component.

•/ Private sector investment in agriculture is strongly inf luenced by the public sector investment, and therefore neglect of public sector investment would adversely af fect private sector investment in agriculture also.

^ Capital formation in agriculture, both by public and private sectors, affects GDP growth in agriculture.

Each one of these three hypotheses is tested w i th the help of stat ist ical tools in the fol lowing sections.

IV. 1 Behaviour of Public and Private Capital Formation in Agriculture:

Table IV. 1 and Fig. IV. 1 reveal the behaviour of public sector investment in agriculture at 1 993-94 constant prices, under alternative concepts of capital format ion as defined and est imated in the previous sec t ion . Compared to public GCFA in 1 974-75 under concept I, investments under concept II increased by Rs. 5 billion when investment in power is added and got almost doubled under concept 111 when investment of agricultural activit ies is included. The difference between the absolute levels of investments under these three concepts narrowed down by the year 1 998-99 . The level of investment is indicative of a fall in the public GCFA whichever way it is defined. The share of public GCFA in the aggregate (public plus private) under the business as usual scenario, wh ich takes the definit ion of public investment given by CSO fell f rom 48 .1 percent in 1980-81 to 25 .34 percent in 1998-99 . The share of same under concept II and concept 111 when investment in power and agriculture are added, knocked down f rom 54 .64 percent and 64 .49 percent in 1980 -81 to 32.3 and 32 .92 during 1998-99 .

Table-IV.1: Public GCFA under Alternate Concepts and their Share in New GCFA at 1993-94 Prices (Rs. billion)

Years Concept I Concept II Concept III %age %age %age share of I share of II share of III in GCFA In GCFA in GCFA

1974-75 34.92 39.49 75.23 29.39 32.01 47.28

1975-76 40.07 45.77 85.05 29.53 32.37 47.07

1976-77 53.84 60.28 78.14 32.07 34.58 40.66

1977-78 59.91 66.88 77.00 37.47 40.09 43.51

1978-79 67.78 77.06 102.42 32.97 35.87 42.64

1979-80 69.51 79.86 117.73 33.78 36.95 46.35

1980-81 73.01 83.51 125.91 51.30 54.64 64.49

1981-82 71.30 81.42 104.46 50.64 53.95 60.05

1982-83 70.92 82.51 103.98 48.81 52.59 58.30

1983-84 71.96 83.25 109.92 48.87 52.51 59.35

1984-85 69.21 81.25 125.85 46.30 50.30 61.06

1985-86 62.13 73.94 101.42 43.96 48.29 56.15

1986-87 58.64 72.80 92.14 42.78 48.14 54.02

1987-88 60.45 75.38 87.90 42.29 47.75 51.59

1988-89 56.99 72.08 83.73 38.61 44.30 48.02

1989-90 49.72 67.54 80.19 37.04 44.42 48.69

1990-91 49.92 71.01 80.91 30.41 38.33 41.46

1991-92 43.76 65.96 69.07 29.24 38.38 39.48

1992-93 45.39 65.86 75.76 28.12 36.21 39.50

1993-94 49.18 67.75 76.68 32.25 39.61 42.60

1994-95 53.97 78.78 89.27 32.04^ 40.77 43.82 1995-96 54.07 71.81 82.00 30.23 36.53 39.66

1996-97 51.70 68.01 69.85 27.55 33.35 33.94

1997-98 47.28 67.74 70.02 25.34 32.72 33.45

1998-99 48.18 67.72 69.65 25.34 32.30 32.92

Trend Growth Rates

1980/81- -3.89* -2.22* -4.27* 1989/90

1990/91- 0.74 0.022 -1.08 1998/99

1974/75- -0.62 0.65 -1.2* 1998/99

Notes: Data before 1980 on GCFA public account (Concept I) is deflated using GCFA deflator.

GCFA deflator Is used to convert concept II and III at 1993-94 prices

Public GCFA for 1998-99 is based on its share in 1997-98

'Significant at 1% level of significance

46

A comparison of the annual trend growth rates of the convent ional and new estimates of public GCFA wi l l make the picture more clear. The behaviour of gross public capital format ion in agriculture under concept I, the business as usual scenario, reveals that during the period 1 974 -99 it has decreased at an average annual rate of 0 . 6 2 % . The decrease has been much faster, at the rate of 3 . 8 9 % during 1980 -89 , and posit ive but insignif icant (0 .74%) during 1990-98 . It is this negative average annual growth rate in public sector capital formation in agriculture, wh ich has been at the centre of controversy on the subject.

20.00

Fig.-IV.1: Public Sector GCFAunder Alternate Concepts at 1993-94 Prices

If • )

— 1 — -H— —^ o

— + - — 1 — — 1 — — h -( 0

— 1 — — h - —^ (T>

— H -O

— 1 _ —\— CM

—1— —h-—+~ —!— —1

h - h - r- r̂ r- on oo 00 00 co oo 00 00 oo cy O) a> (7> O) CD O l o> a> 0 ) llS <̂ h - (T> o -̂ fO 4 lA <A t ^

cy r̂ rS T ^ cS 4 .A (h

h - r̂ h - h - r- t ^ 00 oo on en <T> CT> 0 ^ O) O) O l O) cn o> a> <J} o> O) o> o> o> o> o> O) (n <j) o> 0 ) O)

- Concept I Concept II

- Concept III

Years 1974-99

However, if one considers concept II of public sector GCFA, which includes some percentage of investments in the power sector besides wha t the CSO takes, then the relevant growth rate works out to be 0 . 6 5 % for the period 1974-99 , - 2 . 2 2 % for 1980-89 and 0 . 0 2 2 % for 1 9 9 0 - 9 8 . These growth rates are a l itt le better than what one observes under concept I. In particular, the negative growth in public sector GCFA during 1 974-99 is substantially reduced compared to the scenario under concept I. This perhaps indicates that the si tuat ion under concept II is not as alarming as under concept I, although both reveal a substantial fall in the public sector GCFA during 1980 /81 -1989 /90 period over 1 9 9 0 / 9 1 -1998 /99 period.

Under scenario III, which corresponds to concept III of GCFA and includes not only a part of investments in power sector but also wha t is covered under 'agriculture' in the capital expenditures of the government budgets, the picture appears to be grimmer than under scenario I or scenario II.

47

The growth rates are much lower in all the three periods compared. This implies that the other elements of capital expenditure in agriculture, such as crop husbandry, animal husbandry, soil and water conservat ion, food, storage and warehousing, cooperation and investment in research and educat ion, forestry, fishery etc. which are not included in concepts I and II, have declined at a much faster rate than either irrigation investments or power investments relevant for agriculture. By the end of the period under consideration, i.e., 1 998 -99 , the share of this component of public sector GCFA has almost fal len to ni l , making the values of capital formation under concepts II and III almost identical .

Overall empirical test ing reveals that whichever way one defines public sector GCFA, one finds that the trend is either stagnating or declining since mid 1980s, although the rates differ under various scenarios. The g row th rates est imated for concept III of real publ ic GCFA under consideration is signif icant at one percent level f rom the period 1974-75 to 1998-99 . The period 1980-81 to 1989-90, which indicated marked decline in the public GCFA reveals a negative growth rate under all the three concepts, w i th all the concepts showing significance' at 1 % level of significance. Al though the period 1 990-91 to 1 998-99 shows positive trend growth rate under concept I and II, these are however, found to be insignif icant. For the entire period of 1974-98, the rate of growth of public GCFA remains positive and highest (0.65%) under concept II and signif icant and lowest (-1.22%) under concept III.

IV.2 Relationship between Public and Private Sector GCFA:

There are two types of arguments in the literature pertaining to relationship between public and private investments. One, that there exists (or does not exist) a complementarity between public and private sector GCFA, and second that public sector GCFA has an inducement ef fect on private sector GCFA. Often the complementarity word is used in a broad sense to include inducement effect as wel l , which has caused avoidable debate on the subject (see Annexure IV for a detailed review). Movement of public and private investments in diverse direction since mid eighties has i n s t i g a t e d a c o n t r o v e r s y rega rd ing t h e w e a k e n i n g of the complementar i ty between the t w o (Mishra and Chand, 1995 ; Misra 1 998). However, there is a widely prevalent view that a strong relationship exists between the t w o investments at micro level in the canal irrigated areas and the role of public investment in providing infrastructure, research

1 This is also due to fall in public expenditure on power and a sudden rise in the net investrrent in financial assets (NIS) in agriculture and allied activities during 1996 and 1997 (NAS 2000).

48

and other developmental support to the agriculture sector (Rao, 1994 ; Dhawan, 1 996 , 1 998) . This compels one to dig deeper and visualize the nature of relationship between the two types of investments. This is what is at tempted below.

What is postulated in this study is the inducement ef fect of public sector GCFA on the private sector GCFA. We know that public sector GCFA is basically in the nature of rural infrastructure relating to irrigation water supply, directly or indirectly. For example, in concept I of public sector GCFA, investment in major, medium and minor irrigation schemes account for more than 9 0 % of the share, whi le in concept I I , power sector investments relevant for pumping irrigation water are also added to this. Both of these major items of capital expenditure have long gestat ion period. While the investments in power sector may take anywhere from three to six years to f ruct i fy, the investments in major and medium irrigation schemes have even longer gestation lag, anywhere f rom 6 to 20 years, w i th an average hovering around 1 2 years (Gulati, et .a l . , 1 995) . Given these long lag structures between the t ime investments being undertaken and power or canal water being supplied to farmers, it is dif f icult to visualize a strong complementari ty between say this year's public sector GCFA and the same year's, or even the next year's, private sector GCFA. The response of the farmer to public sector investments in canal irrigation or power supplies is likely to be stretched over years, presumably very little in the beginning and relatively much larger when the real power or water supplies reach the farmers. And even when power or canal waters reach the farmers, they may take years to respond w i th higher investments due to paucity of their own resources. In such a si tuat ion, looking for str ict complementari ty between public and private sector GCFA in the sense of say government spending amount 'x ' rupees for any major and medium irrigation scheme in year t , and the farmer undertaking complementary investments 'y ' in the year t or even t + 1 , would be too naVve a theory of the actual s i tuat ion. The fact of the matter is that we do not have any information on the behavioural pattern of the farmer as to how s/he responds to the public sector GCFA that takes years to mature. A more plausible behaviour is that at any point of t ime, farmer responds to the total physical water and power supplied to him each year. These yearly supplies of water and power are in fact the result of cumulative investments in canal and power sectors in the past. Thus, if it is feasible to measure how much water is supplied each year thrdugh canal networks, and how much power supplied to agriculture, one should take either physical variables or cumulat ive investments as the relevant variables influencing private sector GCFA. In the case of physical variables, the estimates of power supplies to agriculture each

49

2

year are available , but the quantum of water supplied through canals is not easily available. For canals, what is easily available is the cumulative potential created, which can be used as a proxy for the total water supplied. Needless to say, the total power supplied to agriculture or canal water supplied to agriculture in any particular year are the results of cumulative investments in canals and power ti l l that year. Thus, one approach perhaps would be to use physical quanti ty of power supplied to agr icul ture each year, and cumulat ive potent ial created of canal irr igation, as the relevant variables of GCFA in public sector influencing private sector GCFA. Some attempts have been made in this direction to explain the response of private sector investments in agriculture (Rao, 1997 ; Dhawan, 1998). If one is talking in terms of f inancial resources the relevant variables influencing private sector GCFA are the cumulative investments of the public sector in GCFA, and not that year's investment alone.

In the present study, we test the hypothesis of the relationship between private and public sector GCFA by using cumulative investment approach (both physical and financial) of the public sector so far as it is related to concept I and concept II of the definit ion of the public sector GCFA. It may be recalled that concept I of the public sector GCFA includes basically investments in major, medium and minor irrigation schemes, while concept II also takes care of the investments in power sector to the extent they are relevant for agriculture. In concept III of the public sector GCFA, however, there is an element of capital expenditure, like crop and animal husbandry, soil and water conservation, storage and warehousing, forestry and so on, wh ich is not in the same group as that of canals or power. Therefore, that component only is treated on annual basis and not on cumulative basis.

The hypothesis postulated is that the public sector GCFA has a strong and posit ive inducement effect on private sector GCFA. Besides, private sector GCFA is also influenced by the availability of inst i tut ional credit as well as the terms of trade between agriculture and the non-agriculture sector.

IV.2.1 Empirical Testing:

Ordinary least square method is used to test the hypothesis of the relation between pr ivate and public sector GCFA. The public sector GCFA

There is some discussion in tl^e literature relating to power supplies to agriculture that the estimates supplied by the Planning Commission have an element of over-estimation (see Gulati and Narayanan, 2000).

50

corresponds to various concepts defined in the previous sect ion. Since CSO's revised series at base 1993-94 on public GCFA (concept I) is available only f rom 1980 onwards, the t ime period selected for the analysis is f rom 1 980-81 to 1 998-99 . For the purpose of analysis, some other relevant variables, which have bearing on private capital format ion, are also considered. These are the insti tut ional credit and terms of trade. A priori, relationship between private investment in agriculture and various explanatory variables is explained below:

• Public Investment in Agriculture or Irrigation in Physical Terms

Canal intensity, measured as the ratio of area irrigated by canals as a proport ion of net sown area is used to represent the conventional public investment in agriculture or irrigation as given in the NAS. An increase in investment in canals is expected to posi t ive ly in f luence pr ivate investment in t w o ways: (i) it wi l l augment investment in agriculture land and (ii) it wi l l encourage private investors to invest in l ift i rr igat ion. This variable is well correlated w i th private capital formation in agriculture (r = 0.814) .

• Public Investment in Power for Agriculture

In 1974-75 of the total power supplied in the economy, agriculture accounted for 14 percent. This proport ion rose to 3 0 percent in the year 1998-99. The absolute amount of power supplied to agricultural sector each year is taken as a proxy variable (physical) for public investment in power that goes to agriculture. Availability of electr ici ty is expected to acce lera te i nves tmen t in wel l i r r iga t ion the reby a u g m e n t i n g the product iv i ty of cult ivated area and income in the agricultural sector. Our analysis revealfe that power supplied to agriculture is highly associated w i th private investment ( r = 0 .952) .

• Terms of Trade Index

The ratio of prices received for the outputs sold to prices paid for the commodit ies bought as inputs, intermediate and consumpt ion goods, commonly known as the terms of trade, inf luence farmers decision to invest. Favorable terms of trade to agriculture over extended periods of t ime set ground for a sustained growth in the agricultural sector. They induce farmers to invest more in agriculture through use of improved technology and also influence agricultural output and income. Fig.-IV.2 depicts the movement of Terms of Trade (TOT) w i t h TE 1971-72 as the base, real private and public investment in agriculture w i t h base 1993-94 . The TOT index is constructed using three yearly moving averages.

51

This is because farmer's decision to undertake investment in the current year is based on price movements for the past two to three years, it is clearly visible that favourable TOT determines movement of private investment in agriculture. Even if the index is used w i th one year lag, there is not much change in the pat tern. The correlation coeff ic ient between one year lagged TOT variable and private investment is 0 .838 .

Fig.-IV.2: TOT TE (1971-72 base), Public and Private Sector GCFA (1993-94 base)

150

140

130

120

110

100

90

80

70

60

50

40

30

20

'r=t:...

95 94 93 92 91 90 89 88 87 86 85 84 83 82 81 80 79 78 77 76 75

Years 1980-99

> Public GCFA

— Private GCFA

• T O T

1980 1981 1982 1983 1984 1985 1986- 1987 1988 1989 -81 -82 -83 -84 •85 -86 -87 -88 -89 -90

TOT: 87.3 82.9 84.7 86.3 86.0 82.4 85.3 86.9 86.2 86.5

TOT 3 yrs.: 87.1 86.3 84.9 84.6 85.7 84.9 84.6 84.9 86.1 86.5 moving av.

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 -91 -92 -93 -94 -95 -96 -97 -98 -99 •2000

TOT: 90.0 92.7 86.6 90.9 91.7 90.3 93.1 91.5 94.7 93.9

TOT 3 yrs.: 87.6 89.7 89.8 90.1 89.7 90.9 91.7 91.6 93.1 93.4 moving av.

Source: Revised data from Commission on Agricultural Costs and Prices (CACP), Ministry of Agriculture. Figures for 1998 and 1999 are provisional.

52

• Institutional Borrowings

The above three fac tors basical ly induce the farmers to invest in agriculture w i th a view to raise his income. But, his capacity to invest is augmented if inst i tut ional credit is available at reasonable terms. A farmer's decision to invest in assets such as machinery and equipment, therefore, is likely to be signif icantly af fected by availability of f inancial resources on easy terms. Institutional f inance to agriculture is one such variable that a priori should have positive impact on the private sector GCFA as shown by high correlation coeff icient (r = 0.818) between the t w o .

All the investment variables and insti tut ional f inance to agriculture used in the analysis are in Rs. million at constant prices w i th base 1993 -94 . The institutional finance is converted at 1993-94 prices by using GDP deflator. The unit for power supplied to agriculture is in mill ion k w h . The data on TOT index, extracted from the Commission on Agricultural Costs and Prices is at base TE 1 971 -72 and is the revised one as on September, 2000 . The estimates of the regression analysis explaining variations in the private capital formation for the t ime period 1980-81 to 1998-99 are discussed below.

IV.2.2 Results:

The regression results given in log linear funct ional form in Table-IV.2 provide a reasonably good picture of the stat is t ica l tes t ing of the hypothesis postulated above for the period 1980-99 . The real physical variables of canal intensity and power supplied to agriculture, wh ich are the main components of public sector GCFA in concept II can explain 91 % and 9 0 % of the variation in private sector GCFA (Equation 1 & III in Table-IV.2). Both canal intensity and power variables are stat ist ical ly signif icant at 1 % level of significance. Private GCFA is also posit ively associated w i th canal intensity and lagged private investment. The logic behind including the lagged private sector GCFA in the equation is to capture the strong in built trend in private sector GCFA. Explanatory power of the equation shows 89 and 9 2 % variat ion, once we include one year lagged TOT and insti tut ional credit along w i th canal intensity in equation IV and V. Institutional f inance also turns out to be an important determinant of pr ivate sector GCFA, but it seems to have s t rong collinearity w i th power (r = 0.826) and canal intensity (r = 0 .699) . But, it does prove that statistically all the variables hypothesized above do have a strong impact on private sector GCFA.

53

Although the physical variables are very strong statistically and explain high elasticity of canal intensity w i th private sector GCFA at almost 2.0 for the t ime period undertaken. The elasticity of private sector GCFA w i th respect to power supplies to agriculture is 0 .28 (equation II). What this implies is that a 10% increase in the canal intensity may raise the private sector GCFA by 2 0 % , and a 10% increase in the power supplies to agr icul ture wou ld raise the private sector GCFA by 2 . 8 % . It is interesting to observe that the estimates of elasticity are again meaningful when the variable public GCFA is taken in financial terms.

TablelV.2: Physical Factors Affecting Private Investment in Agriculture, 1980-81 to 1998-99: Regression Results

Constant

Coefficient of

Equation no.

Constant Canal intensity

Power supplied

Institutional finance

Terms of trade index lag one year

Private investment lag one year

Adjusted R square

1 -2.59 1.26 (0.79)

0.2 (2.7)

1.92 (2.4)

0.91

II 1.12 0.281 (6.6)

1.65 (2.3)

0.91

III -2.79 1.84 (2.18)

0.85 (9.8)

0.90

IV -15.1 2.9 (3.2)

0.23 (2.53)

3.0 (5.8)

0.89

V -7.4 1.98 (2.5)

1.58 (1.7)

0.60 (3.6)

0.92

Notes: * Log-linear functional form is used in the analysis * Numbers in round parentheses are t-ratios ** Equations Ili-V are estimated using autoregressive transformations (AR (1)) for

serial correlation.

