investment in agriculure

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ReNdS iN AGRiCuL uRAL iNVeS meN

iN iNdiA

Submi ed by :-

ANKUR JAIN – 2274

PRINCE VERMA - 2261

TUSHAR - 2284



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Table of Contents

1. Acknowledgement

2. Abstract

3. Objective

4. Introduction

5. Review of Literature

6. Data and Methodology

7. Regression Results

8. CHOW test

9. Conclusion

10. Limitations

11. References



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ACKNOWLEDGEMENT

From the starting till the completion of this project, there are many people

without whose assistance all my efforts would have been fruitless. I, therefore,

acknowledge all who generously helped me by sharing their time, experience and

knowledge with me without which this project would have never been

accomplished.

I must express my gratitude to Mr.Rajkumar (Project guide) whose perceptive

guidance, constant encouragement, constructive criticism and affection were the

light of guidance during my tenure of my work .



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Abstract

In this project, we intend to study the trends in agricultural investment in india by using macro

level data in both private as well as public sector. Our study involves analysis of data from year

1970 to 2011 on the prices of year 2004-05. Though there are innumerable factors that influence

agricultural investment, but we will study the impact of savings and GDP on agricultural

investment. Though it is quite obvious that savings and GDP have a positive relationship with

agricultural investment, but our project analysis the extent of its impact as well as its variations

over the time .

Objective

The focus of our analysis is to study the variations in private sector as well as public sector

agricultural investment occurring over a time period of year 1970-2011, due to changes in

savings and GDP of India. We also intend to determine whether there is a structural change in

agricultural investment due to change in economic policies of 1991. We will also like to

ascertain the composition of agricultural investment between public sector and private sector andits changes in that time period



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Introduction

Agriculture, in most developing economies, is the core sector providing a livelihood to a

significant proportion of the population, especially in rural areas. Since this sector faces thelargest brunt of underemployment, unemployment and poverty, a growing agriculture and allied

sector is expected to contribute vastly to overall growth and poverty alleviation. Increasing the

productive capacity of agriculture through higher productivity has been an important goal in

developing countries. It has been suggested that due to limited scope for expansion of arable land

there is a need to increase yields to their technically highest levels through appropriate

investment in basic infrastructure, human development, and research and extension services.

This paper looks at trends in the agricultural Investment India over the period 1971-2011,

identifies factors that affect agricultural investment and analyses constraints that have affected

this sector. All-India level analyses highlight the role of public investment/ governmentexpenditure as well as private investment on agriculture as being the crucial determinant in

stepping up the rate of growth of agricultural production.



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Literature review

The author, S.MahendraDev, ascertained in his article that share of private investment in total

investment increased significantly over time from 50% in the early 1980’s to 80% in the decade

of 2000. It may be noted that 90% of the private is made by farmers for on farm production. For

his research he use the data released by CSO (central Statistical organization)

The estimates of CSO's public sector investment comprise mainly of investment in irrigation

projects. Some researchers feel that this is an underestimate and there is a need for widening the

definition of public investment by including investment in physical infrastructure (rural roads

and electrification), social infrastructure (education and agriculture research), subsidies in

agriculture, investment in anti-poverty programs, etc. because all of them are very important

factors and helps in stimulating and give a push to agriculture investment

The author , S.L Shetty (FEB 17-24 ,1990), in his research paper stated that over the decade

1960-61 to 1970-71, gross capital formation in Agriculture at 1980-1981 price rose at an annual

compound rate at 6.3% per annum(based on 3 yearly moving averages) and over the next decade

of 1970’s, it rose at the rate of 5.9% per annum. But during the subsequent seven year period up

to 1987-88 such real gross capital formation in agriculture experienced on absolute decline at

the rate of 2.6% per annum.

The author , A Ganesh Kumar(OCT,17,1992), in his Article “Falling Agriculture Investment

and its consequences concluded that:

1) Though only about 30% of cultivable land in the country is under irrigation, it has acquired a

crucial rate in determining the performance of Indian agriculture.

2) Since 1980-81, Agriculture Investment has shown a clear fall, both in level and also a

percentage of the total investment. It had fallen to Rs. 4,360 crore (about 11% of the total in

1986-87.

This fall in Agriculture Investment is affected in showing down the development of irrigation in

the country.

3) While Total Agricultural Investment has grown by 2.74 times between 1960-61 to 1980-81.

