1 MACRO AND FARM LEVEL INVESTMENT IN INDIA: TRENDS, DETERMINANTS AND POLICIES S.Mahendra Dev Vice Chancellor and Director Indira Gandhi Institute of Development Research (IGIDR), Mumbai, India SEPTEMBER, 2011 Study prepared for FAO (Rome) 2 Macro and Farm Level Investment in India: Trends, Determinants and Policies S. Mahendra Dev "Within the agricultural sector, the degree of progress attained largely depends upon how the farmers deploy the additional incomes generated from year to year from their farm activities. This stems from the fact that the growth rate in the farming economy largely depends on the stock of capital built by the farming community and the ploughing back of such stocks in the form of savings for further improvement of farm activity. If these increments are spent on household expenditure, without building up the necessary infrastructure, the future economic development of the nation will be hampered" (Report of the High Level Committee on Estimation of Savings and Investment, Chaired by C.Rangarajan, GOI, 2009) SECTION 1 INTRODUCTION The positive association between capital formation and agricultural growth is well known. Higher capital-labour ratio increases land and labour productivities in agriculture which in turn raise incomes of the farmers and reduction in poverty and hunger. Two-thirds of investment in agriculture is generated by private sector particularly on farm investment. Some evidence also shows that public and private investments are not-substitutable entities. For example, public investment in roads and infrastructure can not be created by farmers. Similarly corporate investment is mostly in post-harvest activities like processing and high value chains. Therefore, there is a need for capital formation by farmers from their own savings. The evidence at the aggregate level shows that this component has been stagnant or declining. Therefore, one of the important topic for analysis could be how to maximize savings and on-farm investment by farmers. This study has analysed the following: (a) What are the trends and composition of savings and investments in Indian economy? (b) What is the evidence on savings and on-farm investment of farmers? (c) How does price policy influence farm profitability? (d) What are the determinants of farm investments by the farmers?; What are the policies needed for maximizing on-farm investments? The sources of data base for this study are National Account Statistics, National Sample Surveys, All India Debt and Investment Surveys, secondary data and cost of cultivation surveys. The paper is organized as follows. Section 2 examines trends in household savings and investments in the whole economy while section 3 deals with indebtedness and credit for 3 agricultural households. Section 4 examines price policy and farm profitability. Section 5 analyses the Trends in private investment in agriculture with the data from National Accounts Statistics and All India debt and investment surveys. Section 6 examines growth and composition of the capital assets using the farm level data from the cost of cultivation surveys. Using the same farm level data, section 7 examines the determinants of output, labour productivity and capital formation for pooled data as well for groups of farmers. The last section deals with conclusions and policies needed for maximizing on farm investment in Indian agriculture. 