Revisiting the Relationship between Public and Private Capital Formation in Indian Agriculture

Farmers across India cultivate crops and rear livestock and fish in very different agroclimatic conditions and geo­graphies. Accordingly, they invest in farm inputs—seeds, fertilisers, agricultural machinery, and irrigation resources and other fixed capital, such as barns and sheds. Private capital formation (synonymous with investments) by farmers is financed through either out-of-pocket savings or borrowed funds, taken from both institutional and non-institutional sources. Agriculture is a risky business, and farmers undertake various risks at different stages of the production process. These include natural risks, including the uncertainty of weather conditions, pest and insect attacks, crop destruction by stray and wild animals, and fires, which result in a loss of yield. Other risks that farmers face concern market failure, such as the low and fluctuating price of produce, collusion among traders, inefficiency in the input markets, and other imperfections as visible in the credit market. Therefore, government intervention in agriculture is crucial to assist farmers in coping with such risks and to facilitate a smooth production and marketing cycle of various crops.

Government intervention manifests through large investments in the major and medium irrigation systems, enhanced flow of institutional credit to farmers at subsidised rates—especially to the marginal and small farmers who face the harshest conditions in the business. Other important avenues for public expenditure in agriculture are the provision of rural infrastructure, agricultural extension, research and development, and subsidies on fertiliser, seeds, and micro-irrigation systems, to name a few. Although the share of public capital formation in gross capital formation in agriculture and allied activities has decreased over the years from 33% in 1993–94 to about 16% now, its significance to induce private investment in agriculture remains robust. Ample evidence exists at the all-India level (Rath 1989; Chand 2000; Gulati and Bathla 2001; Chand and Kumar 2004), and for a few selected years at the state level (Bathla 2014), confirming a “crowding-in” effect of public investment on private investment in agriculture. Public and private investments, along with factors such as availability of land, labour, credit, and remunerative prices, are shown to have a significant impact on agricultural performance and growth.