But Agriculture Investment fell in the 80’s both in levels and as a percentage of total investment

mainly due to fall in public investment and also because of slowing down of the development of

irrigation.

A fall in Public Investment in Agricultural sector reflects a bias in government policy in favor of

non – agricultural sector.



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While we are discussing about the Agricultural Investment, role of Fertilizers can’t be ruled out.

The author R Thamanajakshi(JUNE 28 ,1969), in his report ascertained that the Fertilizer

Corporation of India is the biggest producer of Chemical Fertilizer in the country. About 8

million of Fertilizers have already been produced in The Corporation operating factories, making

a substantial contribution towards role of self-sufficiency in food.



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Methodology

My research methodology requires gathering relevant data from the specified documents in orderto analyze the material and arrive at a more complete understanding of the impact of savings and

GDP on investment (GCF) in agriculture. I hope to shed light on the following questions through

my research

1. To what extent GDP and savings explains variations in investment (GCF) in agriculture.

2. If there is any structural break in agricultural investment or not in the period 1990-1991.

Study Area

The empirical analysis is conducted using saving ,gross domestic product (GDP) and

investment (GCF) data pertaining to the time period (1971 to 2011) The data series were

obtained from the Economic Survey published by the Ministry of Finance, Government of India

The nominal values in the time series were converted to real values (2004prices) using a GDP

deflator. The variables used in the study are total (total GCF), private (private sector GCF),

public(public sector GCF), saving(total saving of all sectors) and GDP(gross domestic product)

Nature of the data

The data used for regression analysis is secondary data. The data (both dependent and

independent variables) are taken at constant prices 2004-05.

Statistical Analysis and Tools

Data is analysed using SPSS version 16.0. P value below 0.05 is considered as statistically

significant. Ordinary Least Squares method of regression analysis is used. Tests that have been

undertaken to analyze the data are graphical analysis, t test, residual test and CHOW test.



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Data and Methods

Gross Fixed Capital Formation - It is a macroeconomic concept. It consists of resident

producer’s investments, deducting disposals in fixed assets during a given period. It also includes

certain additions to the value of non-produced assets realized by producers or institutional units.

Fixed assets are tangible or intangible assets produced as outputs from production processes that

are used repeatedly or continuously for more than one year

Gross Domestic Product - It is the sum total of factor incomes ( rent+ interest+ profit+

wages)generated within the domestic territory of a country, along with consumption of fixed

capital, during a year

Savings - Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in a bank or pension plan.[1] Saving also includes reducing expenditures,

such as recurring costs..

Estimation tests used -

Multiple Regression Analysis - Multiple regression analysis is a powerful technique used for

predicting the unknown value of a variable from the known value of two or more variables- also

called the predictors.

Dependent and independent variables

By multiple regressions, we mean models with just one dependent and two or more independent

(exploratory) variables. The variable whose value is to be predicted is known as the dependent

variable and the ones whose known values are used for prediction are

known independent (exploratory) variables.

The multiple regression models

In general, the multiple regression equation of Y on X1, X2…, Xk is given by:

Y = b0 + b1 X1 + b2 X2 + …………………… + bk Xk



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Interpreting regression coefficients

Here b0 is the intercept and b1, b2, b3… bk are analogous to the slope in linear

regression equation and are also called regression coefficients. They can be interpreted the same

way as slope. Thus if bi = 2.5, it would indicates that Y will increase by 2.5 units if X i increased

by 1 unit.

Graphical Analysis - Before one pursues formal tests, it is advisable to plot the time series.

Such a plot gives an initial clue about the likely nature of the time series. It tells us whether there

is an upward or downward trend or whether there is seasonality in the data. Such an intuitive feel

is the starting point of more formal tests of stationary

The above diagram signifies that, though both the public as well as private sector agriculture

investment has increased significantly after 1991 economic policy changes, but the increase in

private investment is much higher than public investment.

