How can public policy encourage private investments in Indian agriculture? Input subsidies vs. public investment

Abstract

Private on-farm investment has been lacking by smallholders in Indian agriculture. This study explores the efficiency of alternative public expenditures to support Indian agriculture and encourage private on-farm investment. Specifically, the paper examines the crowding-in effect of input subsidies and other forms of public investments on private on-farm investment. The study uses an autoregressive distributive lag model and data from 1980 to 2018. Findings reveal that irrigation subsidy strongly induces private on-farm investment over the long-run and short-run. However, public expenditures on research, education, and the area served by public canals have a significant crowding-in effect on private on-farm investment over the short and long run. Other factors that stimulate private investment in Indian agriculture include institutional credit, favorable agricultural terms of trade, and future demand for food. Thus, policymakers should better target and rationalize public expenditures programs. Policy recommendations include removing unproductive input subsidies (such as fertilizer and power subsidies) and diverting the freed resources toward public investment in Indian agriculture.