If one moves away from physical variables of public sector GCFA (canal intensi ty and power supplies) to f inancial variables, i.e., cumulat ive investments in canal irrigation and power sector relevant for agriculture, even then one can explain variations in private sector GCFA, though the degree of variation explained reduces marginally compared to that under situation of physical variables. The results of this alternative exercise are given in Tables-IV.3.

54

There is a posit ive associat ion between private GCFA and f inancial cumulative public GCFA (r = 0 .849) . During the t ime period 1980 -99 , cumulative public investment under all the three concepts in f inancial terms turns out be highly signif icant in influencing private investment. Institutional f inance and terms of trade are the other t w o variables that positively af fect private investment. However, there seems to be problem of multicoll inearity as indicated by high and positive correlation between independent variables viz. inst i tut ional f inance and cumulat ive public investments (r = 0.81) (concepts I to III), between lagged TOT and cumulative public investments (r = 0.67) and between insti tut ional credit and lagged TOT (r = 0.65) . The results presented in Table-IV.3 show that public capital formation in agriculture estimated on cumulat ive basis under all the three concepts is statist ically signif icant at 1 % level of significance (equations I, IV and VI) and explain 8 9 % of the variations in the private GCFA. It may be pointed out that if one goes by the f inancial variables of that year only (instead of cumulative f inancial investments) as the relevant explanatory variables, as many of the existing studies have attempted to do (as in Chand, 2000) , the statist ical f i t may or may not turn out to be better. But, knowing the nature of public investment in long term irrigation and power projects, it would be logically incorrect to accept those estimates in influencing private GCFA.

55

Table-IV.3: Financial Factors Affecting Private Investment in Agriculture at 1993-94 Prices, 1980-81 to 1998-99: Regression Results

Equation

no.

Constant CU PGCFA 1 (irrigation!

CU power

1

CU

PGCFA II

CU PGCFA

III

Terms of Institu-trade tional index finance lag 1 year

Private investment lag 1 year

Adjusted Rsq.

1 -3.23 0.16

(2.29) 1.9

(2.13)

0.36

(1.6)

0.89

II 4.25 0.18

(2.7) 0.40

(1.93)

0.74

III -1.07 0.15

(2.64)

1.77

2.09)

0.26

(1.12)

0.90

IV -2.88 0.16

(2.4)

1.9

(2.13)

0.33

(1.5)

0.89

V 4.61 0.185

(2.9)

0.37

(1.8) 0.76

VI -3.31 0.15

(2.22)

1.88

(2.09)

0.37

(1.7)

0.89

VII 4.19 0.19

(2.8)

0.39

(1.9)

0.75

Notes:

CU PGCFA I : Cumulative financial real investment of public GCFA under concept I

CU power: Cumulative financial real investment of public GCFA in relevant power, Rs. million

CU PGCFA II: Cumulative financial real investment of public GCFA under concept I and cumulative relevant

power under concept II, Rs. million

CU PGCFA III: Cumulative financial real investment of public GCFA under concept II and annual investment

in agriculture and allied activities under concept III, Rs. million

* Log linear functional form is used in the analyses

'Numbers in round parentheses are t-ratios

The elasticity of the private sector GCFA wi th respect to cumulative public irrigation investment is 0.1 6 and w i th respect to cumulative power supplies to agriculture 0.15 (equation I and III). This indicates that a 10% increase in the investment in irrigation and power supplies to agriculture would increase private GCFA by 1.6 percent and 1.5 percent. The elasticity of private GCFA to concept II and concept III is almost same at 0.1 6 and 0.1 5 (equations IV and VI) when investment in relevant power and agriculture and allied activit ies are taken. Private GCFA is also closely associated w i th lagged TOT and the elasticity is found to vary between 1.77 to 1.9.

56

The estimates of elasticity of private GCFA w i th cumulat ive physical and financial public GCFA worked out in the present study are not str ict ly comparable w i th the elasticities worked out by Shetty (1990) , Storm (1993), NCAER (1995), lEG-DSE Research Team (1997) , Dhawan (1998) and many more listed in Annex Table IV. 1. Those elasticit ies, based on annual f inancial variables w i th base 1 9 8 0 - 8 1 , vary between 0 .25 to 0 .67. Also, the studies differ on account of different t ime periods taken and model specif icat ion. Only comparison can be made w i th Gandhi's s tudy (1990) where he has used cumulat ive government s tock in agriculture (public investment) in explaining private GCFA and has obtained an elasticity of 0.42 between both the investments. While the t ime period of analysis taken and the model specified in the t w o studies differ, it is evident that elasticity of private GCFA and financial public GCFA has gone down. But, there is no denying that infrastructure public investment in irr igation and power do have a strong inducement e f fec t on the agricultural private investment.

In sum, the comprehensive statist ical test ing proves that public sector investment in agriculture, represented by canal irr igation and power supplies (in cumulative forms), has a positive influence ( inducement effect) on the private sector investments in agriculture. Favourable TOT to agriculture and easy access to insti tut ional credit are the other t w o variables that strongly affect private sector investments in agriculture. Any neglect of these variables in government investment programs, therefore, would surely have an adverse effect on the private sector GCFA. The magnitude of elasticity of private GCFA w i th public GCFA wil l vary as per the t ime period undertaken, model specif icat ion and choice of physical or financial variables that represent public GCFA.

IV.3 Public and Private GCFA and their Impact on Agricultural Growth:

The third hypothesis of the study aims to examine the ef fect of public and private capital formation in agriculture on growth in agriculture. It is hypothesized that growth in agriculture, represented by gross domestic product in agriculture (GDPA) responds positively to both public and private capital formations in agriculture, index of TOT and gross cropped area (GCA). Factors such as rainfall, technology, represented by fertil izer intensity or area under high yielding varieties are also found to have a signif icant influence on the crop output (lEG-DSE, 1997 & Misra and Hazell, 1 996) . The growth in GDPA is tested under all the three concepts of public GCFA estimated in the study at 1993-94 prices. Both physical and financial variables of public sector investment are taken to analyze their impact on growth in agriculture. To recall, the physical variables

57

used are canal intensity and power supplied to agriculture. The f inancial variables are cumulative public investment in agriculture or irrigation as based on CSO's data (concept I), cumulative investment in irrigation and relevant power investment in agriculture (concept II) and cumulative investment in irrigation plus power and yearly investment in agriculture and allied activit ies as presented in the budgetary heads of expenditure (concept III). Like public GCFA, capital formation in private sector (another explanatory variable) is also taken on cumulative basis. Since private capital expenditure, wh ich is largely on tractors, pumpsets and other machinery and equipment is incurred only after a period of 3 to 10 years, cumulat ive investment w i th a weighted average of 5 years t ime period is considered.

IV.S.I Model Specification:

The specif ication of the model indicates that growth in agriculture is influenced by cumulative investments (public and private), Gross Cropped Area (GCA) and TOT. In fact , TOT influences GDPA via the yield impact. The equation is capturing both endogenous and predetermined variables. Private inves tment in agr icul ture tha t in f luences GDPA is also an endogenous variable and depends on public investment and terms of trade. Therefore, impact of terms of trade and public investment on GDPA cannot be measured directly by any of the structural parameters, but it wi l l be captured through simultaneous solution of the system. In such cases, 'reduced form method ' also called ' indirect least squares method ' is applied. The structural system in our analysis gives the fo l lowing reduced form equation of the GDPA funct ion:

(1) GDPA = a + p̂ Investment + P̂ GCA + P̂ lagged TOT

where, investment is equal to cumulative public investment plus cumulative private investment and a is intercept term

(2) Cumulative private GCFA = pjj + p^ cumulative public GCFA+ p^ lagged TOT

where, p^ is the intercept term

Subst i tut ing equation (2) into (1), we derive the f inal reduced form equation as :

(3) GDPA = ( a + p^Pg) + (p^ + p^p^) cumulative public GCFA+ (p^p^)

lagged TOT + (P3) lagged TOT + (p^) GCA

OR GDPA = ( a + p,p^) + p|(1 + p j cumulative public GCFA + (P^Pj+Pg)

lagged TOT + (p^) GCA

58

It is shown that reduced form parameters measure the total ef fect , direct and indirect, of a change in the predetermined variable such as public investment, after taking into account of the inter-dependences among the joint ly dependent variables. The parameters of the variable TOT are also reflecting impact on GDPA through both cumulat ive investments and otherwise. The structural coeff icients obtained f rom reduced form equations are estimated using OLS to get final values of the coeff ic ients. The specif ied regression equations are est imated by Ordinary Least Squares (OLS) using log linear fo rm. It is also possible to straightaway estimate equation (3) by using linear or Non-linear Least Squares (NLS) method. In that case, values of the coeff icients wil l indicate only the direct effect. In case of serial correlation (observed under equation 2) Autoregressive Transformations (AR(1)) are t r ied. In such equat ions, Marquardt non-linear least squares algorithm is applied to the transformed equations. The results of the analysis w i th both physical and f inancial variables of investment are presented in Table-IV.4 for the t ime period 1980-81 to 1998-99.

IV.S.l Empirical Results:

While the factors overlap and the explanatory variables are highly correlated, it is evident f rom the results that Gross Domestic Product in Agr icu l tu re (GDPA) is s t rong ly in f luenced by capi ta l f o r m a t i o n in agriculture. The correlation coeff icient between GDPA and public and private investment stands out to be 0 .89 and 0 . 8 2 . Wi th physical variables, the correlation coeff icient of GDPA and canal intensity is 0 .85 and GDPA and power supplied to agriculture is 0 .97 . Another variable lagged terms of trade is also highly associated w i th GDPA ( r = 0.81) . The analysis shows that both components of GCFA viz. public and private and GCA, turn out to be stat ist ical ly s igni f icant in the t ime period considered for the analysis. For example, equation I (Table IV.4), wh ich takes cumulative public investment, represented by canal intensity, and lagged TOT, explains 88 percent of the variations in GDPA and shows statist ical significance at 1 percent level during the period 1980-99 . The explanatory power improves to 95 percent when power supplied, representing public investment, is also taken as one of the relevant variables that affect GDPA along w i th TOT and GCA (equation II). But, the statist ical significance of lagged TOT goes down in the equation due to high correlation between power supplied and lagged TOT (r = 0 .78) .

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Tabie-IV.4: Determinants of Gross Domestic Product in Agriculture In Physical and Financial Terms at 1993-94 Prices, 1980-81 to 1998- 99: Regression esults based on

Reduced Form Model

Coefficient of

Eq. Constant Canal Power Terms of GCFAPUBCU Gross Adjusted No. intensity supplied trade Cone. I Cone. II Cone. Ill cropped R Sq.

index lag area 1 year

1 1.39 2.3 (2.02)

2.19 (3.94)

0.88

II 1.51 0.16 (3.15)

0.41 (0.90)

1.75 (2.88)

0.95

III •3.04 1.07 (1.97)

0.253 (4.7)

2.23 (3.2)

0.93

IV -3.65 i.o'i (1.9)

0.243 (4.8)

2.16 (3.19)

0.93

V •3.01 1.05 (1.94)

0.244 (4.6)

2.23 (3.2)

0.92

Notes: GCFAPUBCU: Cumulative gross real capital formation on public account at 1993-94 prices, Rs. million Concept I: Cumulative gross real capital formation in Agriculture (irrigation) at 1993-94 prices, Rs. million Concept II: Concept I -•- Cumulative gross real capital formation in power in agriculture at 1993-94 prices, Rs. million Concept II I : Concept II + annual gross real capital formation in agriculture at 1993-94 prices, Rs. million Power consumed in million kwh Canal Intensity: Area irrigated by canal/IMSA (percent) * Current investment under concept II and III is converted at 1993-94 prices using GCFA deflator ** Numbers in round parentheses are t-ratios

In t e r m s of f i nanc ia l va r iab les , c u m u l a t i v e pub l i c i n v e s t m e n t exp la ins a

h igher degree of va r ia t i on in GDPA (r = 0 . 8 9 ) . The resu l ts are g iven in

e q u a t i o n III t o V, s h o w i n g c u m u l a t i v e f i nanc ia l pub l i c i n v e s t m e n t under

t h e t h ree c o n c e p t s , GCA and lagged TOT index . Unde r c o n c e p t I, t h e

c u m u l a t i v e pub l i c i n v e s t m e n t va r iab le i nc ludes bas ica l l y i r r i ga t i on . W h e n

th i s is cons ide red a long w i t h TOT and GCA (equa t ion III), 9 3 % of t h e

va r ia t i ons in GDPA can be exp la ined w i t h all t h e e x p l a n a t o r y var iab les

be ing s ta t i s t i ca l l y s i gn i f i can t . Th is e q u a t i o n f i t s be t te r t h a n t he ones

w h e n pub l i c i n v e s t m e n t is cons ide red in phys ica l f o r m (equa t i ons I and

ID.

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When public investment is considered under concept II (equivalent to concept I plus cumulative real investment in power supplied to agriculture) along w i th TOT and GCA (equation IV), it also explains 93 percent of var ia t ions in GDPA and is s ta t i s t i ca l l y s ign i f i can t at 1 % level of s igni f icance. The explanatory power decreases to 9 2 % w h e n real investment in budgetary agriculture activit ies is added on annual basis in the concept II, termed as concept ill (equation V). In view of fall ing level of real i n ves tmen t in budge ta ry ca tego r ies of ag r i cu l t u ra l programmes, all these may not affect GDPA significantly. However, these investments when combined w i th investment on irrigation and power under the concept III become signif icant at 1 % level of signif icance (equation V).

Apart from statistical significance of public and private GCF in agriculture, the elasticity estimated for these variables explains the percentage change in GDPA as a result of change in cumulative public investments in physical and financial terms. The estimated elasticity for cumulative public GCFA in irrigation works (concept I) reveals that w i th a 10% increase in each of these investments, GDPA would increase by 2 3 % when irr igation is considered in cumulative physical form (as canal intensity) and by 2 . 5 3 % when it is considered in cumulative financial terms (equations I and III). Under concept II of public investment, wh ich also includes investments in power suppl ied to agr icul ture, besides the canal i r r i ga t ion , the percentage increase in GDPA due to 10% change in concept II is 2 . 4 3 % , when concept II is considered in financial terms (equation IV). On the other hand, when power variable is considered in physical f o rm, the elasticity of GDPA wi th respect to power variable turns out to be 1.6% (equation II). There is not much variation in the elasticity of GDPA w i th respect to public investment as covered under concept 111, when annual investments in agriculture and allied activit ies are also added to those in canal irrigation and power supplied to agriculture (equation V) . In the case of lagged terms of trade variable, which is signif icant at 10% level of significance, the elasticity turns out to be 1.07. This implies that a 10% increase ifu^TOT would bring an equivalent growth in the agriculture sector. Anothefevariable, gross cropped area has also a dominant impact on GDPA (2.2). It is interesting to observe that the elasticity est imates of GDPA w i th respect to irrigation and power variables (both in physical terms), as churned out in equations I and 11 vary widely (2.3 and 0 .16 respectively). Just looking at these elasticity est imates, one should not come to the conclusion that canal irrigation is 14 t imes more important than the power in influencing the GDPA. One has to be careful about the specif ication of the respective variables.

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To sum up, it is evident that public sector investment in agriculture, whichever form it is considered is an important variable in influencing growth in agricultural GDP. It affects agricultural GDP directly, as well as indirectly through its inducement effect on private sector investments in agricul ture. Since in a s t ructura l fo rm of equat ions, pr ivate sector investment is strongly influenced by public sector investments and TOT, it becomes an endogenous variable. Thus, in a reduced form, impact of private sector investments on agricultural GDP is subsumed by the impact of public sector investment and TOT on agricultural GDP.

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CHAPTER-V

CONCLUDING REMARKS

V.1 Recapitulat ion:

This study is focused basically on three issues: one, whether capital formation in agriculture is declining over t ime indicating any neglect of agriculture; second, what is the relation between public and private investments in agriculture; and th i rd, how changes in these investments affect growth in agriculture. To have a proper understanding of these issues, the study reviews the very concept and composit ion of wha t const i tutes GCFA, especially on public account, and how it is determined and measured in the system of national accounts (SNA) in India. Since the Indian SNA is largely based on UN SNA, it became imperative for this study to appraise the Indian SNA vis-a-vis the UN SNA in terms of concepts and coverage of capital format ion, and point out the deviat ions between the t w o SNAs in terms of their practice in est imating GCFA. In the light of this detailed appraisal, the need for new estimates of capital formation in agriculture is highlighted. Accordingly, alternative concepts of GCFA, particularly on public account, are suggested and empirical ly mapped for the period 1974-99 . The new concepts may not be ful ly integrated w i th the existing standard Indian SNA or for that matter even UN SNA, but the approach is surely useful in providing a method for monitoring the extent of capital format ion in agriculture vis-a- vis and its l ikely impact on agr icul tural g r o w t h . The suggested f ramework for construct ing new series of public capital format ion in agriculture under alternative concepts can also provide policy inputs for regional and sectoral planning.

The results obtained f rom the new series of real public capital format ion in agriculture are provided for each of the concepts generated. While concept I comprises conventional GCFA on public account, as given by the CSO, concept II includes concept I and investment in power tha t goes to agriculture and concept III covers concept II and the GCF on account of eleven groups of agricultural and allied activit ies classif ied in the budgets. The annual growth rates estimated for each of the concepts of public GCFA indicate a signif icant negative rate of g rowth f rom 1 980 -8 9 . The same however, is non-signif icant and posit ive under concept I and II during 1990-91 to 1998-99 . Overall, the average annual g rowth rate f rom 1974-75 to 1998-99 is positive and signif icant only under concept II, when investment in power is considered on top of concept I. This points out that situation w i th respect to public sector GCFA, though

serious, is not as alarming as is sometimes made out to be, especially when investment in agriculture is re-defined in a broader way to include those investments that facil i tate growth in agriculture. Situation is grim only when public GCFA is est imated on account of i r r igat ion and agriculture and allied activit ies, which are decelerating over the years.

The research and analysis regarding second issue, which aims to analyze the inducement effect of public investment on private investment, points out a positive relationship between the t w o investments. In view of the nature of public investment, which is mainly on irrigation and power having long periods of gestat ion, it is figured out that cumulative public investment in irrigation and power, whether in physical or financial form, would make better sense as the relevant variables to test this relationship. Econometric results also support this very convincingly. These variables turn out to be highly signif icant statistically for the t ime period 1 980-81 to 1 998-99 undertaken for the analysis. Other variables that signif icantly explain the behaviour of private investment are lagged terms of trade index, lagged private investment and institutional f inance.

The third issue also brings out the signif icant role of both public and private investments in agriculture on growth of agricultural GDP. The variables of cumulative public GCFA, whichever the way they are defined, signif icantly influence private sector GCFA, and then the t w o together in f luence GDPA qui te s igni f icant ly . The other impor tan t variables influencing GDPA are the lagged TOT index and gross cropped area (GCA) under agriculture. It is interesting to note that the impact of private sector GCFA on GDPA gets subsumed in the impact of public sector GCFA and lagged TOT index on the GDPA. This is because private sector GCFA is s t ruc tured as an endogenous variable in a s imul taneous equat ions framework, and it gets subsumed into public sector GCFA and TOT index when the simultaneous equations framework is solved to get a reduced form of the relations between different variables that influence GDPA.