F test- F-test is any statistical test in which the test statistic has an F-distribution under the null

hypothesis. It is most often used when comparing statistical models that have been fitted to a

data set, in order to identify the model that best fits the population from which the data were

0

50000

100000

150000

200000

250000

300000

350000

1 9 7 1 - 7 2

1 9 7 4 - 7 5

1 9 7 7 - 7 8

1 9 8 0 - 8 1

1 9 8 3 - 8 4

1 9 8 6 - 8 7

1 9 8 9 - 9 0

1 9 9 2 - 9 3

1 9 9 5 - 9 6

1 9 9 8 - 9 9

2 0 0 1 - 0 2

2 0 0 4 - 0 5

2 0 0 7 - 0 8

2 0 1 0 - 1 1

private

public

total



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sampled. Exact F-tests mainly arise when the models have been fitted to the data using least

squares

The formula for the one-way ANOVA F-test statistic is

F= ESS/(k-1)

RSS/(n-k)

Chow test -HOW TO TEST FOR STRUCTURAL BREAK

The CHOW test is a statistical and econometric test of whether the coefficients in two linear

regressions on different data sets are equal or not

Steps involved in the Chow Test are as follows:-

1) Run the regression using all observations, before and after the structural break,Collect the RSS i.e. Residual Sum of Squares (with constant parameters)

2) Run two separate regressions, one before, RSS (1) and one afterStructural break. The sum will produce the model not restricted.

3) Calculate the test statistic using the following

F = (RSSr – RSSnr) / k

RSSnr / (n1 + n2-2k)

Where: RSSr = Residual sum of squares on the model of all data.

RSSnr = Sum of Residual sum of squares of the models on the two subset of

data. K = Number of restrictions

4) The final stage of the Chow Test is to compare the test statistic with the criticalValue from the

F-tables.

5) The null hypothesis in this case is structural stability, if we reject the nullHypothesis; it means

we have a structural break in the data.6) We then need to decide how to overcome this break.

7) If there is evidence of a structural break, it may mean we need to split the dataInto 2 samples

and run separate regressions.



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REGRESSION EQUATION

1. We will regress capital formation in agriculture on saving and GDP of India pertaining

to -

i. Public sector

ii. Private sector

iii. Total

Regression results obtained are as follows –

GCF=α+β1gdp+β2savings

coeffecients value t-value P- value RSS F-value R²

total GCF α -1762.34 -1.044 0.303

β1 8.431 4.312 0

β2 3.537 3.686 0.001

α 620.988 2.033 0.049

public sec β1 0.311 0.88 0.385

β2 1.266 7.288 0

α -2383.42 -1.421 0.164

private β1 8.119 4.178 0

β2 2.271 2.382 0.022

2151000000 1.14E+03 0.984

2.18E+09 1.69E+03 0.989

7.13E+07 1.76E+03 0.99

The findings of our study can be concluded with reference to :-

1. Public sector investment

2. Private sector investment

3. Total investment



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Public sector

After regressing public sector investment (GCF) on savings and GDP.

The given equation is obtained:-

Public sector (gcf) =620.988+0.311GDP+1.266savings

R²=0.99

From the above equation we can conclude that both savings and GDP have positive relationship

with public sector i.e.

1. Intercept value suggests that when savings and GDP are zero then Public sector (GCF)

will be 620.998.

2. If GDP increases by 1 unit, public sector GCF increases by 0.311 units.

3. If savings increases by 1 unit, public sector GCF increases by 1.266 units.

4. The value of R² of 0.99 suggests that about 99% of the variations in public sector GCF

are explained by GDP and savings.



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Private sector

After regressing private sector investment (GCF) on savings and GDP,


Private sector (GCF) =-2383.42+8.119GDP+2.271savings

R²=0.984


with public sector i.e.

1. Intercept value suggests that when savings and GDP are zero then Private sector (GCF)

will be -2383.42

2. If GDP increases by 1 unit, private sector GCF increases by 8.119 units.

3. If savings increases by 1 unit, private sector GCF increases by 2.271 units.

4. The value of R² of 0.984 suggests that about 99% of the variations in private sector GCF

are explained by GDP and savings.



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Total Investment

After regressing public sector investment (GCF) on savings and GDP,


Total investment = -1762.34+8.431GDP+3.537savings

R²=0.989


with Total investment i.e.

1. Intercept value suggests that when savings and GDP are zero then Total investment will be -

1762.34.

2. If GDP increases by 1 unit, Total investment increases by 8.431 units.

3. If savings increases by 1 unit, Total investment increases by 3.537 units.

4. The value of R² of 0.989 suggests that about 99% of the variations in Total investment is

explains by GDP and savings.



