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.