Capital Formation in Agriculture


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.


Capital Formation assumes overriding priority in the context of policy making by Government and other stake holders as it acts as an indicator in attaining economic growth. It divulges the potentiality of the investment in the public as well as the private sectors and gives net addition to the assets created during the year. Capital formation is more important in agriculture as increasing production and productivity of Indian agriculture is of paramount concern to keep pace with the increased population, thus feeding the millions and also in the context of benefiting the majority of small and marginal farmers engaged in agriculture through increased income against all odds, major being the vagaries of monsoon.

The investment rate in agriculture measured as a ratio of gross capital formation to GDP to the sector has improved in recent years, which has in fact doubled since 1999-2000. Currently, private sector constitutes almost 85 per cent of the capital formation in agriculture. Investment credit has emerged as the major driver there by emphasizing the role of Banks to boost farm level investments. However, the recent declining trend in investment credit vis-à-vis crop loan has serious implications for sustaining capital formation in agriculture. Investment in agriculture is generally undertaken for acquiring physical assets that result in the creation of a stream of incremental income over a period of time.

Capital formation through investment in agriculture helps in improving the stock of equipment, tools and productivity of resources employed, which, in turn, enables the farmers to use their resources, particularly land and labour, more productively. Creation of capital goods, thus, is necessary for raising productivity of existing resources and realizing the long-term growth potential.Therefore, the relationship between capital formation and thus agricultural growth and consequently poverty alleviation are very well documented. Public investment reduces rural poverty through improved growth in agricultural production, agribusiness, rural non-farm employment and lower food prices. While there are often long time lags between investment and visible impact, investments in agricultural research, education, and rural infrastructure are often the most effective in promoting agricultural growth and poverty reduction.

Measuring Capital Formation

The eminent economist Prof. M. L. Dantwala (1986) emphasized capital formation „in’and ‘for’agriculture.Accordingly, there are broadly two series that capture capital formation with regard to agriculture (i) narrow data series and (ii) broad data series.

Central Statistical Organization (CSO) compiles estimates on Capital formation in agriculture with break-up of public and private investments as part of National Accounts Statistics (NAS). Public sector investment includes investment in irrigation schemes and plantations in forestry sector. Irrigation would account for almost 90 per cent of the gross public capital formation in agriculture(Bisaliah et al, 2013).

Private sector investment includes investments by (a) farm households and (b) private corporates. Investments made by farm households on farm equipment, machinery, irrigation, land reclamation and land improvement are included. Household investments would constitute around 90 per cent share in private investment.

The narrow data series comes closest to capture capital formation „in‟ (as opposed to „for‟ agriculture) agriculture and this is the official data series on capital formation with respect to agriculture in India. The need for a „broader data series‟ was motivated by the fact to have a broader measure of agricultural capital formation that includes capital formation in activities such as production of fertilizers and pesticides, development of agricultural markets, rural roads and communications, agricultural education, research and development of agricultural technology, rural electrification etc. which form part of capital formation „for‟ agriculture(broad series) as opposed to capital formation „in‟ agriculture(narrow dataseries).

The broad series captures in a much more exhaustive manner agriculture capital formation. However, the attempts by researchers like Chand(2000; 2001), Roy(2001) and Gulati et al in developing „broad data series‟ have been in relation to their individual research work and not directed at constructing a time series continuously 4 on public sector investment in agriculture. Thus the „broad series‟ does not fall under the category of official series which the narrow series qualifies for.

Public and Private Sector Capital Formation in Agriculture

Investment in agriculture is undertaken by both public as well as by private sectors. While public sector investment is undertaken for building necessary infrastructure, private investment in agriculture is made either for augmenting productivity of natural resources or for undertaking such activities, which supplement income sources of farmers. Private sector investment includes investments made by private corporates and households. The corporate sector investment includes investment by organised corporate bodies like big private companies and unorganised entities like sugar cooperatives and milk co-operatives. The household sector investment comprises investment on farm equipment, machinery, irrigation, land improvement and land reclamation. Private sector constitutes the dominant share in the total GCFA.

Private Sector Capital Formation and Investment

Credit Agriculture credit can be classified into short term and long term credit(investment credit). All banks (Commercial banks, Cooperative banks and RRBs) disburse both types of loans through the banking system. Crop loans are largely for funding the working capital requirements of farmers while term loans are utilized for assets generationat farmer‟s level, thus accentuating capital formation. The available evidence indicates at the strong association between the term loans disbursed and private sector capital formation in agriculture.




Wednesday, 22nd Jun 2016, 09:14:58 AM

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