Public and Private Capital Formation and Agricultural Growth in India: State Level Analysis of Inter-linkages during Pre- and Post-reform Periods

Abstract

The public and private capital formation in Indian agriculture has expanded manifold during the postreform period. Yet, agricultural growth continues to hover around three per cent, raising concerns about the future of agriculture. This study has found that public and private investments in agriculture are unevenly spread across the states and so is the farm income. The states that have invested heavily into irrigation and infrastructure, and have pushed market-driven agro-industrial policies have accomplished higher rates of growth in the private investment and also in farm income. High capital intensity in agriculture has been observed to be inversely related to rural poverty. Nevertheless, barring Gujarat and Odisha, none of the states has shown improvement in the efficiency of investment. The study has also shown that private investment in agriculture is propelled by the public spending on agriculture and infrastructure, institutional credit and demand for agricultural raw material for agro-processing industry, whereas public investment is largely governed by the size of government spending and need to sustain agricultural growth. The findings support that the public expenditure on agriculture and food processing industry augments private investment and income, especially in the agriculturally-dominant and poor states. It has also highlighted the need to establish better alliances between farmers and food processing industry for a faster growth in the agricultural sector.