V.2 Incentives, Investments and Growth in GDPA:

Since the analysis carried out in the preceding chapters clearly indicates the signif icance of public investment in inducing private investments, and consequently their impact on GDPA, it is but legit imate to expect apprehensions regarding the 'neglect of agriculture' when this public sector investment is showing signs of decline or stagnat ion. Further, one may recall that 1970s witnessed the highest rate of growth in the public investment at 9 .5% p.a. and a low rate of growth in GDPA at 1.74 percent. The T980s, on the other hand, had experienced a negative

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growth rate in public GCFA (-3.89% p.a.) and a positive and higher growth rate in GDPA (2.95%) compared to 1970s (Table 1.2 in Chapter I). This perhaps indicates that there are long gestation lags between the public sector investment in agriculture (narrowly defined) and its impact on growth in agriculture. Thus, again, neglect of public sector investments in agriculture over long periods of t ime perhaps indicates put t ing future rates of growth in agriculture in jeopardy. These trends in public sector GCFA have often raised alarm bells in academic and policy-making circler

However, in this entire debate, the role of other factors, especially t ' market incent ives to cu l t ivators , represented by the TOT index, somewhat under-played. If public sector investment, whether in nar or comprehensive sense of the te rm, was the overwhelming f f influencing growth in agriculture, its decline during 1980s surely v have lowered the growth rates in agriculture GDP during 1990.' 1980s. But it has not happened so. The fact of the matter is th . tne trend rate of growth in GDPA has marginally improved during 1990s (3.5%) over 1 980s (2 .9%). This must force one to th ink: what could be the other factors that have not only sustained but improved agricultural growth during 1990s?

A proper response to this puzzle necessitates a detailed examination of what const i tutes GDPA, share of various activit ies that form part of GDPA in the total , and finally nature of relationship of agricultural activit ies w i th public GCFA. This is precisely what is explored in this sect ion.

It is well known that CSO estimates GDP in agriculture and allied activit ies (GDPA) on the basis of value of output and inputs under three sectors (a) only agriculture sector, which comprises food crops viz cereals, pulses, fruits and vegetables etc., non-food crops, such as fibres, plantat ions and poultry, milk, butter etc., (b) forestry sector and (c) f ishery sector. GDP for 'only agriculture sector ' const i tu tes a max imum share (92 percent) in the total GDPA at 1 993-94 prices. This is fol lowed by GDP in the forestry sector and fishery sector, the share of wh ich const i tutes 4.27 percent and 3.69 percent during 1998-99 (Table-V.1). It is also clear that the share of 'only agriculture sector' has increased marginally from 90 .26 percent in TE 1 982 to 91.87 percent in TE 1 9 9 8 , whi le that of forestry has declined from 7.31 percent to 4 .34 percent and of f ishery sector has improved from 2.43 percent to 3.79 percent. The trend growth rates estimated for the t w o t ime periods viz. 1980-89 and 1990-98 indicate that the real rates of growth in all the three components have improved during 1990s over 1980s. 'Agriculture only ' improved f rom 3 . 1 % to 3 .5%, forestry f rom - 0 . 7 % to - i -0.6% and f ishery f rom 5 .7% to 6.1 % over the same period. Overall, the rate of g rowth of agriculture

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and allied sector GDP improved from 2 .9% per annum during 1980s to 3 .5% during 1990s.

A bifurcation of GDP in 'only agriculture sector' reveals that this sector comprises mainly value of output of agriculture and value of l ivestock activit ies , the share of former in the total being 75 percent and that of lat ter 25 percent respectively. Further, the act iv i t ies fa l l ing under 'agriculture' comprise value of cereals, pulses, small millets and other cereals, oilseeds, sugars, f ibres, indigo-dyes-tanning material , drugs-narcotics, condiments and spices, fruits and vegetables and floriculture, other crops, by products and kitchen garden. Livestock activit ies include value of output of milk group, meat group, eggs, wool and hair, dung, silk worm cocoons and honey and increment in stock (Table V. I & Annex Table-3).

A further re-classification of the share of value of output of the major categories falling under the 'agriculture sector alone' indicates that as of now in TE 1 998 , a maximum, 34 .88 percent of the value of output , is contributed by cereals, pulses and byproducts. This is followed by livestock activit ies, oilseeds, sugars, fibres and other crops category of activit ies, the shares of which stand to be 24 .78 percent and 20 .07 percent. The share of frui ts-vegetables-f lor icul ture-ki tchen garden and plantations (drugs and narcotics), indigo, dye and tanning, condiments and spices activit ies together hold nearly 20 percent of the share in the total (Table-V.1 & Annex Table-4).

Value of output in agriculture involves evaluation of the products and by-products and ancillary activities at the prices received by the producers. Whereas GDP is estimated in terms of gross value added (GVA). The estimates of GVA are arrived at by deducting total value of internrediate consumption from the value of agricultural output and then adding to it the GVA from governrrent irrigation system (GDI 1989).

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Table-V.1: Trend Growth Rate of GDP and Value of Output from Agriculture and Allied Activities at 1993-94 Prices

IRs. killion)

Years GDP GDP GDP GDP % Share in Total Agriculture Forestry Fishery Aggregate GDP GDP GDP

Agriculture Forestry Fishing

IE 1982 1485.30 120.23 39.99 1645.54 90.26 7.31 2.43

TE 1990 1981.64 115.47 64.94 2162.05 91.66 5.34 3.00

IE 1998 2563.34 121.15 105.72 2790.21 91.87 4.34 3.79

Trend Growth Rate

1980/81- 3.13* -0.71 ** 5.74* 2.95* 1989/90

1990/91- 3.55* 0.61' 6.14* 3.50* 1998/99

Value of Output of Agriculture

Years Cereals, Oilseeds, Fruits, lndigo,dye, Livestock Agri. Agri. pulses. sugar, vegetables, tanning, drugs. total only by fibres. floriculture. narcotics, products other

crops kitchen garden

condiments & spices

1 2 3 4 5 (1-5) (1-4)

TE1982 762.88 353.17 281.04 68.54 389.86 1854.29 1466.43

TE 1990 958.81 482.54 343.23 91.82 5B7.00 2443.41 1826.41

TE1998 1083.38 624.81 511.18 119.57 771.06 3112.00 2340.94

% Share in Total Value of Output from Agriculture (including Livestock)

TE 1982 41.16 19.07 15.16 3.70 20.91 79.09

TE1990 39.25 19.74 14.05 3.76 23.20 76.80

TE1998 34.88 20.07 16.42 3.84 24.78 75.22

Trend Growth Rate

1980/81- 2.16 3.05 2.25 3.54 4.99 3.03 2.47 1989/90

1990/91- 1.83 3.38 5.70 3.77 3.92 3.31 3.11 1998/99

Notes: Trend growth is estimated using semi-log function * and ** significant at 1 and 5% level of significance. Growth rate of value of output of each activity is significant at 1% level of significance. Source: Authors own estimates based on unpublished data as on August 2000 obtained from CSO.

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The change in the share of value of output across these four categories of agricultural activit ies over a period of t ime (1980-81 to 1998-99) reveals fall in only the f irst category and a rise in the others. While the share of cereals and pulses and by products shows nearly a seven percentage point fal l , the share of oilseeds, sugar, fibres etc. category of activit ies and fruits, vegetables, plantations etc. category of activit ies experiences 2.0 percentage point rise over the t ime period. The behaviour of the value of output under these categories of the agriculture sector is also explained by their respective growth rates given in Table-V. 1. It is very interesting to note that the trend growth rate of the category showing real value of output of cereals and pulses has declined f rom 2.16 percent per year during eighties to 1.83 percent during nineties. The deceleration is also observed in the case of l ivestock activi ty where it has fallen from 4 .99 percent in eighties to 3.92 percent in nineties. Though there is an acceleration in the growth rate of oilseeds, sugars, fibres, other crops category of agricultural activit ies f rom 3.05 percent to 3.38 percent over the two decades, a significant jump from 2.25 percent to 5.7 percent in the rate of growth is observed only in the case of fruits-vegetables, f loriculture and kitchen garden category of activit ies.

Four points are worth noting here. First, the GDP in 'agriculture sector alone' has risen and the rise is attr ibuted mainly to the increase in the value of frui ts, vegetables, f loriculture, plantation and kitchen garden activities together and to some extent to the oilseeds and sugars activities. Further, capital expenditure of the farmers as based on AIDIS (analyzed in chapter I) has also clearly shown that GFCFA which was more in the pure agricultural related activities in 1 971 -72 and 1 981 -82 has diversified to orchards, plantations and other activit ies in 1991-92. This verifies that within the agriculture sector alone, the trend is towards diversification away from foodgrain crops. A fall in the growth rate of area, production and yield of foodgrains, in particular rice has already been observed during the nineties over eighties (Annex Table-5). In contrast, the available data on area, production and yield of fruits and vegetables show a substantial increase from 1 983 to 1 999 . Time series data on area and yield of fruits and vegetables is available only from the year 1991 and both show a higher rate of growth in comparison to the foodgrains sector. The annual rate of g rowth of output of f rui t and vegetable crops together has witnessed a substantial increase from 2.29 percent during 1983-89 to 5.4 percent during 1 9 9 0 - 9 8 ^

2 The area and production figures obtained from National Horticulture Board, Ministry of Agriculture cover nearly 44 fruits and 86 vegetables and are exclusive of area and production of flowers. The value of fruits and vegetables output, as estimated by CSC, however, includes the value of floriculture crops. CSO has revised fruits and vegetables production figures from 1980-89 using quanturr index constructed on the basis of growth in production of each crop from 1990 to 1998.

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This relative neglect of foodgrains, on one hand, and acceleration in the production of fruits and vegetables, on the other, could be related to farmers' response to the market. As a result of increasing per capita incomes and changing consumption habits of people at large, especially in the urban areas, the demand for cereals has dramatically s lowed down over the years whi le that of fruits and vegetables cont inue to grow. This fact is corroborated by higher expenditure elasticit ies for f ru i ts and vegetables in both rural and urban areas (fruits : 0 .442 & 0 . 3 6 0 and vegetables: 0 .385 & 0.253) compared to that for rice (0 .064 & 0.016) and wheat (-0.056 & -0.080) as based on various rounds of household consumer expenditure surveys (NSS) (Kumar 1998) . Other studies by Bhalla, Hazell and Kerr (1999) , Bhalla (1995) and Radhakrishna and Ravi (1994) have also clearly indicated an inelastic demand for cereals and a decline in it over t ime in both rural and urban areas, although the level of their expenditure elasticities for foodgrains is somewhat higher than those reported by Kumar (1998) . Nevertheless, expenditure elast ic i t ies for foodgrains are way below those for hort icultural products, dairy, poul t ry and fishery. In view of these, the private investors seem to be diversifying to demand driven agriculture and allied activit ies.

Secondly, restrictive government policies in the foodgrain market in terms of levies, movement restrictions, stocking l imits, ban on futures t rad ing, etc., perhaps also dissuade private investors to invest in these crops. Whereas markets for horticulture crops, though somewhat at nascent stage and even disorganized, funct ion basically in line w i t h the forces of demand and supply and hence provide a favourable climate to the growers to reap maximum benefits. These factors indicate a clear linkage between increased demand for fruits and vegetables, operation of free markets in the hort icultural produce, changing investment pattern of the households away f rom foodgrains and a consequent rise in the area, product ion and hence GDPA on account of fruits and vegetable category of crops.

Thirdly, a slow down in the production and yield of foodgrains, especially rice can also be related to fall in the public GCFA. As ment ioned earlier, the CSO's concept of public GCFA comprises mainly the i r r igat ion projects, wh ich has slowed do.wn during 1980s and early 1990s. This might have restricted farmers to invest in the product ion of rice, wh ich primarily depends on the availability of canal water. This also proves our argument that a decline in the public GCFA during one decade (say in eighties) results in a fall in the growth in agriculture in the subsequent decade. But, the growth in agriculture, represented by GDPA has increased in the nineties compared to what i t was in the eighties, i t is only the growth in the value of foodgrains output wi th in the est imates of GDPA, which has declined over the decade and is not expl ici t ly visible in the

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overall scenario. Undoubtedly, there is a negative impact of decelerat on in the public GCFA in the eighties on the growth of foodgra.ns output in the nineties. But it is being covered by the growth in hort iculture and other allied activit ies.

Fourthly, another factor behind the stagnation in the yield of rice, and probab ly some dece lera t ion in w h e a t a lso, cou ld be the uneven consumption of fertilizers - N, P and K. The consumption ratio which was 5 9 • 1 9 -1 in 1980-81 has reached a level of 8.5 : 3.1 . 1 Dy tne vear 1998 This, together w i t h low investments in canal i r r igat ion, therefore, seems to have affected adversely the growth of foodgra.ns.

To wind up, it appears that the pattern of growth in agriculture is under structural t ransformation. From a foodgrain led growth during 1970s and 1980s, pattern of g rowth is changing fast towards hort icultural products, l ivestock products and fishery. Foodgrain growth was largely driven by technology, incentives by the government in terms of support/ procurement prices, and heavy investments in public sector GCFA such as canal irrigation and power supplies. But the agricultural growth of 1990s seem to be demand and market driven. Incentives, in terms of improvement in TOT, and private sector investments in minor irrigation and agricultural machinery appear to be the new drivers of g rowth . Nevertheless, public sector investments in canals and PO^^^^o remain important for their inducement ef fect on private sector GCFA, and therefore on GDPA. Given these results, it won ' t be out of line to conclude w i th a speculat ion: if India had not neglected the public sector GCFA during 1980s and early 1990s, the growth in GDPA during 1990s would have been above 4 % p.a. And this could have placed India comfortably on an overall growth path of more than 7% per annum.

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ANNEX TABLES

Annex Table-1: State Level Percentaqe Share of Fixed Capital Expenditure of Households in Total Fixed Capital i Expenditure in Aqriculture durinq 1991-92

1 2 3 4 5 6 7 8 Total Stale/ Improvement/ Orchards & Wells Other irriqatkin Aqricultural Transport Farm Other (includinq) FCFA Expenditure reclamation of Plantations resources machinery equipment houses etc furniture & items land/buildinqs fixture Andhra Pradesh 28.24 1.18 27.64 12.55 11.37 11.76 2.75 4.31 100.00 Assam 61.50 0.00 0.47 0.00 3.29 20.66 8.92 5.16 100.00 Bihar 41.43 0.00 4.29 10.00 21.43 14.29 5.71 2.86 100.00 Gujarat 11.76 4.36 26.58 7.84 35.95 8.93 0.44 4.14 100.00 Haryana 1.90 0.00 17.91 3.66 28.09 11.94 35.41 1.09 100.00 HImachal FVadesh 11.37 9.83 3.47 0.77 8.09 51.25 12.91 2.31 103.00 Jammu & Kashmir 13.90 3.73 8.81 7.80 12.20 36.95 13.22 3.39 100.00 Kamataka 16.62 1.32 2144 12.56 2.36 36.17 3.12 6.42 100.00 Kerala 34.18 43.43 6.40 0.51 5.22 0.84 8.25 1.18 100.00 Madhya Pradesh 8.27 0.24 20.56 9.85 22.26 37.83 o.:s 0.61 100.00 Maharashtra 14.13 2.61 34.16 19.75 11.11 14.13 0.96 3.16 100 .en Manipur 1.42 0.28 0.00 0.00 0.28 0.28 4.53 93.20 100.00 Meahalava 0.00 2.73 0.00 0.00 51.82 14.55 10.00 20.91 100.00 Nagaland 2.03 45.76 0.00 0.00 12.12 7.44 12.61 20.05 100.00 Orissa 38.67 6.67 12.00 1.33 18.67 10.67 5.33 6.67 100.00 Punjab 1.92 0.00 0.10 6.57 37.01 48.23 1.82 4.35 100.00 Rajasthan 9.41 0.58 23.05 12.87 15.75 35.73 0.10 2.50 100.00 Sikkim 15.38 69.23 0.00 0.00 11.54 0.00 0.00 3.85 100.00 Tamil Nadu 16.99 0.65 30.75 6.45 34.41 4.95 4.09 1.72 100.00 Tripura 21.43 7.14 0.00 3.57 32.14 3.57 25.00 7.14 100.00 Uttar Pradesh 7.04 0.21 1.71 5.97 40.94 37.53 4.90 1.71 ICO .00 West Bengal 27.19 0.88 614 4.39 19.30 10.53 10.53 21.05 100.00 A & N Islands 16.10 9.83 017 0.00 3.22 42.54 17.12 11.02 100.00 Arunachal Pradesh 41.38 0.00 0.00 0.00 5.17 0.00 23.28 30.17 100.00 Chandiqarh 70.00 0.00 0.00 7.50 0.00 0.00 22.50 0.00 100.00 Dadar&N Mayeli 0.00 0.00 0.00 0.00 0.73 99.04 0.00 0.18 icnoo Delhi 0.00 0.00 0.00 6.74 22.47 0.00 39.61 31.18 100.00 Goa 1.35 1.73 0.00 96.92 0.00 0.00 0.00 0.00 100 .m LakshadweeD 2.34 3.58 0.00 10.73 32.24 0.00 0.00 1.11 100.00 Mizoram 0.00 0.52 G.OO 1.03 18.04 0.00 73.20 7.22 100.00 Pondicherry 31.27 0.00 0.00 0.00 1.09 25.82 0.00 41.82 100.00 Daman &Diu 0.00 0.00 0.00 0.00 0.00 OOO 0.00 100.00 100.00 All India 13.74 3.17 18.60 10.15 22.20 24.31 4.02 3.81 100.00

Source: AIDIS1991-92. RBI

Annex Table-2: Economic and Purpose/Functional Classification of Public Expenditure on Administration in the Indian SNA

1. General public services:

1.1 Public order and safety, general administration and external affairs

1.2 General research

2. Defence

3. Education :

3.1 Administration, regulation and research

3.2 Education in schools, universities and other institutions including subsidiary services.

4. Health :

4.1 Administrations, regulation, research

4.2 Hospitals, clinics and individual health services

5. Social security and welfare services

6. Housing and other community amenities

7. Cultural, recreational and religious services

8. Economic Services:

8.1. General administration, regulation and research

8.2. Agriculture, forestry, fishing and hunting : This includes animal and crop husbandry, soil conservation and watershed development, community services, education and research in the agricultural universities and institutes.