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CHOW TEST

1) The given table ascertains the structural change observed in the year 1991 in private sector

capital formation:

private coeffecie value t-value p- value rss F-value R²

α -2383.417 -1.421 0.164

β1 8.119 4.178 0

β2 2.271 2.382 0.022

α1 40.981 0.998 0.332

β11 5.642 4.717 0

β21 0.215 0.151 0.881

α2 -13489.1 -2.402 0.028β12 14.589 3.713 0.002

β22 -0.519 -0.289 0.776

2nd period 1.69E+09 463.743 0.982

whole period 2151000000 1.14E+03 0.984

1st period 155821.035 846.056 0.99

RSSr =2151000000 N=40 k=3

RSSur=1688155821 n1=20 n2=20

F = (RSSr – RSSur) / k

RSSur / (n1 + n2-2k)

F=3.1072768

We can conclude that there is a structural break in 1991 at 5% level of significance. This

structural break is the effect of 1991 economic policy changes on private agricultural investment.



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2) The given table ascertains the structural change observed in the year 1991 in public sector

capital formation

public coeffecients value t-value p- value rss F-value R²

α 620.988 2.033 0.049

β1 0.311 0.88 0.385

β2 1.266 7.288 0

α1 4.499 0.116 0.909

β11 4.715 4.188 0.001

β21 -2.64 -1.979 0.064

α2 2878.653 2.928 0.009

β12 -1.008 -1.466 0.161

β22 1.8325 5.835 0

2nd period 5.18E+07 758.877 0.989

whole period 7.13E+07 1.76E+03 0.99

1st period 138057.2 178.48 0.955

RSSr =71300000 N=40 k=3

RSSur=51888057.19

n1=20 n2=20

F = (RSSr – RSSur) / k

RSSur / (n1 + n2-2k)

F=4.2443039

We can conclude that there is a structural break in 1991 at 1% level of significance. This

structural break is the effect of the 1991 economic policy changes in public agricultural

investment.



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3) The given table ascertains the structural change observed in the year 1991 in total capital

formation -

total GCF coeffecie value t-value p- value rss F-value R²α -1762.34 -1.044 0.303 2178000000 1686 0.989

β1 8.431 4.312 0

β2 3.537 3.686 0.001

α1 45.48 0.981 0.34

β11 10.375 7.67 0

β21 -2.246 -1.516 0.148

α2 -10609.8 -1.788 0.092

β12 13.581 3.272 0.004

β22 1.316 0.693 0.497

2nd period 1.88E+09 619.891 0.986

whole period

1st period 198647.535 1.36E+03 0.994

Rssr =2178000000 k=3

Rssur =1884198648 n=40 n1=20 n2=20

F = (RSSr – RSSur) / k RSSur / (n1 + n2-2k)

F =1.7677196

Here, we can conclude that there is no structural break in 1991,in total investment at 5% level of

significance. Therefore, it is evident that the effect of the structural break present in private as

well as public agriculture investment is nullified by each other.



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Conclusion

We can conclude that though both private and public sector GCF have direct relationship with

GDP, but GDP has a much stronger impact on private sector investment as compared to public

sector investment. Impact of savings is also higher in private sector investment as compared to

public sector investment. From CHOW test, we can conclude that there is a significant impact of

new economic policy of 1991 on agricultural investment which can be seen as a structural

change in private and public agricultural investment. But, there is no structural break in 1991,in

total investment at 5% level of significance. Therefore, it is evident that the effect of the

structural break present in private as well as public agriculture investment is nullified by each

other.



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Limitations

1) We have studied the impact of GDP and savings on agricultural investment. It would be

better if we would have also taken other factors into consideration such as employment in

agriculture, real interest rate on agricultural credit, irrigation facilities availability etc.

2) Our analysis is limited to linear regression form but it could be expanded to other

functional forms also.



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References

1) Data has been collected from CSO(central statistical organization) website

2) Damodar N Gujarati, 4th

edition, ‘Basic Econometrics’

3) ‘S.Mahendra Dev’, ‘A note on Trends in Public Investment in India’.

4) A. Ganesh Kumar, (OCT 17, 1992) “Falling Agriculture Investment and itsconsequences”.

5) R Thamarajakshi, (JUNE 28, 1969) ‘Intersectoral Terms of Trade and Marketed Surplus

of Agricultural Produce, 1951-52 to 1965-66’.

6) S.L. shetty, (FEB 17-24, 1990) ‘Investment in Agriculture: Brief Review of Recent

Trends’.

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