Capital formation in agriculture went down in the 1990s, first in the public sector and then in the private sector. Public sector capital formation has revived since the UPA came to power, but policy issues for private investment remain. Increasingly, there are questions of the effectiveness of investment due to receiving low returns.
After liberalisation in 1991, the economic policy system for agriculture was extremely weak in terms of market signals to farmers. We said agricultural profitability is going down and investment will fall. In those days, younger economists?now stars?would start by saying that Hanumantha Rao Garu and I were decrying the fall in investment. The argument was first given for the Narasimha Rao government and later for the 1990s.
Public investment decreased on account of the restriction on public expenditure as a part of the Bretten Woods programme of budget reform, and private investment fell on account of profitability falling. The agricultural economy had both diminishing returns and cost push declines in profitability, which took place in a period of substantial privatisation of agriculture. These trends were decisively reversed in this decade. The UPA government gave agriculture high priority in the mid-term review of the Tenth and Eleventh Plans. This led to a substantial revival of public capital formation in agriculture. The period also saw an improvement in the terms of trade for agriculture and a revival of private investment.
Agricultural capital formation as a percentage of agricultural GDP rose from 14.07% in 2004-05 to an amazingly high 21.31% in 2008-09, with increases in both the public and private sector, according to recent estimates at 2004-05 prices. It is now silly to say that the sector is investment starved. Private agricultural capital formation as a percentage of agricultural GDP, according to these estimates, fell from 12.41% in 2005-06 to 11.58% in 2006-07. But preliminary estimates for 2008-09 show an increase to 17.55%, which is phenomenal. So what is the problem?
In the low investment phase, economists like me had argued that a gross rate of capital formation of about 12% of agricultural GDP was necessary to support an annual agricultural growth rate of around 3.5-4%. In 1997, this author said that, ?It would be na?ve to plan agricultural growth and policies with low incremental capital-output ratios (ICORs). (In terms of gross capital formation, past ICORs were 4.37 from 1978-79 to 1986-87 and 3.32 from 1987-88 to 1991-92). Agricultural gross fixed investment is around two-thirds of agricultural gross investment. It would be imprudent plan for an ICOR of less than 3 for agricultural fixed capital formation.? It is now obvious that these kind of investment levels have been consistently exceeded but the agricultural growth rate does not show the resilience that a 20% capital formation would provide. This, in turn, raises fundamental questions on productivity of investment, and land and water constraints.
We need to get back to the drawing board. We built an agro-climatic plan but let it fizzle away. This land needs treatment of very different kinds in its great diversity. So does its water. My favourite map is one which shows that all the world?s land and water resources are in India. And one-fits-all means money literally down the drain because drainage is a real problem in excessively irrigated areas. The mithun and upland paddy cultivation is important in Arunachal, but also a fascinating bounty of spices, drugs, you name it. Did you know that muesli grows wild there? But we don?t give long-term credit for it at the same rates as on the west coast. Why can?t we let farmers switch from paddy to prawns or fish in the backwaters, coastal areas and in the Deccan river valleys? The issue is demand-driven technology, now that the farmer and others outside agriculture are investing in agriculture. Otherwise, the 21% figure is not possible.
Montek is right in saying that we live in silos. The solution to canals, as also to ponds, is one?to pump another. Drips are a different story. But the farmer does it all together. He pumps out water from canals and IFPRI says surface irrigation is all wrong. He uses drips, with the water he gets from non-perennial canals in the Deccan, for fruit and hi-tech horticulture. When he invests heavily in seeds, he keeps a small farm pond handy for the stress period if all fails. For he has to repay debt.
The Planning Commission is apparently now saying that it is against strategic planning. If you don?t have an overarching vision you will always remain in the world of the proverbial frog, which is the worst of all silos, even if you call it a systemic solution. Your vision has to be operationalised at the cutting edge of praxis.
The author is a former Union minister