8.3. Mining, manufacturing and construction

8.4. Electricity, gas, steam and water

8.5 Atomic energy

8.6 Transport and communication

8.7 Other economic services, such as storage and warehousing activities

9. Other services

9.1 Relief on calamities

9.2 Expenditure on miscellaneous services

Source: 001(1989)

74 A

Annex Table-3: Value of Output from Agriculture and Livestock at 1993-94 prices, Rs. billion Years Cereals Pulses Oilseeds Sugars Fibres lndigo,dye Drugs & Condiments Fruits &

& tanning narcotics & spices vegetables 1 2 3 4 5 6

0.03 7

28.1? 8

37.22 37.37

9 262.14 ?64?6' 274,85

1980-81 512.63 99.03 113.01 101.80 58.65 6

0.03 7

28.1? 8

37.22 37.37

9 262.14 ?64?6' 274,85

1981-821 521.09 106.19 134.65 120.30 67.03 66.74

0.03 30.71

8 37.22 37.37

9 262.14 ?64?6' 274,85 1982-83 499.35 108.00 119.27 123.19

67.03 66.74 0.04 31.39 40.73

9 262.14 ?64?6' 274,85

1983-84 597.03 116.92 145.56 114.18 55.24 0.04 29.71 42,60 289,29

1984-85 571.46 108.78 149.30 110.40 71.25 0.05 35.14 42.29 316,66 1985-86 593.79 119.74 127.98 109.17 77.54 0.05 30.70 47.03 301,16 1986-87 568.16 106.79 131.62 116.70 58.67 0.05 31.84 45.48 325.76

1987-88 554.24 98.60 148.44 123.20 53.20 0.04 29.66 49.28 291.17 1988-89 677.83 126.36 204.87 128.93 72.19 0.05 ! 37.33 55.83 327.02

319.28 1989-90 682.16 116.42 196.09 142.73 r"92.98 0.08 ^ 34.45 55.58j 327.02 319.28

1990-91 702.73 130.10 212.53" 152.00 82.48 0.05 0.07 0.07

36.49 55.61 341.41 1991-92 684.37 107.72 213.66 157.99 r"82.47

0.05 0.07 0.07

37.98 ' 35.9?

53.88 " 6 2 ? 7

337.20 367.46 1992-931 714.74 117.51 228.8l1 144.62 93.72

0.05 0.07 0.07

37.98 ' 35.9?

53.88 " 6 2 ? 7

337.20 367.46

1993-94 745.23 122.81 240.96 146.27 89.61 0.07 40.66 67.40 384.20 1994-95 776,98 128.68 248.43 171.61 99.72 0.09 39.59 68.03 402.98 1995-96 732.12 113.13 251.51 175.43 107.49 0.09 40.81 64,92 425.94 1996-97 802.52 132.13 277.80 175.01 119.44 0.11 45.71 72,76 484,55

1997-98 783.9? 124.15 259.76 305.28

175.90 186.08

94,53 '103.47

^^2.33

0.14 46.91 7 4?93

71.26 487.54 520.78

' " 2?? 5,92

1998-99 821.82 142.09 259.76 305.28

175.90 186.08

94,53 '103.47

^^2.33

0.14 46.91 7 4?93

71.26 487.54 520.78

' " 2?? 5,92

Trend Growth Rate " " 2.19

94,53 '103.47

^^2.33

0.14 46.91 7 4?93

71.26 487.54 520.78

' " 2?? 5,92

1980-89 2.97 1.24 5.31 " " 2.19

94,53 '103.47

^^2.33 8.24 1,83 3.89

4.76 "' '~3.70

487.54 520.78

' " 2?? 5,92 1990-98 2.10 1.56 4.19 2.86 3.36 13.00

1,83 3.89

4.76 "' '~3.70

487.54 520.78

' " 2?? 5,92

Source: Unpublished data as on August 2000 obtained from CSO

Annex Table 3 : Contd.

Years Other By products Kitchen Value of Milk Meat Eggs W 0 0 I & crops garden Output Agri. group group hair

10 11 12 13 14 15 16 17 1980-81 52,26 146.93 13.75 1425.55 226.53 59.65 9.62 1.23 1981-82 51.44 149.04 13.94 1496.45 243.01 63.56 10.41

1.23

1982-83 53.57 146.37 13.78 1477.28 253.97 66.77 10.94 1.36 1.43 1983-84 55.63 152.04" 14.03 I6I2.27I 274.24 72.35 12.11 1.36 1.43

1984-85 54.31 146.16 13.84 1619.64 292.77 78.17 13.48 "15;62"

1.51 1^58 1985-86 47.06 147.61 13.84 1615.67 313.60 80.59

13.48 "15;62"

1.51 1^58

1986-87 47.37 146.29 ~ 138.71

13.71 " 13Tl7

1592.44 T546.9T

326.17 332.98

84.97 87.54

16.12 16.17

1.61 1987-88 47.20

146.29 ~ 138.71

13.71 " 13Tl7

1592.44 T546.9T

326.17 332.98

84.97 87.54

16.12 16.17

1.61

1988-89 55.71 147.80 13.94 1847.86 346.08 92.72 17.51 1.66 1989-90 51.42 146.29 13.98 1851.46 368.16 98.14 18.77 1.65 1990-91 55.70 146.75 14.05 1929.90 385.37 102.34 19.60 1.60 1991-92 51.35 141.00 13.91 1881.60 400.18 107.02 20.45 1.45 1992-93 56.81 143.64 14.02 1980.02 413.64 120.22 21.27 1.68 1993-94 53.97 143.60 13.96 2048.74 434.08 125.38 22.82 1.78 1994-95 58.16 145.16 13.91 2153.34 459.55 123.58 23.76 1.81 1995-96 55.37 143.81 11.82 2122.44 475.49 128.21 25.15 1.86 1996-97 57.71 147.11 13.48 2328.33 494.48 130.17 25.36 1.95 1997-98 59.12 147.49 13.19 2263.95 507.36 133.23 26.30 2.00 1998-99 60.34 154.86 14.00 2430.55 536.61 137.32 27.82 2.05

1980-89 -0.51 -0.29 -0.09 2.46 5.47 5.60 7.92 3.62 1990-98 1.34 0.66 -0.69 3.11 4.23 3.40 4.43 3.90

75

Annex Table 3 : Contd.

Years Dung Silk worm Increment Value of Out­ Aggregate of GDP & honey in stock put livestock Agr.& Livest. Agriculture

18 19 20 21 22 23 1980-81 55.76 4.87 9.16 366.82 1792.37 1593.16 1981-82 57.72 4.33 9.77 390.08 1886.53 1677.46 1982-83 57.72' 5.37 10.56 406.69 1883.97 1665.99 1983-84 59.03 5.80 11.28 436.24 2048.51 1825.05 1984-85 61.13 6.16 12.11 465.33 2084.97 1851.86 1985-86 59.29 6.27 12.94 489.29 2104.96 1865.70 1986-87 61.45 6.66 13.98 510.96 2103.40 1853.64 1987-88 62.52 7.05 14.98 522.90 2069.81 1828.98 1988-89 64.07 7.45 16.17 545.66 2393.52 2111.84 1989-90 62.21 9.20 8.26 566.39 2417.85 2143.15 1990-91 62.34 9.70 8.01 588.96 2518.86 2231.15 1991-92 62.07 8.59 9.13 608.89 2490.49 2196.60 1992-93 62.41 10.10 9.67 638.99j 2619.01 2323.86 1993-94 62.14 9.70 13.75 669.65 2718.39 2419.67 1994-95 62.88 9.85 14.98 696.41 2849.75 2540.90 1995-96 63.96 9.27 16.35 720.29 2842.73 2518.92 1996-97 65.83 9.31 18.50 745.60 3073.93 2760.91 1997-98 66.20 10.24 19.10 764.43 3028.38 2707.91 1998-99 67.35 11.26 20.73 803.14 3233.69 2901.81

1980-89 1.35 7.10 3.10 4.99 2.96 1990-98 1.06 1.54 13.29 3.92 3.50

76

Annex Table-4: Percentage Share of Value of Output of Agriculture and Livestock in Total at 1993-94 prices

Years Cereals J>ulses Oilseeds Sugars Fibres Indigo.dye Drugs & Condiments Fruits & & tanning narcotics & spices vegetables

1 2 3 4 5 6 7 8 9 1980-81 35.96 6.95 7.93 7.14 4.11 0.00 1.97 2.61 18.39 1981-82 34.82 7.10 9.00 8.04| 4.48 o.ool 2.05 2.50 17.69 '1982-83' 33.80 7.31 8.07 8.34] 4.52 0.00 2.12 2.76 18.61 1983-84 37.03 7.25 9.03 7.08 3.43 0.00 1.84 2.64 17.94 1984-85 35.28 6.72 9.22 6.82 4.40 0.00 2.17 2.61 19.55 1985-86 36.75 7.41 7.92 6.76 4.80 0.00 1.90

2.00 2.91 2^86

18.64 20.46 1986-87 35.68 6.71 8.27 7.33 3.68 O.OQ

1.90 2.00

2.91 2^86

18.64 20.46

1987-8? 35.83 6.37 9.60 7.96 3.44 0.00 1.92 3.19 '' 18.82 1988-89 36.68 6.84 11.09 6.98 3.91 0.00 2.02 3.02 17.70 1989-90 36.84 6.29 10.59 7.71 5.02 0.00 1.86 3.00 17.24 1990-91 36.41 6.74 11.01 7.88 4.27 0.00 1.89 2.88 17.69 1991-92 36.37 5.72 11.36 8.40 4.38 0.00 2.02 2.86 17.92 1992-93 36.10 5.93 11.56 7.30 4.73 0.00 1.82 3.17 18.56 1993-94 36.33 5.99 11.76 7.14 4.37 0.00 1.98 3.29 18.75 1994-95 36.08 5.98 11.54 7.97 4.63 0.00 1.84 3.16 18.71 1995-96 34.49 5.33 11.85 8.27 5.06 0.00 1.92 3.06 20.07 1996-97 34.47 5.67 11.93 7.52 5.13 0.00 1.96 3.12 20.81 1997-98 34.63 5.48 11.47 7.77 4.18 0.01 2.07 3.15 21.53 1998-99 33.81 5.85 12.56 7.66 4.26 0.01 2.01 3.00 21.43 Source: Compiled by authors' based on data from CSO

Annex Table 4 Contd.

Years Other By products Kitchen Value of Output (Agri.)

Milk Meat Eggs Wool & crops garden

Value of Output (Agri.) group group hair

10 11 12 13 14 15 16 17 1980-81 3.67 10.31 0.96 100.00 61.76 16.26 2.62 0.34 1981-82 3.44 9.96 0.93 100.00 62.30 16.29 2.67 0.33 1982-83 3.63 9.91 0.93 100.00 62.45 16.42 2.69 0.33 1983-84 3.45 9.43 0.87 100.00 62.86 16.58 2.78 0.33 1984-85 ̂ 3.35 9.02 0.85 100.00 62.92 16.80 2.90 0.32 1985-86 2.91 9.14 0.86 100.00 64.09 16.47 3.07 0.32 1986-87 2.97 9.19 0.86 100.00 63.83 16.63 3.15 0.32 1987-88 3.05 8.97 0.85 100.00 63.68 16.74 3.09 0.32 1988-89 3.01 8.00 0.75 100.00 63.42 16.99 3.21 0.30 1989-90 2.78 7.90 0.76 100.00 65.00 17.33 3.31 0.29 1990-91 2.89 7.60 0.73 100.00 65.43 17.38 3.33 0.27 1991-92 2.73 ' 7.49 0.74 100.00 65.72 17.58 3.36 0.24 1992-93 2.87 7.25 0.71 100.00 64.73 18.81 3.33~ 0.26 1 9 9 3 ^ 2.63 7.01 0.68 100.00 64.82 18.72 3.41 0.27 1994-95 2.70 6.74 0.65 100.00 55.99 17.75 3.41 0.26 1995-96 2.61 6.78 0.56 100.00 66.01 17.80 3.49 0.26 1996-97 2.48 6.32 0.58 100.00 66.32 17.46 3.40 0.26 1997-98 2.61 6.51 0.58 100.00 66.37 17.43 3.44 0.26 1998-99 2.48 6.37 0.58 100.00 66.81 17.10 3.46 0.26

77

Annex Table 4 : Contd.

Years Dung Silk worm increment Value of Out­ Share in Aggregate & honey in stock put livestock Agriculture Livestock

18 19 20 21 22 23 1980-81 15.20 1.33 2.50 100.00 79.53 20.47 1981-82 14.80 1.11 2.50 100.00 79.32 20.68 1982-83 14.19 1.32

1.'33 2.60 100.00 78.41 21.59

21.30 1983-84 13.53 1.32 1.'33 2.59 lob.oo 78.70

21.59 21.30

1984-8& '13.14 1.32 2.60 100.00 77.68 22.32 1985-86 12.12 1.28 2.64 100.00 76.76 23.24 1986-87 12.03 1.30 2.74 100.00 75.71 24.29 1987-88 11.96 1.35 2.86 100.00 74.74 25.26 1988-89 11.74 1.37 2.96 100.00 77.20 22.80 1989-90 1990-91"

10.98 10.58

1.62 1.46 100.00 76.57 23.43 1989-90 1990-91"

10.98 10.58 1.65 1.36 [ 100.00 76.62 23.38

24745 1991-92 10.19 1.41 1.50 100.00 75.55 23.38 24745

1992-93 9.77 1.58 1.51 100.00 75.60 24.40 1993-94 9.28 1.45 2.05 100.00 75.37 24.63 1994-95 9.03 1.41 2.15 100.00 75.56 24.44 1995-96 8.88 1.29 2.27 100.00 74.66 25.34 1996-97 8.83 1.25 2.48 100.00 75.74 24.26 1997-98 8.66 1.34 2.50 100.00 74.76 25.24 1998-99 8.39 1.40 2.58 100.00 75.16 24.84

78

Annex Table-5 : Area, Production and Yield ot Rice, Wheat, Fruits & Vegetables from 1980 to 1999 - - - -Area is in million ha. Production in m. tonnes, Yield is in kg./ha - - - -Foodgrains Rice Fruits

Yiefd Years Area Production Yield Area Production Yield Area Production Yiefd

1980-81 126.67 129.59 1023.05 40.15 53.63 1336.00 - - -1981-82 129.14 133.30 1032.21 40.71 53.25 1308.00 - - -1982-83 125.10 129.52 1035.33 38.26 47.12 1231.00 - - -1983-84 131.16 152,37 1161.71 41.24 60.09 1457.00 - 24.23 ~ 1984-85 126.67 145.54 1148.97 41.16 58.34 1417.00 - 23.74

~ 1985-86 128.02 150.44 1175.13 41.14 63.83 1552.00 2.37 24.77 [10459.04 1986-87 127.20 143.42 1127.52 41.17 60.56 1471.00 2.40 26.50 11064.30 1987-88 119.69 140.35 1172.61 38.81 56.85 1465.00 2.83 27.67 9775.34

9601.01 1988-89 127.67 169.92 1330.93 41.74 70.49 1689.00 2.77 26.61 9775.34 9601.01

1989-90 126.77 171.04 1349.22 42.17 73.57 1745.00 3.05 26,27 8604.98 1990-91 127.84 176.39 1379.77 42.68 74.29 1740.00 - 23.39

8604.98

1991-92 1992-93

121.87 • 168.38 1381.64 42.65 74.68 1751.00 2.87 1 28.63 9962.42 i J 0279.16

1991-92 1992-93 123.15 179.48 1457.41 41.78 72.87 1744.00 3.21 r 32.96

9962.42 i J 0279.16

1993-94 122.75 184.26 1501.10 42.54 80.29 1888.00 1911.00

3.18 37,26 11700.69 8958.69 1994-95 123.86 191.50 1546.10 42.81 81.81

1888.00 1911.00 4.31 38.60

11700.69 8958.69

1995-96 121.01 180.42 , 1 4 9 0 . 9 5 42.84 ^ 76.98 1797.00 , 3.36^ 41.51 12364.31 11301.12 1996-97 123.58 199.44 1613.85 43.43 81.74 1882.00 3.58 40.46 12364.31 11301.12

1997-98 123.85 192.66 1555.59 43.42 82.30 1895.00 3.70 43.26 11686.39 1998-99 125.36 203.04 ^ 1619.66 - 84.74 - 3.73 44.04 11817.01

" -4.87* 2.47

1.42**

" -4.87* 2.47

1.42**

Trend growth rate -0^3 6.7*' 2 . 1 ' " -4.87*

2.47 1.42**

Eighties: 1980-89 -0^3 2.734- 2.968* r 0.41 3.62* 3.19* 6.7*' 2 . 1 ' " -4.87* 2.47

1.42** Nineties: 1990-99 -0.06 1.947* 2.01*

2778* 0.35* a 5 2 '

1.62* 1.27** 3 .19" 6.03* " -4.87*

2.47 1.42** Overal l : 1980-98 -0.234* 2.537"

2.01* 2778*

0.35* a 5 2 ' 3.06" 2.52* 3.61* 4.65*

" -4.87* 2.47

1.42** Notes: • & " significant at Source:

1 and 5% le Agricultura

vel of signitic ance • & " significant at Source:

1 and 5% le Agricultura Statistics at i 1 Glance, Itflinistry of Agriculture, April 2000 & National Horticulture Board, Gurgaon

Annex Table 5 : Contd.

Vegetables Fruits and Vegetables Combined Years Area Production Yield Area Production Yield 1980-81 - - ~ - - -1981-82 - - ~ ~ - " 1982-83 " " " " " " 1983-84 - 45.63 - " 69.86 " 1984-85 1985-86

— 47.53 48.72 : :]- - --

71.27 73.48

"

1986-87 T987-88" 4'12

48.10 " " 74.60 11020.14

1986-87 T987-88" 4'12 48.93 11875.491 r 6.95 76.60 11020.14 1988-89 5.10 52.77 10350.14 7.87 79.38 10086.28 1989-90 - 53.01 - - 79.28 ~ 1990-91 - 54.36 - - 82.75 " 1991-92 5.59 58.53 10465.22 8.47 87.16 10294.56 1992-93 5.05 63.81 12647.37 8.25 96.76 11727.18 1993-94 4.88 65.79 13492.00 8.06 103.04 12784.37 1994-95 5.01 67.29 13422.50 9.32 105.89 11359.15 1995-96 5.34 71.59 13419.68 8.69 113.10 13012.08 1996-97 5.52 75.07 13612.69 9.10 115.53 12702.80 1997-98 5.61 72.68 12962.90 9.31 115.95 12455.26 1998-99 5.87 87.54 14922.60 9.59 131.58 13716.04

Trend growth rate - - - -.: Eighties : 1980-89 - - - -.: 2.39* - ~ 2.29* ~

Nineties : 1990-99 1.55 5.07* 3.18* 2.13* 5.4* 4.32*

2.93* Overall : 1980-98 - 4.14*

3.18* 2.13* 5.4* 4.32*

2.93*

79

ANINIEXURE I

Revisions in the Estimates of GDP and GCF in Agriculture

This annexure draws heavily on "New series on National Accounts S ta t i s t i cs (Base Year 1 9 9 3 - 9 4 ) , pub l ished by Cent ra l S ta t i s t i ca l Organisation, New Delhi, 1 9 9 9 " . The new series in the National Accounts Statistics presents macro-economic aggregates w i th base 1993-94 . The series has also been revised using latest available database and introducing methodological changes where necessary. The revisions have been guided by three main considerations, (1) revision of the base year f rom 1 980-81 to a more recent year, (2) complete review of the existing data base and methodology employed in the est imation of various macro-economic aggregates, and (3) implementation of the recommendations of the 1 993 Systems of National Accounts (1993 SNA). It may be mentioned that CSO wil l shortly produce estimates of various macro economic aggregates at current and constant (1993-94) prices f rom the year 1980 onwards. In the present study, provisional est imates on agriculture and allied activit ies industry of use, estimated from 1980 onwards are used. Series on estimates of a few macro-economic aggregates from 1 950-51 onwards w i th base 1993-94 are already provided in NAS 2000 .