4 SECTION 2 TRENDS IN HOUSEHOLD SAVINGS AND INVESTMENTS IN THE ECONOMY Here we look at first at the level of the economy on house hold savings and investments at the macro level as a background to the analysis on agricultural on –farm savings and investments. The trends in savings and investments for the economy will be at all India level. It is known that in India, investment is almost completely financed by domestic savings as foreign sources are limited. 2.1. Trends in Savings The trends in gross domestic savings show that it increased from 8.6% in 1950-51 to 36.9% in 2007-08 before declining to 32 to 34% in 2008-09 and 2009-10 respectively (Table 2.1). Household sector plays an important role in savings as compared to private corporate sector and public sector. As per cent of GDP, household sector savings increased from 5.7% in 1950-51 to 12.9% in 1980-81 to 18.4% in 1990-91 and to 24.1 % in 2003-04. The growth rate of household savings was around 10% per annum in the 1980s. It declined to 7.5% in the 1990s but again increased to 8.6% in 2000s (see Table 2.2 and Fig 2.1). It is important to note that household savings constitute around two-thirds of gross domestic savings in the country (See Table 2.3 and Fig 2.2) Table 2.1. Domestic Savings by Institutions as per cent of GDP: 1950-51 to 2009-10 In 199-200 prices 1950-51 5.7 0.9 2.0 8.6 1951-52 5.1 1.3 2.7 9.0 1952-53 5.7 0.6 1.7 8.0 1953-54 5.4 0.8 1.5 7.6 1954-55 6.2 1.1 1.8 9.1 1955-56 9.0 1.2 2.1 12.3 1956-57 8.4 1.2 2.3 11.9 1957-58 6.8 0.9 2.3 10.0 1958-59 6.2 0.9 2.0 9.1 1959-60 7.6 1.2 2.1 10.8 1960-61 6.5 1.6 3.1 11.2 1961-62 6.2 1.7 3.3 11.2 1962-63 7.0 1.7 3.5 12.3 1963-64 6.3 1.7 3.8 11.9 1964-65 6.3 1.5 3.8 11.6 1965-66 8.6 1.4 3.6 13.7 1966-67 9.5 1.3 2.8 13.6 1967-68 8.1 1.1 2.4 11.6 1968-69 7.9 1.1 2.8 11.8 5 1969-70 9.7 1.3 3.0 14.0 1970-71 9.5 1.5 3.3 14.2 1971-72 9.9 1.6 3.2 14.7 1972-73 9.6 1.5 3.1 14.3 1973-74 11.4 1.6 3.4 16.4 1974-75 9.6 1.9 4.0 15.7 1975-76 10.9 1.3 4.7 16.9 1976-77 12.4 1.3 5.4 19.1 1977-78 13.2 1.4 4.8 19.5 1978-79 14.6 1.5 5.1 21.2 1979-80 13.0 2.0 4.9 19.8 1980-81 12.9 1.6 4.0 18.5 1981-82 11.5 1.5 5.1 18.1 1982-83 11.1 1.6 5.0 17.7 1983-84 11.7 1.5 3.9 17.1 1984-85 13.1 1.6 3.5 18.2 1985-86 13.1 1.9 3.9 19.0 1986-87 13.2 1.7 3.5 18.4 1987-88 15.6 1.7 2.9 20.2 1988-89 15.8 2.0 2.8 20.5 1989-90 17.0 2.4 2.4 21.8 1990-91 18.4 2.7 1.8 22.8 1991-92 15.8 3.1 2.6 21.5 1992-93 16.4 2.7 2.2 21.2 1993-94 17.3 3.4 1.2 21.9 1994-95 18.6 3.5 2.3 24.4 1995-96 16.9 5.0 2.6 24.4 1996-97 16.0 4.5 2.2 22.7 1997-98 17.7 4.3 1.8 23.8 1998-99 18.8 3.9 -0.5 22.3 1999-2000 21.1 4.5 -0.8 24.8 2000-01 21.6 3.9 -1.8 23.7 2001-02 22.1 3.4 -2.0 23.5 2002-03 22.9 4.0 -0.6 26.3 2003-04 24.1 4.6 1.1 29.8 In 2004-05 prices 2004-05 23.6 6.6 2.3 32.4 2005-06 23.5 7.5 2.4 33.5 2006-07 23.2 7.9 3.6 34.6 2007-08 22.5 9.4 5.0 36.9 2008-09p 23.8 7.9 0.5 32.2 2009-10q 23.5 8.1 2.1 33.7 Source: Economic Survey 2010-11, Government of India, 2011. P: provisional estimates; q= quick estimates Table 2.2 Growth Rates of Household Savings: 1980-81 to 2008-09 Periods Growth Rates (%) 1980-81 to 1989-90 9.7 1990-91 to 1999-00 7.5 2000-01 to 2008-09 8.6 6 Figure 2.1: Decadal growth rate of household savings Table 2.3: Share of household savings in gross domestic savings Share of household savings in gross domestic savings (in %) Years 1980-81 69.66 1981-82 63.63 1982-83 62.83 1983-84 68.58 1984-85 71.92 1985-86 69.19 1986-87 71.77 1987-88 77.36 1988-89 76.76 1989-90 78.01 1990-91 80.60 1991-92 73.35 1992-93 77.23 1993-94 78.73 1994-95 76.29 1995-96 69.08 1996-97 70.58 1997-98 74.36 1998-99 84.61 1999-00 85.19 2000-01 91.15 2001-02 94.26 7 2002-03 87.83 2003-04 81.70 2004-05 76.53 2005-06 70.89 2006-07 67.44 2007-08 62.16 2008-09 73.47 2009-10 69.59 All the figures in Rs.