Investment Behaviour of Farmers Across Indian States: Determinants and Impact on Agriculture Income

Abstract

This study examines the investment behaviour of farmers using the decennial National Sample Survey Debt and Investment Survey (Schedule 18.2) from 1981 to 2012. It begins with an analysis of spatial trends and variations in the composition of fixed capital expenditure followed by factors that determine investment in agriculture and its impact on farm income. The analysis reveals a phenomenal increase in per household investment from Rs. 2133 in 1981–82 to Rs. 6993 in 2012–13 at 2004–05 prices. Of this, residential land and buildings constitute a sizeable share at 68% followed by farm business at 23.3% and non-farm business at 8.7%. Capital expenditure on residential land and buildings has grown at a much higher rate (4.7%) compared to that in farm and non-farm businesses (2.52 and 3.31%), respectively, during this period. Growing urbanization, expansion in industrial activities and low income from cultivation may have made investment in land lucrative relative to farming. A changing investment priority of farmers has implications for agricultural growth as it is done at the expense of farm assets. A slight upturn in investment in farm business has taken place during the 2000s, but its composition continues to be dominated by irrigation structures, transport and machinery and implements. Large interstate and farm size disparities in capital expenditure continue to persist. Further, nearly 86% of farm investment is carried out through loans of which the share of institutional borrowings is 63.4%, which should be scaled up. The empirical analysis based on three-stage least squares lends support to these findings as investment in agriculture is found to be adversely affected by farmers’ changing preference and positively by institutional borrowings and public investment. Private and public investments together with favourable incentive structure and infrastructure development exert positive and significant impact on agricultural income. The study emphasizes on upholding farmers’ interest in agriculture in view of rapid changes in their investment priorities. For this, role of the respective state government stands imperative in scaling up resource allocation and institutional credit to agriculture.

Annexure 1 Exogenous and Endogenous Variables Used and Source of Data

Rain	Annual rainfall index (fertilizer statistics of India)
GDPGNA	Annual rate of growth in non-agriculture GSDP or non-agriculture income per capita (national accounts statistics—NAS)
World price	World food price index, 2005 = 100, includes cereal, vegetable oils, meat, seafood, sugar, bananas and oranges price indices (international financial statistics)
TOT	Terms of trade based on 3 years moving average; estimated taking SDP agriculture current/constant price divided by SDP non-agr. current/constant price at 2004–05 (EPW data base and NAS)
Land productivity	Agricultural income/NSA (GSDPA/NSA) (NAS and agricultural statistics at a glance)
Agri R&D	Public expenditure on agriculture R&D, soil conservation, crop and animal husbandry (finance accounts, GOI)
Labour	Agriculture labour—all age group as per UPSS (NSS) per NSA
IRRI	Irrigation intensity: Percentage of cropped area irrigated by public and private sources (agricultural statistics at a glance)
ELECT	Electricity consumption in agriculture per hectare (annual reports of State electricity board and agricultural statistics at a glance)
FERT	Fertilizer consumption per hectare (fertilizer statistics of India)
ROAD	Road density measured in km per 1000 km2 (statistical abstract of India and rural development statistics)
Land	Gross cropped area (fertilizer statistics of India)
Private investment in agriculture	Fixed capital expenditure in farm business (AIDIS 1981, 1991, 2002, 2013) The estimates are interpolated based on past growth rates
Share RBL/FCE	Private investment (FCE in land and building) as ratio of total FCE, AIDIS size of public spending − total public expenditure/GSDP
Input subsidy	Fertilizer + power + credit + irrigation estimated as follows
Fertilizer sub	Fertilizer subsidy estimated using unit rate based on all India estimates and then apportioned across states based on consumption (fertilizer statistics of India)
Power sub	Power subsidy based on unit cost of supply minus agricultural tariff rate × consumption of power in agriculture (annual report of SEB)
Credit sub	Credit subsidy (only interest) based on loan outstanding of PACS, RRBs and CBs based on difference in lending rate of agri and non-agri sectors (NAFSCOB)
Irrigation sub	Irrigation subsidy based on O&M Expenditure—receipts + interest income/receipts; 2nd estimate = irr subsidy + 1% of cumulative capital expenditure (exclude exp. on flood control (finance accounts)
Public investment in agriculture	Public expenditure on minor, medium, major irrigation and command area development (finance accounts)

1. Note Public spending on each head comprises revenue and capital expenditure. The latter is measured as a stock variable based on accumulated expenditure at the end of 1981, that is the base year in the study. The annual depreciation is taken to be 10%