W i t h i n t he a g r i c u l t u r e , f o r e s t r y and f i s h e r y sec to r , t h e ma jo r methodological improvements that are introduced in the new series w i th base 1993 -94 are( l ) coverage of the agricultural product ion in the foreyard/backyard, f loriculture, deep sea f ishing, valuation of the output of prawns and shrimps separately and (2) use of latest data base and prices for compil ing estimates of income aggregates and gross capital format ion. In specific, the changes made in the new series in agriculture sector are :

1.1 Gross Domestic Product in Agriculture (GDPA):

The new series on GDP agr icul ture, fo res t ry and f i sh ing ind icates substant ia l improvements . The changes in the value of o u t p u t in agriculture and allied activit ies are on account of revisions in the major sectors/activit ies as given below.

Oilseeds : Under this category, price data for coconut and sunf lower crops available f rom DESAg have been used in place of exist ing data on prices. This has resulted in an upward revision in the value of these crops.

Fruits and Vegetables : The old series w i th base 1980-81 was based on data given by the DESAg and the State DES. The estimates of production of a large number of fruits and vegetables and f lower crops (floriculture) were not included due to non-avaflability of data. In the new series, data on other crops such as apple, lemon, mosambi, orange, pineapple, tomato etc. (total 86 vegetables and 4 4 fruits) have been made available and included on the basis of information given in the Indian Horticulture Database published by the National Hort icul ture Board, Min is t ry of Agriculture. The Indian Horticulture Database is published annually and gives statewise production figures of crops. The information on production of frui ts and vegetables is collected by the respective state departments who obtain data from village level patwari . CSO has t ime series data on production of each frui t and vegetable crop from 1990 onwards. The production figures for the period 1 980 to 1990 are revised by constructing quantum index for each crop. This index is constructed on the basis of growth rates of crops estimated from 1990 to 1998. Further, the price data is available w i th both state DES and DESAg. CSO uses prices given by the latter for estimating value of all the fruits and vegetables. All this has resulted in an addition in the value of output of agriculture sector.

Foreyard/Bacl(yard Farming : The value of output in agriculture now includes production of crops in foreyard/backyard of houses. The report - Operational Land Holdings in India, 1991-92 salient features, March 1997 and Livestock Survey, 1991-92, NSS (48th round) provide area under the total kitchen garden, poultry, livestock w i th and w i thout poultry and any other combination in the rural areas. The information available for one year on area under kitchen garden and any other combination categories is extrapolated to other years using the ratio of total area under kitchen garden to the total rural area operated at all India level. This ratio is assumed to be constant for the subsequent years.

By Products: Using cost of cult ivation data, the information on value of by products has been obtained and included in the value of output of agriculture.

Apart f rom output side, a few changes have been made on the input side as wel l . These are :

Current Repairs, l\/laintenance of Fixed Assets and Ottier Operationai Costs: These are estimated on the basis of data given in AIDIS 1 991-92 in place of AIDIS 1981-82. This results in a reduction in the value of inputs used.

Market Charges : Information on market charges available f rom the latest survey carried out by DESAg is used.

82

Financial Intermediation Services (FISIM): The new series have made adjustments on account of FISIM in the agriculture sector. This includes imputed bank charges which resulted in an increase in the value of inputs.

Consumption of Diesel Oil: This is based on the number of diesel engine pump sets and tractors. Fresh data available on the CCS is used to re-estimate the consumption of diesel oil in the agriculture sector.

GDP in the Forestry Sector :

The revisions in the GDP in the forestry sector has arisen as a result of inclusion of current data on household fuel wood consumpt ion (NSS 43 and 50th rounds), subtracting from household (HH) total consumpt ion of fue lwood, the actual estimates of value of output of agricultural products viz. cotton sticks, arhar sticks etc. and estimating afresh the consumption of f i rewood in the industry and on funerals.

GDP in the Fishing Sector:

The main changes in the fishing sector are inclusion of product ion of 30 ,000 MT of marine fish against deep sea f ishing, valuation of output of prawns and shrimps separately and adoption of state wise product ion data on marine fish and inland fish that is available f rom ministry of Agriculture.

1.2 Gross Capital Formation in Agriculture (GCFA):

In the new series, the estimates of GCFA for the year 1993 -94 in the household sector are revised in the light of AIDIS 1991-92 in place of AIDIS 1981-82. The central and state governments' capital t ransfers to agricultural households are also included. Compared to est imates based on AIDIS 1981-82, the changes in the new series have resulted in a downward revision in the GCFA at current prices. The GCF on account of forestry and f ishing, however, do not show major changes. This is because of non-availability of data on the capital formation that has taken place in these sectors. Overall, compared to old data series, the new data series indicates a downward revision in the estimates of GCF in agriculture sector. Data do not reflect any changes/improvements on account of increase in the value of output in agriculture and allied act ivi t ies. This is due to absence of information in the AIDIS data on investment in activit ies other than agriculture, being undertaken by the households.

83

ANNEXURE |[

State Level Analyses of GFCFA at 1 9 8 0 - 8 1 Prices

For gross capital formation at the state level, one can talk of only w i th context to 11 states. Further, the estimates at the state level are for GFCFA, and not GCFA, and are exclusive of capital formation in forestry and fishing sectors. For the period, 1 980-90 , these 11 states (as given in Table-l l . l ) together contr ibuted 5 3 . 3 4 % in the total GFCFA at the all India level in 1990-91 at 1980-81 prices. Amongst these 11 states, one state (Gujarat) displayed the lowest and negative average annual rate of growth (-4.95%) of GFCFA and Punjab experienced a maximum rate of growth of GFCFA during 1980 to early 1990s. Two southern states-Andhra and Karnataka showed high growth rates (Andhra Pradesh 4 . 1 8 % and Karnataka 3 .54%), while all other states had moderate growth failing in between 1.23% to 2 .45%. The year to year data on GFCFA for most of these states reveals that there was a perceptible deceleration in the growth of GFCFA during the second half of 1980s, wh ich also gets reflected in the all India picture. Only exceptions to this trend are Haryana and Karnataka, which revealed a very high rate of growth from 1990-91 to 1993-94 .

Unfortunately, the decomposit ion of GFCFA into public and private sector is available only for 7 states (Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Orissa, Rajasthan, and Tamil Nadu). The changing relative share of public and private fixed capital formation in agriculture during 1980-95 indicates that the share of public capital formation declined below 5 0 % in four states (Gujarat, Madhya Pradesh, Orissa and Tamil Nadu), w i th the maximum fall in Madhya Pradesh from 60.1 5% in 1 980-81 to 3 3 . 7 2 % in 1992-93. The states of Maharashtra and Karnataka, however, revealed an increase in the share of public capital formation in agriculture (Table-11.2). It is wor th reiterating here that the methodology for est imating public sector f ixed capital formation at the state level and at the all India level differ, which may be one of the reasons behind still a somewhat higher share of public sector capital format ion in agriculture at the state level vis-a-vis at the all India level. As mentioned in chapter I, unlike the all India data on capital formation in agriculture, estimates at the state level are for GFCFA, and not GCFA, and are inclusive of capital format ion that is undertaken in DCU, NDCU and administrative departments. The public sector component of GFCFA showed a negative growth in three states (Gujarat, Madhya Pradesh and Orissa), w i th Gujarat topping the list w i th - 4 . 0 5 % per annum during 1980 to early 1990s. In contrast, the private sector component of GFCFA showed a positive

84

growth in all the seven states, w i th Orissa showing the highest g rowth rate of 11.05% per annum (Table 11.2 and F ig . - l l . l ) .

What is happening to capital formation in agriculture in relation to the rest of economy at state level? Is it fo l lowing a similar trend of 'relative neglect' as was observed at all India level ? Table-11.3 provides some informat ion on this aspect, and the picture seems to be somewhat diffused across states. The share of GFCFA in GDFCF has decelerated in all the states w i th only exception of Haryana . Rajasthan showed a maximum fall f rom 2 4 . 1 6 % in 1980-81 to 1 4 . 0 6 % in 1996 , fol lowed by Madhya Pradesh and Tamil Nadu. We have this information for the public sector component of the GFCFA vis-a-vis public sector GFCF in the whole economy. On this basis, agriculture does seem to be losing out to the rest of economy since early 1980s in almost all the states in varying degrees, except perhaps in Karnataka (Table-11.4).

The ratio of GFCF to gross domestic product in agriculture is also showing large f luctuat ions. The average ratio is highest in Maharashtra at 9 . 4 1 , fol lowed by Madhya Pradesh and Gujarat. The lowest average ratio is observed in the states of Tamil Nadu (4.34) at Andhra Pradesh (6.54) (Table-11.5). The year wise information on the rate of investment reveals that Gujarat in one year (1987-88) had touched a peak of 19 .04 , the highest amongst all the states for all the years for wh ich informat ion is available. This was presumably due to a severe drought in Gujarat in that year that pushed the ratio so high. Across states, there does not appear to be a strong positive trend in the ratio of GFCFA to GSDPA f rom 1 9 8 0 to 1996. With the exception of only one state viz. Punjab where there is positive and highly significant trend growth rate, all other states exhibit varied rates of growth in the rate of investment. While a posit ive and non-signif icant growth rate is observed in the case of Andhra Pradesh, Karnataka and Orissa, all other seven states have displayed negative growth rates. The negative growth rate is signif icant at 5 percent level of significance in Haryana and Tamil Nadu and at 10 percent level of significance in Kerala and Maharshtra.

How about the capital intensity of agriculture at the state level? Like all India level, annual ICOR across the states are also subject to w ide variations. A three yearly moving average is, therefore, taken to smoothen the GFCFA and GSDPA series f rom 1 980 to 1 994 . The ICOR is est imated by taking three years averages of GFCFA and incremental GSDPA, derived from three-yearly moving. The analysis is presented for five t ime periods

1 The unpublished data on GFCFA and GDFCF in Haryana is re-checked from CSC. It however, requires further probing.

85

viz. 1 9 8 0 - 8 2 , 1 9 8 3 - 8 5 , 1 9 8 6 - 8 8 , 1989 -91 and 1 9 9 2 - 9 4 . Whi le Karnataka, Madhya Pradesh, Punjab, Haryana and Tamil Nadu had positive and high ICOR during all these t ime periods, other states viz. Andhra Pradesh, Gujarat, Kerala, Maharashtra, Orissa and Rajasthan revealed erratic trends in the capital intensity during early eighties (Table-11.6). For all the states together, the ICOR showed a steady fall f rom 1.9 during 1 986 -88 to 1.89 during 1 989-91 and 1.56 during 1 992 -94 . The results display no meaningful relationship between investment and incremental output for many states. Time series data at the state level are required to explore the pattern of ICOR,

12.00

10.00

8.00

6.00

4.00

2.00

0 00

-2 00

-4 00

-6.00

Fig.-11.1: Average Annual Growth Rate of Public and Private GFCF at 1980-81 Prices

Karnataka t ^ ^ 'a Pr. Maharashtra Onssa Rajasthan

86

Table-11.1: State Level Gross Fixed Capital Formation (GFCF) in Agriculture at 1980-81 Prices, Rs. Million 1 2 3 4 5 6 7 8 9

Years Andhra Pr. Gujarat Haryana Karnataka Kerala Madhya Pr. Maharashtra Orissa Punjab 1980-81 1862 2530 1412 2161 1051 3185 3232 1217 1581 1981-82 1777 2529 1764 2103 1115 2854 3755 1118 1722 1982-83 2459 2857 1808 1893 1138 2942 4375 1544 1812 1983-84 2128 2912 1627 1875 1184 3290 4539 1620 1962 1984-85 2588 2747 1706 1865 1131 3725 4205 1558 1789 1985-86 2875 2068 1921 2067 1172 3962 3982 1567 2139 1986-87 3210 2164 1923 2236 1162 3567 4036 1596 2271 1987-88 3187 2512 1393 2034 1221 4464 4656 1587 2811 1988-89 3261 2134 1488 2228 1216 4187 4934 1706 2771 1989-90 "1 2678 1557 1665 2187 1241 4150 5186 1653 3694 1990-91 2733 1619 1954 2252 1191 3919 4803 1400 3425 1991-92 3194 - 2098 2525 - 3686 4379 1596 4414 1992-93 3074 " 2278 3090 - 3693 4560 1556 4382 1993-94 3428 ~ 2383 • 3647 ~ 5206 - 3697 1994-95 - - - - ~ " - - 4356 1995-96 ~ ~ ~ - ~ - - - 3965 1996-97 - ~ - ~ ~ - - - ~ Trend Growth Rate (%per year)

4.18* -4.95* 2.45* 3.54* 1.23* 2.43* 2.35* 1.72** 7.8*

Note: The trend growrth rates are estimated using semi-log function — * and " significant at 1 % and 5% level of significance

— Source: Unpublished data obtained from CSO |

The estimates have been prepared by the Directorate of Economics and Statistics of the respective states

Table 11.1 : Contd.

10 11 Years Rajasthan Tamil Nadu GFCFA-States GFCFA-lndia %Share of states 1980-81 2106 966 21302 47650 45 1981-82 2308 1192 22237 45870 48 1982-83 1983-84

2454 1123 24405 46760 52 1982-83 1983-84 2329 1130 24595 42590 58 1984-85 2226 1031 24572 45970 53 1985-86 2261 980 24993 43740 57 1986-87 2403 1089 25657 41470 62 1987-88 2175 1185 27225 45770 59 1988-89 1204 846 25976 46510 56 1989-90 1269 1079 26359 46140 57 1990-91 1839 1136 26269 49250 53 1991-92 2386 980 25257 51470 49 1992-93 2636 1149 26418 57700 46 1993-94 2497 - 20859 55420 38 1994-95 3017 - 7372 66860 11 1995-96 3194 " 7159 74060 10 1996-97 3298 ~ 3298 75320 4 Trend Grov vth Rate {%f er year)

1.78* -0.13 " " ~ " " ~

87

Table-11.2: Percentage of Public Sector GFCF in Agriculture In the Total GFCF in Agriculture at 1980-81 prices 1 2 3 4 5 6 7

Years Gujarat Karnataka Madhya Pr Maharashtra Orissa Rajasthan Tamil Nadu Average 1980-81 60.54 57.89 60.15 54.13 74.53 41.28 26.39 53.56 1981-82 55.73 51.49 56.69 54.86 65.19 46.35 37.09 52.49 1982-83 64.17 57.09 57.45 58.59 64.26 46.58 35.92 54.87 1983-84 58.98 59.59 50.43 60.76 62.83 40.62 56.141 55.62 1984-85 59.04 56.90 49.87 57.50 61.92 36.49 46.89 52.66 1985-86 54.23 54.83 48.83 52.46 53.91 34.14 44.63 49.00 1986-87 67.47 51.67 42.58 47.99 63.04 36.33 44.36 50.49 1987-88 77.61 45.23 48.03 51.12 57.25 36.32 45.00 51.51 - -1988-89 56.01 43.40 42.13 50.90 47.88 69.77^ 45.21 50.76

- -1989-90 46.61 49.02 39.62 49.43 43.69 66.61 27.75 46.10 1990-91 42.33 45.87 38.93 49.02 55.06 41.75 30.04 43.29 1991-92 - \ 51.51 35.76 44,82 48.45 41.99 34.91 42.91 1992-93 - 54.03 33.72 50.94 44.44 40.80 32.45 42.73 1993-94 - 59.16 - 55.61 - 46.14 - 53.63~ 1994-95 - - - - - 50.28 - 50.28 1995-96 - ~ - — - 50.09 - 50.09 - ^ -1996-97 ~ - -

— - 47.08 - * 47.08

- ^ -

Average annual growth rates of public GFCFA: 1980-96 -4.05 5.30 -2.33 4.73 -0.12 4.63 6.89 TE 1983-84 5.26 -3.42 -4.30 16.59 6.35 4.23 40.67 TE 1990-91 -27.85 4.12 -10.57 -0.19 -4.99 -0.74 -12.02

Average annual growth rates of private GFCFA: 1980-96 2.06 4.49 6.00 3.67 L_11.05 10.21 3.52 TE 1983-84 6.75 -5.00 9.65 6.51 25.47 3.84 -9.90 TE 1990-91 22.59 3.66 1.12 2.69 1.12 31.83 13.74 Notes:

GFCF of Gujarat relates to government adminstration and DCU only From 1990-91 ttie estimates given are GCF and not GFCF

Source: Compiled by authors' based on dat a from EPW (1998), GO! (1999) and CSO The estimates obtained from CSO have been prepared by the Directorate of Economics and Statistics of the respective states

88

Table-11.3: Percentage of GFCF in Agriculture in GDFCF at 1980-81 Prices 1 2 3 4 5 6 7 S

Years/States Andlira Pr. IHaryana Karnatalca Kerala IVIadhya Pr. Punjab Rajastiian Tamil Nadu

1980-81 14.26 ' " 27.46 21.37 14.13 19.68 25.71 24.16 6.26

1981-82 15.30 34.62 20.49 12.36 17.07 24.081 23.02 6.28

1982-83 18.21 29.70 16.88 11.57 18.21 26.39 23.52 5.76

1983-84 13.45 33.85 14.76 11.46 17.92 24.61 22.42 6.64 1984-85 15.78 37.89 15,78 11.54 17.31 18.95 22.08 4.95 1985-86 18.08 40.54 17,20 9.05 19.05 23.41 21.24 4.88 1986-87 18.47 44.27 18.85 - 17.65 24.06 13.78 4.80 1987-88 16.65 33.57 17.67 - 19.07 22.57 16.31 r 5.01

1988-83 17.53 34.06 17A7^ - 16.32 20.71 10.14 3,03 1989-90 ^ 13.39

11.51 4 9 3 8 16.84 ~ 17.72 26.26 ^ 10.08 4,98

1990-91 ^ 13.39

11.51 53,87 16.37 - 1 15.85 19.02 11.99 r 4,87 r 4,57

4,85 1991-92 13,47

11.60 81.42 15.66 - 15.47 24.42 15.68

r 4,87 r 4,57

4,85 1992-93 13,47 11.60 73.13 16.96 - ' 15.81 23.94^ 14.68

r 4,87 r 4,57

4,85 1993-94 12.28 ^ 67.33 19.60" ... 18,26 12.97

r 4,87 r 4,57

4,85

1994-95 - - ... ,.- - 19.85 14.93 -1995-96 - - - - - - 14.73 .-1996-97 - - - - - - 14.06 -Average 15.00 44.36 17.56 11.68 17.52 22.82 17.16 5,14 Source: Compiled by authors' based on data from EPW (1998), GOI (1991) and CSO

Table-11.4: Percentage Share of Public Sector GFCF in Agriculture in Public Sector GDFCF at 1980-81 Prices 1 2 3 4 5 6 7

Years/States Gujarat Karnataica IVIadhya Pr Maharshtra Orissa Rajasthan Tamil Nadu 1980-81 52.01 20,88 18.63 10.18 19,15 21,80 4,52 1981-82 56.45 19,02 15.68 11,14 27,52 20,89 6,07 1982-83 58.56 15,46 f" 16.15 ̂ 14,53 r 25,47 22,00 5.28 1983-84 ^ 58.91 L 15.82 ̂ 16.05 16,00 25,69 20,02 L 8.18 1984-85 59,44 16.15 18.37 13,55 28,00 19,79 5.73 1985-86 54,07^ 19,19 17.41 10,95 22,58 16,48 5.47 1986-87 55,79 18,55 13.10 10,41 16,54 14,94 5.13 1987-88 48,15 15,02 16,67 12,54 10,60 11,58 5 ^ 1988-89 ^ 54,29 16,46 12,29 12,52 11,59 12,85 3.25 . , ...̂ 1989-90 50,04 19,02 13,81 10,43 9,73 12,08 2.59 1990-91 40,96 17,04 12.00 11,60 10,47 9,37 3.24 1991-92 1992-93

40,43 14,98 11.48 L 7,39 10,57 12,56 3.37 1991-92 1992-93 35,03 17,46 11.68 r 8,91 9,13 r 12,24 3.70 1993-94 35,40 21,99 - 7,93 10,39 11,54 .. 1994-95 "1995-96' 1996-97

36,27 - 9.07' 6.02 14,46i 13,27'""' '"- "'

' 1155: ' --

1994-95 "1995-96' 1996-97

42,63 - 12.05 -- '6^67

12,79 14,46i 13,27'""' '"- "'

' 1155: ' --Average 49,60 17.831 14.741 10-40 13,72 14,11 4,59 •

Source: Compiled by authors' based on data from EPW (1998), GOI (1991) and CSO

89

Table-11.5: |Percentage Share of GFCF in Agriculture In GSDP In Agriculture at 1980-81 Prices |

1 2 3 4 5 6 Years/States Andhra Pr. Gujarat Haryana Karnataka Kerala Madhya Pr.

1980-81 5.62 9.82 7.87 8.55 7.76 9.92 1981-82 4.40 8.26 9.93 7.44 8.15 8.53 1982-83 6.14 10.86 9.75 6.87 8.41 8.40 1983-84 5.07 9.07 8.50 6.47 9.43 8.20 1984-85 6.75 8.50 8.68 5.92 8.13 10.27 1985-86 7.50 8.44 8.67 7.52 8.06 9.76 1986-87 9.36 8.83 9.10 7.04 8.39 9.66 1987-88 8.19 19.04 7.56 6.42 8.42 10.84 1988-89 7.01 6.07 5.80 6.65 7.28 9.40 1989-90 .5.61 5.03 6.60 6.38 7.59 9.90 1990-91 5.90 5.55 7.00 7.00 6.72 7.86 1991-92 6.76 - 7.54 6.62 - 8.32 1992-93 6.58 - 7.99 7.82 ~ 7.62 1993-94 6.60 ~ 8.10 8.53 ~ ~

1994-95 - " " ~ ~ ~

1995-96 ~ - — - - ~

1996-97 ~ " - ~ - " Average 6.54 9.04 8.08 7.09 8.03 9.13 Source: |Compiled by authors' based on data from EPW (1998), GOI (1991) and CSO

Table II.5 : Contd.

7 8 9 10 11 Years/States Maharashtra Orissa Punjab Rajasthan Tamil Nadu 1980-81 8.13 7.43 6.53 9.50 5.10 1981-82 8.96 6.65 6.42 9.25 5.01 1982-83 11.04 10.58 6.55 9.87 6.11 1983-84 10.82 8.31 7.15 7.10 5.10 1984-85 10.27 9.28 5.87 7.66 3.95 1985-86 9.79 7.90 6.46 8.35 4.03 1986-87 11.48 8.44 6.91 9.21 4.44 1987-88 10.04 9.33 8.16 10.24 4.76 1988-89 9.95 8.47 7.80 3.24 3.48 1989-90 8.44 7.29 9.36 3.76 3.91 1990-91 8.30 9.20 8.80 4.48 3.96 1991-92 9.45 8.91 10.49 6.77 3.06 1992-93 7.03 9.76 10.19 6.26 3.51 1993-94 8.07 - 8.27 7.38 -1994-95 ~ - 9.54 6.77 ~ 1995-96 " - 8.72 7.65 -1996-97 - - - 6.30 -Average 9.41 8.58 7.95 7.28 4.34

90

Table-11.6: State Level Incremental Capital Output Ratios in Agriculture at 1980-81 Prices

1 1 1 GFCF Averages over the years based on three yearly moving averages, Rs. million Years Andhra Pr. Gujarat Haryana Karnataka Kerala Madhya Pr. Maharashtra 1980-82 2076.80 2702.42 1697.03 2004.44 1123.29 3011.27 4005.21 1983-85 2604.29 2580.28 1771.71 1956.39 1156.20 3576.42 4229.81 1986-88 3117,32 2195.35 1620.73 2142.61 1203.40 4112.54 4563.90 1989-91 2919.66 1769.89 1906.02 2388.82 1215.74 3923.27 4781.33 1992-94 3232.10 ~ 2253.16 3087.33 - ~ 4715.10 1992-94 3232.10 ~

Incremental GDPA Averages over the years based on three yearly moving averages, Rs.million

Andhra Pr. Gujarat Haryana Karnataka Kerala Madhya Pr. Maharashtra 1980-82 2938.47 2117.60 396.30 1243.93 -326.83 2680.53 726.00 1983-85 -1265.67 -859.80 834.96 663.59 284.49 575.86 -746.69 1986-88 2463.43 -223.39 706.60 967.86 581.27 1542.57 4519.80 1989-91 790.98 1040.02 1660.81 1148.37 959.91 1661.33 1290.57 1992-94 1749.31^ 587.33 793.02

Haryana

2130.40 879.20 2693.58

Madhya Pr.

2865.03

Maharashtra ICOR Andhra Pr. Gujarat

793.02

Haryana

2130.40 879.20 2693.58

Madhya Pr.

2865.03

Maharashtra ICOR Andhra Pr. Gujarat

793.02

Haryana Karnataka Kerala

2693.58

Madhya Pr.

2865.03

Maharashtra

1980-82 0.71 1.28 4.28 1.61 -3.44 1.12 5.52 1983-85 1986-88

-2.06 -3.00 -9.83

2.12 2.95 4.06 6.21 -5.66 1983-85 1986-88 1.27

-3.00 -9.83 2.29 2.21 2.07 2.67 1.01

1989-91 3.69 1.70 1.15 2.08 1.27 2.36 3.70 1992-94 1.85 " 2.84 1.45 - - 1.65 Source: Authors' estimates based on data from EPW (1998) and CSO

Table 11.6 : Contd. GFCF Averages over the years based on three yearly moving averages, Rs. million Years Orissa Punjab Rajasthan Tamil Nadu GFCFA-States 1980-82 1360.41 1768.64 2326.43 1120.99 23196.91 1983-85 1576.45 1961.34 2301.78 1058.1-? 24772.82 1986-88 1620.68 2705.57 1918.89 1053.59 26254.58 1989-91 1551.02 3738.31 1851.89 1057.55 26048.22 1992-94 1 ~ 4154.57 2708.61 - 24177.94

Incrementa 1 GDPA Averages over the years ba sed on three yearly moving averages, Rs.million

Orissa Punjab Rajasthan Tamil Nadu GFCFA-States 1980-82 1032.37 1071.47

Te 13.91 3538.77 1064.73 16483.33

1983-85 512.80 1071.47 Te 13.91 -39.20 1178.53 2752.78

1986-88 478.79 1444.67 1101.26 209.57 13792.41 1989-91 -1197.06 1615.21 2911.49 1841.21 13722.84 1992-94 663.61 1310.97 193.21 1637.16 15502.82

ICOR Orissa Punjab Rajasthan Tamil Nadu GFCFA-States

1980-82 1.32 1.65 0.66" 1.05 1.41 1983-85 3.07 1.22 -58.72 0.90 9.00 1986-88 3.38 1.87

"2.31 1.74 0.64

5.03 0^57

1.90 1.90

- — -1989-91 -1.30

1.87 "2.31

1.74 0.64

5.03 0^57

1.90 1.90

- — -

1992-94 ~ 3.17 14.02 - 1.56

91

1

ANNEXURE IIS

State-Wise Non-Departmental Commercial Undertakings (NDCUs)

in Agricultural and Allied Activities Sector

Andhra Pradesh (AP) fisheries corporation l td.

2. AP forest development corporation ltd.

3. AP state irrigation development corporation i td.

4 . AP state seeds development corporation l td.

5. AP meat and poultry development corporation l td.

6. Assam fisheries development corporation l td.

7. Assam tea corporation ltd

8. Assam plantation development corporation ltd

9. Bihar rajya matsya beej vikas nigam itd.

10. Bihar hilly areas lift irrigation corporations l td.

11. Bihar state forest development corporation l td.

12. Gujarat water resources development corporation l td.

13. Gujarat fisheries development corporation ltd.

14. Gujarat state forest development corporation l td.

15. Gujarat sheep and wool development corporation l td.

16. Haryana state minor irrigation and tubewells corporation l td.

17. H.P. horticulture produce marketing

18. H.P. state forest corporation ltd.

19. Karnataka meat and poultry marketing corporation l td.

20 . Karnataka fisheries development corporation l td.

2 1 . Karnataka state agro corn products l td.

22 . Karnataka forest development corporation l td.

23 . Karnataka state forest industries corporation l td.

24 . Karnataka pulpwood ltd.

25. Karnataka inland fisheries development corporation l td.

26. Kerala inland fisheries development corporation ltd.

92

27. Oil palm India l td.

28. The rehabilitation plantation l td.

29. The plantation corporation of Kerala l td.

30 . State farming corporation of Kerala l td.

3 1 . Kerala forest development corporation ltd.

32. Kerala state coconut development corporation l td.

33. Kerala livestock development and milk marketing board l td.

34 . Kerala state poultry development corporation l td.

35. M.P. rajya van vikas nigam ltd.

36 . Forest development corporation of Maharashtra l td.

37 . Irrigation development corporation of Maharashtra l td.

38. Maharashtra state farming corporation l td.

39. Parbhani krishi gosamardhan l td.

40 . Manipur plantation crops corporation ltd.

4 1 . Forest development corporation of Meghalaya ltd.

42 . Orissa lift irrigation corporation l td.

43 . Orissa forest development corporation l td.

44 . Orissa fish seed development corporation l td.

45 . Orissa state seeds corporation l td.

46 . Punjab state tubewel l s corp. l td.

47 . T.N. forest plantation corp. l td.

48 . T.N. sugarcane farm corp. l td.

49 . T.N. tea plantation corp. l td.

50. T.N. poultry development corp. l td.

5 1 . T. N fisheries development corp. l td.

52 . T. N meat corp. l td.

53. ARASU rubber corp. ltd.

54. T.N. state farms corp. l td.

55. T.N. state tubewells corp. l td.

56. Tripura forest development and plantation corp. l td.

57. U.P. matsya vikas nigam l td.

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58. U.P. van ngam ltd.

59. W.B. forest development corp. l td.

60 . W.B. tea dev. corp. l td.

6 1 . W.B. livestock processing development corp. l td.

62 . State fisheries development corp. l td.

63. W.B. minor irrigation corp. ltd.

64 . Arunachal Pradesh forest Corp. l td.

65. Karnataka krishna basin lift irrigation corp. l td.

66 . Kerala livestock development board l td.

67 . M.P. l i f t irrigation corp. l td.

68 . M.R plantation l td.

69 . Maharashtra fishery development corp. ltd.

Source : Unpublished information as on June, 1999, CSO

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ANNEXURE IV

Public and Private Investment in Agriculture -A Review of the Debate

IV. 1 The Debate:

The literature on capital formation in agriculture has focussed mainly on four issues. These are, (1) trends in public and private investment in agriculture, (2) factors behind these trends, (3) relation between public and private investments in agriculture, and finally (4) impact of public and private investment on agricultural g rowth . In almost all the studies, econometric models have been employed to provide answers to these issues. Official data given in NAS wi th base 1980-81 and household data given in AIDIS for 1 981 -82 and 1 991 -92 have been used. The major conclusions arrived at in various studies covering the above listed issues are presented in a summary char t appended to th is annexure. In subsequent sect ions, however, we a t tempt to explore in detai ls the literature on one of these issues, namely relation between public and p r i v a t e c a p i t a l f o r m a t i o n , w h i c h is o f t e n r e f e r r e d to as t h e 'complementari ty hypothesis ' .

The 'complementar i ty ' between public and private capital format ion in agriculture is examined on the basis of (a) direction of movement of both public and private investments, and (b) statist ical relationships between the t w o investments. A recapitulation of the macro data on real public and private capital format ion in agriculture indicates that f rom 1960 to late 1 970s, the movement of both the investments was in the same direction (Fig. 1.1a). This continued almost upto 1986-87 , though on a weaker basis. Such posit ive associat ion between public and private investments in agriculture over long period was interpreted as having 'complementarity' or 'crowding in ' effect (Krishnamurty and Pandit, 1 985 ; Rath, 1989; Rao, 1994; Dhawan, 1 996) . The years after 1 986 -87 , clearly exhibit a divergent movement between public and private investments w i th former falling and the latter rising steadily. This has generated an in tense debate regarding the subs id ing e f f ec t of an es tab l i shed ' complementar i t y ' between public and pr ivate capital f o rma t ion in agriculture.

A survey of l iterature indicates .evolution of three divergent v iews on the issue of complementar i ty between public and private investments in agriculture from early eighties. The proponents of one view (Krishnamurty and Pandit, 1985; Chakravarty, 1987 ; Shetty, 1990 ; Storm, 1993 ; Rao,

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1994 ; Dhawan,1996) on the basis of empirical investigations argued that public investment has an inducement effect on private investment and hence there is a 'crowding in ' effect or 'complementar i ty ' between public and private investments in agriculture, in a broad sense of the term. It is also contended that public investment creates condit ions for private investment in agriculture or else private investment is conditional or contingent upon public investment. For instance, based on CSO data, Kr ishnamur ty and Pandit (1985) conc luded tha t one rupee public investment in agriculture induces private investment of more than a rupee. While considering the stimulating role of public investment on private investment, Dhawan (1996 & 1998) observed that public investments in canals and rural electrif ication have positive bearing on the private household investment in machinery and construct ion of dugwells etc. The elasticity of private fixed capital formation in agriculture w i th respect to canal irrigation ratio and rural electri f ication is 0.25 and 0 .20 during 1 981 -82 . Rao (1 994) has also opined that public investment in irrigation canals has bearing on private investment in tractors and other implements.

The advocates of second view (Sundararajan and Thakur, 1980; Rath, 1 989; Mitra, 1 996 ; Misra & Hazell, 1 996 and 1 998) again using empirical models claim complementari ty at a less aggregate level, but no definite conclusion regarding the overall impact of public investment on private investment in agriculture is reached by them. Doubts are raised about the private assets that get enhanced by irrigation investment at the macro level. It is argued that the effect may hold at a less aggregative level, p_articularly in the dry regions where public investment on irrigation influences households to carry out farm operations. Therefore, a weak complementar i ty e f fec t between public and private investments in agriculture may be observed (Mitra, 1996; Misra & Hazell, 1996 & Misra, 1998). Nevertheless, (Misra, 1998) highlights l imitations of official data on public investment and cautions in drawing any definite conclusions about the role of public investment in influencing private investment in agriculture. Further, Sundararajan and Thakur (1980) have estimated 0.6 billion net reduction of resources available initially to private sector as a result of increase in investment of Rs. one billion by the public sector. However, in the subsequent periqd, additional resources generated by public sector served to raise overall investment. Since their model pertains to Indian economy from the period 1960 to 1976, it cannot be used to deduce conclusion at the sectoral level, in particular for the agricultural sector. Nevertheless, for the economy as a whole, the conclusions arrived by them support partial 'crowding Out' of private investment due to public investment.

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The proponents of third view (Mishra and Chand, 1995 and Chand, 2000) have challenged that there is no apparent complementarity between public and private investment and the latter may be partly induced by public investment or partly autonomous. The validity of any kind of relation between both the investments in agriculture sector is questioned by them on the basis of conceptual, methodological and factual issues. The effect of public investment on private investment is refuted on the grounds that 'complementar i ty ' should be interpreted (in a static sense) as a kind of relationship of being together to form unity, which in turn produce an outcome that neither of the complements can produce all by itself. The examples quoted are complementary relationship between sugar and tea and investment in field channels and canal irrigation projects. Since private investment by the households is for a large number of act ivi t ies apart f rom construct ion of field channels, the total investment, therefore can n o t be re lated sole ly to publ ic canal deve lopmen t . Fur ther , complementarity, according to the authors is suggested to be separated from inducement effect as the latter indicates a causal relationship. It is op ined t h a t c o m p l e m e n t a r i t y k ind of r e l a t i onsh ip b e t w e e n t w o investments is not a causal one and hence cannot be studied w i th the help of statistical relationship.

In response to this view, the issue was further debated at length by Dhawan (1996) and Rao (1997). Dhawan opined that negative relationship (elasticity -0.50) between public and private investment obtained by Mishra and Chand (1995) for the period 1980-81 to 1991-92 , can be attr ibuted to their failure to explore the relation in a mult iple regression framework and restriction of the analysis to the period of eighties when publ ic inves tment decl ined substant ia l ly wh i le pr ivate inves tment continued to rise. It was also felt that the cri t ic ism of complementar i ty hypothesis by Mishra and Chand (1995) has originated part ly f rom their dissatisfaction w i th the official (NAS) estimates of public GCFA, wh ich include mainly investment in major and medium irrigation works. Dhawan (1996) by deviating from official estimates re-examined the relationship by taking canal intensity (net canal irrigated area as percent of net sown area) instead of public investment as the relevant explanatory variable in explaining variations in the fixed capital formation at the household level. Similarly, Rao (1997) took recourse to power supplied to agriculture as a proxy for public investment in power (agriculture) in explaining variat ions in private investment in agriculture. Both the studies found a posit ive and signif icant association between the private and public investments in ag r i cu l t u re and hence proved ' c r o w d i n g i n ' e f f e c t or s t r o n g 'complementart i ty ' relationship between the t w o investments.

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Extending the same issue further, Chand (2000) once again questioned the complementari ty hypothesis at the macro level by re-defining and re-est imating public investment in agriculture. The public investment in agriculture is defined by him in a broader framework so as to include not only investment in major and rhedium irrigation work (as done by CSO) but investment in other areas/activit ies. Using capital out lay data by the government, as given in the f inance accounts of the Central and State Governments, 23 heads of expenditure, which are considered to be falling under agriculture sector inclusive of investment in irrigation projects, are identif ied. After preparing a 'broad series' on public investment both at the all India and state level, the study re-examined complementar i ty relationship using statistical relationships. The results displayed a negative and non-significant impact of public investment defined under broad series on private investment. This is indicative of a lack of inducement effect of the public investment on private investment at the aggregate level. The analyses across the states for the year 1981-82 and 1991-92 , however, revealed that the estimated broad public investment series bears a positive and signif icant impact on private investment in 1981-82 and a positive and insignificant impact in 1991-92.

From the preceding discussion., several issues can be questioned. The most impor tan t are - is underest imat ion of of f ic ia l data on publ ic investment the major reason behind its weak relationship w i th private i n v e s t m e n t s in ag r i cu l t u re? If yes , w h y t h e n , t he re ex i s t s no complementarity between the t w o , when public investment is re-defined? Is there a need to re-examine the re lat ionship on conceptua l and methodo log ica l grounds? Finally, w h a t w i l l be the role of publ ic expenditure in agriculture and allied activit ies, if private investment is found to be autonomous? This is precisely what the subsequent sections intend to explore.

IV.2 Conceptual Basis of Establishing 'Complementarity' Relation:

At t h e o u t s e t , i t is i m p o r t a n t t o po in t ou t t h a t t he deba te on complementari ty relation between public and private investment should not have arisen had there been one agreeable and consistent definit ion of 'complementar i ty ' . In the literature, the term 'complementar i ty ' is used synonymously w i th another term 'crowding in ' ef fect though these are interpreted to have di f ferent meanings in theory. The 'crowding in ' between public and private investments is used in a much broader sense in explaining some association than the strict 'complementar i ty ' between the t w o . Nevertheless, both the terms indicate the impact of government's expansionary policies or government spending on private investment in

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an economy. On the belief that the former acts as a stimulus to the latter, the positive effect between the two is called 'crowding in' effect or commonly 'complementarity' relationship or 'inducement' effect and the negative association as 'crowding out' effect.

Since official estimates on public investment showed a weak relationship with private investment in agriculture, Chand (2000) tried to look into the phenomenon of complementarity again by re-defining and re-estimating public investment in agriculture by taking 23 heads of capital expenditure at the all India level and for the states. The heads of capital expenditure identified are:

1. Crop husbandry

2. Soil and water conservation

3. Animal husbandry

4. Dairy development

5. Fishery

6. Forestry and wildlife

7. Plantations

8. Food, storage and warehousing

9. Agricultural research and education

10. Investment in agricultural financial institutions

n . Cooperation

12. Other agricultural programmes

13. Rural development programmes

14. Hill areas

15. North eastern areas

16. Other special area programmes

17. Major irrigation

18. Minor irrigation

19. Command area development

20. Flood control projects

21 . District and other roads

22. Rural electrification

23. Fertilizer industry

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The relationship estimated using broad series on public investment wi th in a multiple regression framework, fails to show any inducement ef fect of public investment (broad series) on private investment in agriculture f rom the period 1 980-81 to 1996-97. The analyses explored across the states indicate an inducement effect during 1981-82 and the same becomes diluted during 1991-92. The results also indicate that public investment does not have a signif icant impact on the growth of agricultural output . The agricultural growth is influenced mainly by private investment and agricultural terms of trade. Nevertheless, it is repeatedly argued by Chand (2000) that the role and importance of public investment in creating infrastructure and promoting long term agricultural growth should not be undermined, irrespective of whether there exists any complementari ty relationship between public and private investment or not. Chand (2000) seems to be in some sort of a paradox. His theoretical understanding (or should one say "intuition") suggests that public sector investment is an important determinant of growth in agriculture, but the empirical results of his analyses go contrary to his intui t ion.

These conclusions of Chand (2000) , therefore, are questionable and require further probing as to whether 23 heads of publ ic expenditure should be taken to be fu l ly representat ive of public investment in agriculture or not. Also, if public investment is stated to be so important in theory, then why it does not come out to be signif icant in his empirical investigations, even if it is believed that there exist leakages in public investment as opined by him? A detailed investigation into his work (analyzed below) reveals t ha t the est imates given by hirh on public investment in agriculture cannot be taken as per their face value. The series defined suffer f rom crit icism on conceptual and methodological grounds due to wh ich the analyses on relation between public and private investment and their impact on growth in agriculture have got misplaced.

IV.2.1 Re-Defining Public Investment in Agriculture:

As ment ioned above, Chand (2000) has taken 23 head of capi tal expenditure from the finance accounts to define a new concept of public investment in agriculture. He has not mentioned in his study the basis of including various activit ies wi th in the agriculture sector. We wi l l evaluate each and every item of capital expenditure as taken in the study and find out their relevance for the agriculture sector.

It is logical to include investment in 'agriculture and allied act ivi t ies' heads of expenditure (1 to 12) as these seem to have direct bearing on private investment, w i th certain exceptions, like expenditures done on food processing and milk supply schemes wi th in the food, storage and

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processing activit ies. Not all expenditures carried out w i th in the 'rural development and special area programme", 'hill areas and north-eastern areas' and ' f lood contro l ' categories of expenditure are used for making improvements in agriculture. A major part of expenditure under these categor ies is done towards creat ion of emp loymen t , ant i pover ty programmes and roads and streetl ights and protect ion of populat ion f rom floods, both in the urban and rural areas. Therefore, there is a need to look into the proportion of investment that is relevant for agriculture.

Further, it is widely accepted that public investment in many sectors viz. roads, rural markets, power etc. may not only have a bearing on private investment in a particular sector, say agriculture, their presence, however, facil i tates investment in the overall economy. It is, therefore acceptable to say that investment in roads and power induces private investment. But, is it correct to say that all the expenditure incurred on distr ict and other road is for agriculture only? This category of expenditure is taken in total i ty in his report and is likely to be an over-estimate. This is because 'distr ict and other roads' are used not only for agricultural purposes but for commut ing non-agricultural commodit ies as well as commuters for non-agricultural purposes. The study should have explored the share of total investment on distr ict roads that are relevant for only agriculture. Given the paucity of data on such norms, Chand has ducked these questions.

In the case of expenditure on 'rural e lect r i f icat ion ' component , the expenditure seems to be an under-estimation of the total investment done in power that is relevant for agriculture. From the f inance accounts or budget, it is apparent that expenditure under 'rural e lectr i f icat ion ' head covers only tribal area subplan, direction and administrat ion and investment in public sector and other undertakings. This expenditure consti tutes around 5-6% of the total capital investment in power projects by the Central government. It basically covers expenditure on transmission and distr ibut ion and not on the generation of power in the rural areas. The expenditure on generation is massive and is shown in the other categories of capital expenditure wi th in the 'power' head of expenditure. Suffice it to say that the sharp decelerating trend in the public investment indicated in Chand (2000) might be due to lower est imates of tota l investment in power in the agriculture sector.

There is no conceptual clarity or explanation by the author as to why expenditures on fertilizer industries or power are included in agriculture and pub l ic expend i tu re on o thers ac t i v i t i es l ike pos t s , r a i lways , communicat ions, agro-processing, rice, sugar mills and other consumer industries are excluded. If direct consumptive use of an input, say fertilizer

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and power used in agriculture is the cri ter ion, then the series is an under­est imation because agricultural produce has to be brought to the market for sale and further uses via public and other means of transport. Going by this argument public investment in goods train or transport industry, wh ich carries agriculture produce to their destination should have also been included in the study.

Before venturing into what all activit ies should be covered under public investment in agriculture and on what conceptual basis, it is important to highlight other constraints in Chand (2000) study. These relate mainly to understanding of the data. Needless to say that the limitations identified can result into either under est imat ion or over est imat ion of public investment in agriculture. Firstly, data on capital expenditure in the finance accounts as well as budget documents is inclusive of physical investment in assets and financial investment in stocks and shares. The concept of capital formation refers to addition in only physical assets and hence expenditure on financial assets should have been deducted f rom the total capital expenditure on various items in his work.

Secondly, data on capital expenditure for all the heads of expenditure are net of receipts and recoveries . Chand (2000) seems to have taken expenditure on gross basis as is visible f rom the posit ive and high expenditure on ' food, storage and processing' category of agriculture expenditure, which is found to be almost negative in most of the years in the state finances. The practice of taking gross expenditure may not be a correct way because from the very def in i t ion, it is clear that capital formation for a particular sector or inst i tut ion, is measured by the total value of acquisitions, less disposals of f ixed assets during the accounting period plus certain additions to the value of non-produced assets realized by the productive act iv i ty of those insti tut ional units. The sales or other disposals are recorded as negative expenditures or negative acquisit ions for the sector or institution under consideration. The negative and positive values recorded for GFCF cancel out for the economy as whole, except for the costs of ownership transfer (UN 1993). Therefore, the practice of taking expenditure on gross basis wi l l indicate higher level of public investment in agriculture, which may not be the reality.

Thirdly, most of the expenses incurred on irrigation and power projects are carried out f rom the actual capital expenditure allotted for the purpose by the central and state governments and some through developmental loans available to the government from national and international agencies.

Receipts and recoveries are a result of disposal of old capital stock and associated transfer costs on account of change in the ownership of an asset.

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A separate account of such loans and advances by the Union and State government for each act iv i ty is given wi th in the f inance accounts. The broad series constructed by Chand (2000) seems to have missed to take into account capital expenditures incurred on agricultural and other activit ies out of loans of developmental nature.

IV.2.2 Activities to be Included under Public Investment in Agriculture:

In order to f ind out what all activit ies should be considered to form part of public investment in agriculture, it is essential to f ind out how each item of expenditure is allocated between various industries of use and between public and private sectors. In an economy, capital format ion done in one sector is not independent of other investments, be it in the private sector wi th in the agriculture or industry or public sector. For example, public railways would not have been successful in laying railway tracks and transport ing goods in the absence of private steel and iron i ndus t r i es , pub l i c roads , w a g o n s and eng ines p r o d u c e d in t h e manufacturing sector. There are several important condit ions before final outcome can actually be attained. In the first place, there must be a considerable mileage of railway lines, existence of complementary i tems, such as engines, wagons and other equipment, existence of lorries to carry goods etc. In India, whi le expenditure on laying of railway lines is unde r taken by the pub l i c sec tor , e x p e n d i t u r e incu r red t o w a r d s manufacturing of locomotives, engines etc. is carried out in both public and private sectors. Therefore, it is safe to conclude that there is no measurable income f low or investment, which can be attr ibuted to any speci f ic capital stock or sector as such. When a comp lementa r i t y relationship between two investments, say investment in roads and modes of transportat ion are matched, it results in an upward movement in the capital formation in the whole economy through forward and backward linkages. Nevertheless, segregation of its impact between the sectors is a dif f icult task.

So, where can one draw a line? We have tried to explore this in the present study in chapter II by looking at the est imation procedures being fol lowed in the national and international accounting f ramework. Af ter digging into the concept, coverage and practice of est imation of capital formation across various industries of use and inst i tut ions w i t h in the Indian and UN system of National Accounts, we have re-defined and re-estimated the series based on three alternate concepts. The detai ls of each concept are given in chapter III in the main tex t . In brief, concept I takes the off icial definit ion of public investment in agriculture, wh ich includes primarily investment on major and medium irr igation works .

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Concept II defines public investment in major and medium irrigation works and relevant power supplied to agriculture. Concept III includes investment under taken in concept II and investments covered in eleven heads of capital expenditure under 'agriculture and allied act iv i t ies' as given in the Finance Accounts . The logic of inc luding a cerat in por t ion of investment in power and agriculture in the coverage of public sector investment in agriculture emanates from the accounting system and this makes our approach perhaps more reliable and authentic compared to that fol lowed by Chand (2000). We have also argued for construct ion of some more concepts, using relevant investment in rural development and transportat ion and other heads of capital expenditure, but have not used due to paucity of relevant information on the norms to be used for allocation of these investments between agriculture and non-agriculture sectors.

Other important issue to be resolved is the methodology to segregate public expenditures as per agriculture and non-agriculture sectors. To date, no mechanism has ever been evolved to reallocate capital formation between various industr ies of use specif ied tha t cont r ibu te to the agricultural sector. In a bid to achieve higher rate of agricultural production and product ivi ty and overall fast development in the rural sector, the government of India in the late eighties had decided to ensure f low of 50 percent of the public sector outlay to the agricultural/rural sectors from the e ighth f ive year plan (1990-95 ) onwards (Annex Table IV.2). Accordingly, the government had estimated Ministry/ Department wise rural components of the total public sector outlays using some benchmarks for rural-urban areas.

Does this approach have any practical implications? Can benchmarks for rura l -urban appor t i onmen t in t he sectora l ou t lays be adop ted to accompl ish the task of re-al location of capital fo rmat ion in several industries to agriculture? The answer seems to be negative because of certain limitations inherent in this approach. The ratios, which are available only for one point of t ime may serve well in allocating public outlay in the rural and urban areas. As such, the sectoral plan and non-plan outlays are aggregate in nature and do not reflect additions to capital stock in the agricultural and non-agricultural sectors separately, accruing from expenditure in a particular head/sector. In many cases, there is no f i rm basis as to how these ratios are derived. For instance, public expenditure apportioned to rural areas under the food supply, food processing industry.

The overall development of agricultural sector was aimed to be achieved through development of village and small scale industries, greater efficiency of public enterprises, reduction of incon e inequalities and removal of regional imbalances etc.

104

fertilizer industry and many more is est imated to be 100 percent. This seems to be doubtful as outlays on these industries not only provide impetus to farmers in putt ing more area under cult ivat ion in the rural areas, but augment productive base in the urban areas as wel l . An exercise of this kind, if init iated can ascertain meaningful results only if detailed expenditure data is made available to generate suitable coeff ic ients for appor t ionment of expendi ture into agr icu l ture and non-agr icu l tu re activit ies. Also, due to diversif ication in the agricultural act iv i t ies and increasing role of markets, the coeff icients wil l have to be generated on annual basis and are required to be updated f rom t ime to t ime.

An appropriate approach to allocate expenditure solely in agriculture could be consumption based. We have used this approach in the present study for allocation of capital expenditure on power into agriculture. To illustrate, capital invested in power industry generates power for all the sectors in the economy and the extent of use of power in agriculture can act as a proxy for the total investment done in power industry for agriculture. Same way the extent of uti l ization of surface transport and railways for carrying agricultural products can be used as indicators of the share of investment for agriculture sector in the total investment undertaken transport and railways industries of use. But, this necessitates a detailed analysis of expenditure items wi th in transport and rai lways' industries on various activit ies carried out by public and private sectors and then segregation of appropriate expenditure into agriculture using consumption based coeff icients.

IV.3 Empirical Mapping of 'Complementarity' Relation:

It is clear that the estimates of public sector investments in agriculture as given in Chand (2000) are open to debate and need to be re-examined in a broader conceptual f ramework. The lack of complementar i ty relation between public and private investment analyzed by him is likely to be attr ibuted to inconsistency in the estimates. This is despite the fac t that constructed broad public investment series is found to be 52 percent higher than the official series at current prices. We have also tr ied to evaluate other factors behind the failure to capture a positive associat ion between the investments by him and many other authors.

From the literature, it is apparent that the relationship, at the first instance was determined on the basis of their movement in the same di rect ion. Statist ical relationship is another way to establish 'complementar i ty ' between public and private investments. But, this is questioned on grounds of nOn-existence of any causal relationship between these investments

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and also change of coeff icient values w i th inclusion or omission of any variable or w i th change of funct ional form (Mishra and Chand 1995) . It was argued that even if both the investment series are moving in diverse directions, it is not indicative of absence of any inducement ef fect of one on the other. A positive relationship can still be visualised, for instance in case of major irrigation projects, where there are long gestation lag and the benefits start accruing at a later stage, which may induce farmers to invest in their farms at that, point of t ime. Dhawan (1996) by taking evidence f rom a few cases opined that canal farmers evinced renewed interest in developing their own means of irrigation wells at any stage of canal development. This later stage could come well after a generation of t ime has elapsed since the complet ion of a canal project^ A causal relationship and hence inducement ef fect in its entirety can only be determined, if one is sure about the nature and type of the investment taking place in a particular sector. When public sector investments show up after a long period of t ime and private investments reveal their impact in shorter durat ion, the statistical analysis, if carried out w i th annual data series can fail to capture any causal relationship between the t w o . It is, therefore essential to account for long gestation lag in the public investments whi le estimating the relationship or use proxy variables as done by Dhawan (1996) and Rao (1997) .

In view of this reason and several others explained in chapter IV of the present study, it is hard to reconcile w i th the argument of no inducement effect or weak complementarity between public and private investments as stated by Chand (2000) and Misra (1996 & 1998) and many others.

It is logical to believe that the private investor wi l l respond to public investment in public canals or power in later years and not in that year itself or to one year lag investment. Therefore, public investment in irr igation, under the conventional concept or new concepts, defined to cover a large number of activities ranging from soil and water conservation to power and to fertilizer industries, should be specified on cumulative basis or w i th long period lag depending on the nature of investment. It is also plausible to take physical variables as canal water supplied each year or power supplied to agriculture as the relevant variables influencing private investment. These financial or physical variables wil l very well capture the positive impact of public investment variable on private investment in the empirical analyses. This is proved in our study (chapter IV) where we have estimated positive and significant relationship between public and private investment for the t ime period 1980-81 to 1998-1999 . A lso , in contrast to result obtained in other studies, publ ic investment comes out to be a signif icant variable in influencing growth in agriculture.

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To wind up, complementarity relation between public and private investment in agriculture can be established with the official data on investment in major and medium irrigation works as well as with new estimates based on sound conceptual grounds, which ever way they are defined. The public investments will surely induce private investments in a time period t or t + n and one can prove it empirically by taking public investment variable with appropriate lag or using it in on cumulative basis, be in financial or physical terms. Finally, both public and private investments will affect growth in agriculture and the impact of the former may be direct or indirect through its inducement effect on private investment in agriculture.

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Summary Chart: Perspectives on Deceleration in Capital Formation in Agriculture

o 00

Study Decelaration in capital formation in

agriculture: Reasons

Relationship between

public & private GCFA

Study period/Determinants of private GCFA & other

remarks.

1. Rath (1989) Complementarity

contingent upon public

investment

Credit seems to have played a major role in accelerating

private investment in agriculture.

1. Rath (1989) Complementarity

contingent upon public

investment

Credit seems to have played a major role in accelerating

private investment in agriculture.

2. Hanumantha Rao

(1994,1997) Steep rise in the cost of construction

since the mid seventies, slow growth

rate of per capita income in agriculture

and adverse terms of trade for

agriculture in the eighties.

Complementarity * Study period 1980-94; Private GCFA; determinants =

Public investment lagged one year, index of terms of trade

lagged one year, electricity consumption in agriculture,

technology (time). Significant association

3. Dhawan

(1996,1998) Complementarity * Study period; 1981-82; State level analysis based on

AIDIS; Private GFCF irrigation = credit, rainfall, revealed

preference for agricultural investments vis-a-vis other capital

expenditure options (farm pref)

• Private GFCF in well irrigation = credit, rural

electrification, rainfall, farm pref.

- Private GFCF = canal intensity, credit, farm pref.

Significant association.

3. Dhawan

(1996,1998) Complementarity * Study period; 1981-82; State level analysis based on

AIDIS; Private GFCF irrigation = credit, rainfall, revealed

preference for agricultural investments vis-a-vis other capital

expenditure options (farm pref)

• Private GFCF in well irrigation = credit, rural

electrification, rainfall, farm pref.

- Private GFCF = canal intensity, credit, farm pref.

Significant association.

4. Gandhi (1990) and

(1996) The decline in private investment in the

1980 to 1986 period may be associated

with squeezing of rural savings as well

less net commercial bank credit and

cooperative credit to agriculture in real

terms.

Complementarity *Study period :-

Private GCFA = Public GCFA (From Dhavvan 1998).

*Study period 1952-1992.

Private GCFA = rural savings, cooperative credit, high

yielding varities, agricultural wages and commerical bank

credit. Significant association.

o CD

5. Misra&Mazell

(1996)

*Misra(1998)

Complementarity; "The

public investment will

have a leading role in the

form of providing

infrastructure as well as

necessary research and

development and

support."

Vacillation on the issue.

•Study period 1952-53,1989-90; Private GCFA = Index of

terms of trade, lagged Public investment, GCA, Technology,

Area under HYV; Weak association of private GCFA with

public investment.

•Study period 1961-62-1995-96;

Private GCFA = lagged TOT, HYV, Dummy, Public GCFA.

5. Misra&Mazell

(1996)

*Misra(1998)

Complementarity; "The

public investment will

have a leading role in the

form of providing

infrastructure as well as

necessary research and

development and

support."

Vacillation on the issue.

•Study period 1952-53,1989-90; Private GCFA = Index of

terms of trade, lagged Public investment, GCA, Technology,

Area under HYV; Weak association of private GCFA with

public investment.

•Study period 1961-62-1995-96;

Private GCFA = lagged TOT, HYV, Dummy, Public GCFA.

6. Gulati&Bhide

(1993)

Decline in profitability of investment in

agriculture vis-a-vis other sectors. •Study period 1965-89/90; Private GCFAIprivate GDCF =

lagged (GDPA/GDPT) and lagged TOT Significant

relationship.

6. Gulati&Bhide

(1993)

Decline in profitability of investment in

agriculture vis-a-vis other sectors. •Study period 1965-89/90; Private GCFAIprivate GDCF =

lagged (GDPA/GDPT) and lagged TOT Significant

relationship.

7. Gulati & Sharma

(1997)

High growth of input subsidies, overall

decline in the resource flows to states

from the centre along with a decline in

the share of capital expenditure to total

expenditure.

7. Gulati & Sharma

(1997)

High growth of input subsidies, overall

decline in the resource flows to states

from the centre along with a decline in

the share of capital expenditure to total

expenditure.

8. Shetty

(1990)

Decline in expenditure incurred for

agriculture and irrigation as a proportion

of aggregate expenditure of the centre

and states during the 1980s. Reduced

public sector investment in agriculture

combined with an unattractive growth

horizon, adverse terms of trade, poor per

capita income growth and inadequate

growth in savings may have adversely

depressed household's investment in

agriculture.

Accepts

Complementarity

relationship as stated by

Rath (1989)

•Study period 1960-86187; Private GCFA = lagged public

GCFA. Form Dhawan (1998)

9. Mitra (1996) Slowing down of the government's expenditure (outlay) on the agriculture and allied activities, irrigation and on rural development and special area programmes.

Partial complementarity at micro level.

Relies on Bashir (1990) study.

10. NCAER (1995) 'Study period : 1960-89/90; Private GFCFA = Public 6CFA, credit, lagged TOT. From Dhawan (1998)

10. NCAER (1995) 'Study period : 1960-89/90; Private GFCFA = Public 6CFA, credit, lagged TOT. From Dhawan (1998)

11. Krishnamurty & Pandit (1985) * lEG-DSE Research Team (1997)

Complementarity Study Period: 1962-80: Private GCFA - lagged public GCFA, lagged TOT. (from Dhawan 1998). •Study Period: 1970-94/95; Private GCFA " Public GCFA, lagged TOT, real agriculture output (GDP), credit. Credit is insignificant.

11. Krishnamurty & Pandit (1985) * lEG-DSE Research Team (1997)

Complementarity Study Period: 1962-80: Private GCFA - lagged public GCFA, lagged TOT. (from Dhawan 1998). •Study Period: 1970-94/95; Private GCFA " Public GCFA, lagged TOT, real agriculture output (GDP), credit. Credit is insignificant.

12. Chakravarty (1987) Complementarity *Time period: 1970-82/83; Private GCFA = lagged public GCFA. From Dhawan (1998)

12. Chakravarty (1987) Complementarity *Time period: 1970-82/83; Private GCFA = lagged public GCFA. From Dhawan (1998)

13. Storm (1993) Complementarity *Study period: 1962-86/87; Private GCFA - lagged public GCFA, lagged TOT. From Storm (1993) & Dhawan (1998).

13. Storm (1993) Complementarity *Study period: 1962-86/87; Private GCFA - lagged public GCFA, lagged TOT. From Storm (1993) & Dhawan (1998).

14. Sundararajan & Thakur(1980)

Partial Complementarity *Study period; 1960-76; Refers to all sector including agriculture; Private sector GDP, relative price of capital, public sector and private capital stock separately.

14. Sundararajan & Thakur(1980)

Partial Complementarity *Study period; 1960-76; Refers to all sector including agriculture; Private sector GDP, relative price of capital, public sector and private capital stock separately.

15. Mishra & Chand (1995)

Real cause of decline in public capital formation in real terms during the 1980s lies in the politics of the state agricultural policies in promoting private investment in agriculture.

No apparent complementarity; private investment may be induced or autonomous

A detailed debate on the issue of complementarity of public and private investment and the efficiency of capital use in agriculture. *Study period 1980-92; Private GCFA •= Public investment.

16. Chand (2000) Partial Complementarity depending on the type of public investment in different regional settings.

'Study period 1980-1996; Private GCFA - Institutional credit, terms of trade. Public investment.

16. Chand (2000) Partial Complementarity depending on the type of public investment in different regional settings.

'Study period 1980-1996; Private GCFA - Institutional credit, terms of trade. Public investment.

17. Chand &Jha (1999)

Paucity of resources with state and central government, which in turn are due to steep rise growth in farm subsidies and populist schemes launched at state and centre aimed at wooing different sections of society.

17. Chand &Jha (1999)

Paucity of resources with state and central government, which in turn are due to steep rise growth in farm subsidies and populist schemes launched at state and centre aimed at wooing different sections of society.

Table IV. 1: Estimates of Elasticity of Private GCFA w.r.t Public GCFA at base 1980-81

Authors/ Public Lagged Credit Agr. Rainfall Revealed Canal Rural Variables GCFA TOT output prefer- intensity electri

(GDP) ence ficatlon

1. Krishnamurty 0.60* 1.217 & Pandit (1985) 1962-80

2. Chakravarty 0.62* (1987) 1970-82/83

it ** 3. Gandhi (1990) 0.42

4. Shetty(1990) 0.66* 1960-86/87

5. Gulatl&Bhide 0.118 0.96 (1993) 1965-89/90**

6. Storm (1993) 0.6B* 1.44 1962-86/87

7. NCAER(1995) 0.26 0.231 0.359 1960-89/90

8. Mishra&Chand(19g5) 1980-92 0.50

9. Misra&Hazell(ig96) 1960-70 1.55 1970-80 0.688 1980-90 -0.313

10. Saibaba(1996) 0.50 1.13 0.73# 1970-90

11. IEG-DSE(1997) 0.41 2.02 0.004 2.1# 1970-95

12. Ohawan(ig98) 1981-82 (state level) 0-60 0.69 0.25 Private GFCF in irrigation 0.69 -0.93 0.87 In well irrigation 0.64 -0.98 0.94 0.20

/Votes: If GDP in agriculture is averaged over three years

Lagged public GCFA ** Dependent variable: Private GCFA/private GDCF and public GCFA is represented by lagged GDPA/

GDPT *** Cumulative government stock

112

Table IV.2: Rural Component of Public Sector Outlays, 1989-90, 1990-91.

Ministries! Annual Plan 198990 Annual Plan 1990-91 Departments Rural Sector Share as Rural Sector Share as

% of outlay % of GBS % of outlay % of GBS

1. IVIinistry of Agriculture -Agric. & co-operation 100.00 100.00 100.00 100.00 -Agric. research & education 100.00 100.00 100.00 100.00 -Rural development 100.00 100.00 100.00 100.00 -Fertilisers 100.00 100.00 100.00 100.00

2. Ministry of Civil Aviation & Tourism -Civil Aviation -Tourism

3. Ministry of Commerce

4.

•Commerce -Supply

Ministry of Communication

58.96 64.81 62.15 64.79

-Telecommunication services 03.00 03.00 03.00 03.00 - Postal services 50.00 50.00 50.00 50.00

5. Ministry of Energy -Coal 12.00 12.00 12.00 12.00 - Power 31.00 31.00 31.00 31.00 - Non-Conventional energy 80.00 80.00 80.00 80.00

6.

7.

Ministry of Environment, Forest & Wildlife

Ministry of Finance

50.00 50.00 50.00 50.00

8.

- Payment to financial institutions - Expenditure

Ministry of Food Si Civil Supplies

22.70 22.70 46.77 50.51

- Food 100.00 100.00 100.00 100.00 -Civil supplies 23.71 23.71 20.89 32.92

9. Ministry of Food Processing Industry

100.00 100.00 84.38 90.00

10. Ministry of Family & Health Welfare - Health 45.42 45.42 45.46 45.46 - Family welfare 70.00 70.00 70.00 70.00

11. Ministry of Home Affairs "

12. Ministry of Human Resources Development -Education 46.00 46.00 46.00 46.00 •Youth Affairs 8i sports 23.68 37.00 37.00 37.00 •Art and Culture 31.00 31.00 31.00 31.00 •Women 8i child development 70.00 70.00 70.00 70.00

contd..

113

contd..

13. Ministry of Industry

-Industrial development

-Public enterprises

52.57 52.63 63.67 63.67

14. Ministry of Information

& Broadcasting

15. Ministry of Labour 20.00 20.00 20.00 20.00

16. Ministry of Personal Grievances

and Pensions

17. Ministry of Petroleum Si Chemical

-Petroleum & natural gas

•Chemical & petro-chemicals

30.00 30.00 30.00 30.00

18. Minstry of Planning

-Planning Commission

-Statistics

" 12.19 12.19

19. Ministry of Science & Technology

-Science & technology

-Scientific & industrial research

-Biotechnology

20. Ministry of Steel 8i Mines

- Steel

- Mines

21. Ministry of Surface Transport

-Surface Transport

-Roads

-Ports, lighthouses & shipping

. 09.09 09.09 14.49 14.49

22. Ministry of Textiles 38.61 62.49 46.09 61.29

23. Ministry of Urban Development " 07.48 07.48

24. Ministry of Water Resources 99.00 99.00 99.00 99.00

25. Ministry of Welfare 90.00 90.00 90.00 90.00

26. Department of Atomic Energy

-Atomic Energy

•Nuclear Power Schemes 31.00 31.00 31.00 31.00

27. Department of electronics "

28. Department of Ocean Development

29. Department of Space

30. Ministry of Railways 21.00 21.00 21.00 21.00

Grandlc ta l 30.94 44.16 31.08 48.81

Source: Annual Report, 1989-90, Planning Commission, GOI.

114

ANNEXURE V

Industrial Classification and Major Activities

1. Agriculture: This includes agriculture proper, l ivestock product ion, forestry and logging, hunt ing, trapping and f ishing -f ish farms and fish hatcheries. Activi t ies related to service in each of these groups are also considered part of agriculture along w i th the operation of irrigation system.

2. Mining and Quarrying: This covers mining of coal, lignite, metal ores and extraction of crude petroleum and natural gas and other service activit ies incidental to oil and gas excluding surveying.

3. Manufacturing: This industry group covers all manufacturing activit ies related to food, tobacco, text i les, wood, leather, paper and paper products , chemicals , basic meta ls , mach inery and equ ipmen t , television and communicat ion equipment, motor vehicles and so on .

4 . Electricity, gas and water supply: This includes expenditure on power projects, gas supply works, irrigation projects and water supply, its col lect ion, distr ibution and puri f icat ion and other sanitat ion projects.

5. Construction: This covers construct ion works by the contractors and other agencies of residential and non-residential buildings and other construct ion works, such as construct ion of irrigation dams, power plants, irrigation wells, marine construct ion, telegraph lines, repairing of highways, streets and bridges etc.

6. Trade services, restaurant and hotel services: This per ta ins to wholesale and retail trade of foodgrains and other agricultural and non agricultural i tems to retailers, industrial and inst i tut ional and other wholesalers. Retail establishments selling prepared food and drinks for immediate consumpt ion, such as restaurant and hotels are also covered in this category.

7. Transportation, storage and communication: Under th is industr ial classif ication is included land, water and air t ransport , support ing and auxiliary transport activit ies, such as of travel agencies, storage and warehousing facilit ies by the state and private agencies, post and telecommunicat ions.

8. Banking, insurance and real estate: Th i s c o v e r s f i n a n c i a l in termediat ion, banks and other f inancial ins t i tu t ions, insurance

•115

business, real estate, renting and other business act iv i t ies like computers, research and development.

9. Ownership of dwellings: Construction and equipment used in the process of ownership of dwell ings in both rural and urban areas are covered in this industry of use.

10. Public administration and defence: This covers compulsory social security, police, fiscal services, like collection of taxes etc. law, police, educat ion, health, social security and welfare services, housing and c o m m u n i t y a m e n i t i e s , e c o n o m i c s e r v i c e s such as gene ra l admin i s t ra t i on , agr icu l ture, forest ry , f i sh ing , hun t i ng , m in ing , manufactur ing, roads and other economic services like investment grants, storage and warehousing, navigation and f lood control and so on.

11. Community, social and personal services: This industry includes medical, health, education and welfare services and social work, domestic services, sewage and refuse disposal, recreational, cultural and sporting activities and personal services not else where classified.

Source: UN 1968 , 1971

116

A N N E X U R E V I

Empirically Mapping of GCFA and its Public Sector Components: Concepts I to III

This sect ion aims at providing in detai l the l ist of heads of capi ta l expenditures that are considered to be fall ing w i th in the purv iew of agriculture and allied sector as defined under the three concepts of public GCFA. The source of data for each of the expenditure and the method of estimating capital formation in agriculture from that expenditure is also given. In this study, estimates of public capital format ion in agriculture are constructed at both current prices and constant prices w i th base 1993-94.

VI. 1 List of Heads of Capital Expenditure

A. Concept I (Business as Usual)

Investments under the Public sector

1. Major medium and minor irrigation projects and plantations

2. Non-departmental commercial undertakings (NDCUs)

B. Concept II (Concept I + Investment in Power)

Under this concept, investments included in concept I and infrastructural investment in the form of power that is provided to the agriculture sector. These investments facil itate agricultural g rowth. Investment under energy (power) head of expenditure covers investment in hydel generat ion, thermal power generation, nuclear power generation, diesel/gas power generation, transmission and distr ibut ion, rural electr i f ication and general expend i tu res inc lus ive of i n ves tmen t in pub l ic sec tor and o the r undertakings. The amount of investment allocated to agriculture sector is based on the power supplied to agriculture as a percentage of total power supplies in the economy.

C. Concept III (Concept II + Investment in Agriculture and Allied Activities as per the Budgetary Classification)

This includes investment under concept II and the total capital expenditure fall ing under the agriculture and allied activit ies category of economic

117

services w i t h i n the capi ta l account . The var ious heads of capi tal expenditure falling under agriculture, forestry and fishery are given below.

1 . Crop husbandry : Expenditure on farming cooperat ives, seeds, agricultural farms, manure and fertilizers, plant protection, commercial crops, agricultural engineering, hort iculture and vegetable crops, transfers to / f rom reserve funds and deposit accounts and other expenditures.

2. Soil and water conservation

3. Animal husbandry : Outlays on veterinary services and animal health, catt le and buffalo development, poultry development, tribal areas plan and other expenditure.

4 . Dairy development: investment in dairy development projects, milk supply schemes, other expenditure

5. Fisheries: Inland and marine fisheries, processing preservation and m a r k e t i n g , i n v e s t m e n t in pub l i c u n d e r t a k i n g s , f i s h e r m a n ' s cooperatives, tribal area sub plan and other expenditure

6. Forest ry and w i l d l i f e : c o m m u n i c a t i o n and bu i l d ings , fo res t conservation, development and regeneration, social and farm forestry, forest produce and tribal area sub plan, wi ldl i fe and zoological parks, p lanta t ions- tea, coffee and rubber.

7. Food, storage and warehousing: procurement and supply by agencies such as Food Corporation of India, food processing, investment in public sector undertakings, warehousing and marketing cooperatives, tr ibal area sub plan and other investments

8. Agricultural research and education

9. Co-operation: credit and other cooperatives, tr ibal area sub plan

10. Investments in agr icul tural f inancia l i ns t i tu t ions : publ ic sector undertakings and other investments

11. Other agricultural programmes: marketing facil i t ies, marketing and quality control

118

VI.2 Sources of Data

CSO compiles data on construct ion, machinery and equipment used in major and medium irrigation works f rom capital accounts (expenditure) data given in the detailed budgetary documents of the centre and the states . Disaggregated information at a-lower level of government on various assets created in agriculture as well as other industr ies/sectors is categorised in the social, communi ty and personal services industry of use. The series based on capital expenditure on major, medium and minor irr igation works is published in NAS and represents conventional estimates of GCF in agriculture, taken as concept I in the study. For construct ing public GCFA under concepts II and III, we have used data on capital expenditure of the central government f rom the Finance Accounts of the Union Government, prepared by the Comptroller and Auditor General of India (CAG) under the Department of Expenditure of the Ministry of Finance. The categories fol lowed in the f inance accounts are similar to the budget documents. The state level capital expenditure on these heads is taken from the Finances of State Government published by the Reserve Bank of India. The data is available for a total of 25 states in the country. Information on t w o heads of expenditure, viz. agricultural and allied services sector and power given under the economic categories of capital account are compiled. Capital account data given in the Finance accounts and RBI bulletin are based on annual budgets and are net of receipts and recoveries on capital account .

Apart f rom direct spending, the central government transfers resources to the respective state governments for various activi t ies. Further, it advances loans of capital nature directly to the states, union terr i tor ies, public sector undertakings and to a lower level of government. The loans advanced is mostly routed through the respective state governments and the concerned ministries. New series on public GCFA defined under concepts II and III are constructed using capital expenditure data of the central government, state governments (combined) and developmental loans advanced by the state governments. The loans advanced by the

Capital account (expenditure) deals with expenditure met usually from borrowed funds with the object of increasing concrete assets of a material and permanent character. It includes receipts of a capital nature intended to be applied as are set-off against expenditure.

Receipts and recoveries on capital account are a result of disposals of old capital stock and associated transfer costs on account of change in the ownership of an asset. Gross capital fornration for a particular sector or institution is, therefore, measured by the total value of acquisitions, less disposals of fixed assets during the accounting period plus certain additions to the value of non-produced assets realized by the productive activity of that institutional units. The sales or other disposals are recorded as negative expenditures or negative acquisitions for the sector or institution under consideration. The negative and positive values recorded for GFCF cancel out for the econorry as whole, except for the costs of ownership transfer (UN 1993).

119

central government are not considered in the analyses. This is because most of the expenditures incurred on capital format ion by the states, through loans advanced by the central government, are recorded in the loan accounts of the respective states. In the analyses, loans and advances of only developmental nature for agriculture and allied activities and power under the capital account are included.

New series on gross capital formation in agriculture under concept II and III are est imated f irst at the all India level f rom 1974-75 to 1996-97 . The main reason for choosing 1974-75 as the f irst year is that the grouping of the major heads of expenditure and division into various sections was designed from this year . From 1974-75 onwards, the major heads of expenditure designed at the Central level also hold at the state level.

It may be stated that not all capital expenditure incurred by the union and state governments under the public sector results into physical capital format ion. Some portion of the expenditure is utilized by the respective governments for investing in the financial assets also. Information on total f inancial assets, also called net investment in stock (NIS) by each of the administrative departments under various industries of use is given in the NAS under the economic and purpose classif ication of expenditure of administrat ive departments. In order to arrive at physical capital format ion, data on NIS in agriculture and allied activit ies and electricity, gas, s team and water supply are deducted f r om the to ta l capi ta l expenditure incurred on these sectors. In the absence of information on NIS separately for the electricity sector, the total NIS, which are given for electricity, gas, steam and water supply together, are divided equally into four parts. From the total capital expenditure estimated in the power sector, 2 5 % of the NIS is deducted to estimate investment exclusively in physical assets wi th in the power sector. This annual expenditure is further apportioned to agriculture as per the consumption of power in agriculture each year. The NIS in the case of agriculture and allied activit ies could be an under representation because a lot many agricultural activit ies by NAS are categorised in other economic services. NIS in power is also combined w i th gas, steam and water supply sectors.

3 Prior to this, broad heads of capital expenditure were under the following categories (a) agriculture, (b) multipurpose river schemes, (c) irrigation, navigation, embankment and drainage work, (d) electricity (e) public works, (f) railways and (g) general government expenditure.

120

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