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Investment Priority for Poverty Reduction and Higher Agricultural Productivity Seema Bathla Centre for the Study of Regional Development Jawaharlal Nehru.

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Presentation on theme: "Investment Priority for Poverty Reduction and Higher Agricultural Productivity Seema Bathla Centre for the Study of Regional Development Jawaharlal Nehru."— Presentation transcript:

1 Investment Priority for Poverty Reduction and Higher Agricultural Productivity Seema Bathla Centre for the Study of Regional Development Jawaharlal Nehru University, New Delhi Project Team P K Joshi, S K Thorat and Bingxin Yu

2 Rationale for Public Investment Social benefits from agricultural expenditure are far greater than the private producer benefits Amount spent by private sector tends to be lower than the socially optimal level, and this under-provision creates a rationale for the public provision of such goods Literature abounds on the positive impact of public expenditures on agricultural output and poverty in developing economies (Fan and Rao (2008), Fan and Brzeska (2010), Mogues et al. (2012)  Public spending “in agriculture” and “for agriculture”  Rapid growth of productivity drives agricultural growth and is key to poverty alleviation, mostly through technology adoption & increased spending on R&D (Fan et al. 2006; Nin-Pratt, Yu and Fan 2009; Fuglie 2010).

3 The Prescription: If government has an additional billion rupees to spend on agriculture, it should be spent on investments rather than subsidies to achieve higher agricultural growth and rural poverty reduction. In other words, input subsidies “crowds out” public investments in agriculture. Literature (IFPRI 1999; 2002 & many others) Suggested : A reversal in the declining trend in public investments in agriculture witnessed during the 1980s and 1990s Subsidies tend to be unproductive due to low marginal returns - A check on the rising level of farm input subsidies, no matter how important they have been for agricultural growth

4 The Scenario during the 2000s A phenomenal increase in the public investment (capital formation) in agriculture Investment on private account has grown at a much higher rate Input subsidies continue to rise at nearly 3% per annum; a higher growth in credit subsidy is identified in recent period Magnitude of input subsidies in 2000s three times higher than public investment in agriculture compared to four times during the 1990s

5 Annual Rate of Growth in Agriculture Investment and Input Subsidies from at price (Rs. Billion) Average Public GCFA Private GCFAGCFA Input SubsidyIrrigationCreditPowerFertilizer Input Subsidy/ Capita (Rs.) Annual Rate of Growth (Percent) Source: Finance Accounts, GOI, Agriculture Statistics at a Glance, Statistical Abstract of India, Fertilizer Statistics. Note: Irrigation subsidy is estimated from onwards. Public and private GCFA is up to

6 Fig.1 : Public and Private Investment in Agriculture and Input Subsidy, Rs. Billion at Price

7 Fig. 1b: Tradeoff between Public Investment and Farm Input Subsidy, Rs. Billion at Prices

8 Fig.2a Agricultural Expenditure and Input Subsidies, in billion Rupees Note: Fertilizer subsidy taken from Fert. Stat. is apportioned to states as per consumption; Other subsidies based on the difference between suppliers’ costs and revenues received from farmers.

9 Fig. 2b:Trends in Input Subsidy in Agriculture, Rs. Billion at Price

10 Fig. 3: Percentage Share of Input Subsidy in Agriculture Income

11 Fig. 5: Regional Disparities in Input Subsidy Per Ha Rs. at Prices (Average 1981 to 2011)

12 Fig. 6: Regional Disparities in Per Capita Public Expenditure

13 Structure of Social and Economic Expenditure and Share, Average

14 Percentage Share of Various Heads of Expenditure in Total (Av to 2011) Average share within head (%) Growth rate (%) Share of capital exp. (%) Total exp. (billion rupees) Development exp. (billion rupees) Social exp. (billion rupees) Economic exp. (billion rupees) Economic services Agriculture & allied services Rural development Irrigation and flood control Rural energy Rural road and transport Village and small industry

15 Average share within Agriculture (%) Growth rate (%) Share of capital exp. (%) Agriculture & allied services Crop husbandry Soil and water conservation Animal husbandry Dairy development Fisheries Forestry and wildlife Plantations Food, storage warehousing Agri. research and education Agri. financial institutions Cooperation Other agri. Programs

16 Development and Non-development Expenditure (Rs. Billion)

17 Estimating the Relative Impact of various Subsidies and Investments on Agricultural Growth and Poverty reduction

18 Public Spending Investments Infra: Irrigation, Power, Road Agriculture Productivity and Growth Tech: Fert, Seeds, R&D Soc Serv: Edn, Health, Welfare Non-agri Empt: (MNREGA, Vill Ind etc.) Non-farm Wages Rural Poverty Food prices Other exog. var.. Pop. growth, agro-eco factors, urban growth, macro and trade policy and world price Subsidies Food Sec & Empl Progs Agri- Inputs Farm Wages Red line indicates indirect effect Conceptual and Analytical Framework

19 1. RPoverty = f1(AY, TOT, AWage, NFEmpl, Pop Density, Rain) 2. Agri Income (AY) = f2 (Agri Research, Land, Labour, IRRI, ELECT, LITE, FERT, ROAD, Rain, NFSM-Dummy) 3. AWAGE = f3(GDPGNA, AY, ELECT, ROAD, LITE, HealthExp, MNREGA- dummy) 4. NFEmpl= f4(GDPGNA, NA Wage, ROAD, LITE, ELECT, RurDev Exp, Vill Ind Exp, MNREGA ) 5. TOT = f5(AY, World price, GDPGNA) 6. FERT = f6(Input subsidies, TOT(-1), IRRI, Agri Research, ROAD, ELECT) 7. IRRI = f7(Irrigation Exp., TOT, Power Subsidy, Rainfall) 8. ELECT = f8(Energy Exp.) 9. ROAD = f9(Road-transport Exp.) 10.LITE= f10(Education Exp.)

20 Changes Introduced based on IFPRI (2007) Data base based on Finance Accounts ; consistent from to based on 1987 budgetary classification Agriculture income taken to be land productivity instead of labour productivity Literacy replaced with the number of years of schooling No. of villages electrified replaced with power consumption in agriculture Inclusion of non-agricultural wage rate Dummy to capture the impact of MNREGA and National Food Security Mission during 2000 Impact of Change in Policy Regime (election dummy to capture change in the government ) Public capita public expenditure is specified in lag as well as in stock terms Expenditure on agriculture research & development broaden to include expenditure on soil conservation and crop husbandry

21 -Methodology : Both Structural Econometric Model based on Maximum Likelihood Estimation and 3SLS (SURE) -Use of double log functional form -Inclusion of state and time effects -Time period : ; and based on 17 states data. Newly formed states combined (Jharkhand, Uttrakhand and Chattisgarh) with old ones -Test of model specification: endogeneity, identification, multicollinearity, specification and measurement errors -Hausman test shows a few subsidies and expenditure variables to be endogenous. One year lag is taken to address the problem. -Sargan test used for identification -Alternate equations to address multicollinearity

22 Estimated Rural Poverty Equation *,**,*** indicate significance at 1, 5,10% level. State effects significant. TOT is 3 yrs moving average. Agricultural wage and non-farm employment are correlated during 1990s. Agricult ure Income TTAgricultu re Wage Non Farm Employm ent (% Share) RainCon stant R2R2 Likeliho od Ratio N= **-0.49*-1.17* * s N= *- 0.19*** -0.42*-0.25* * s N= *-1.88* * * * s N= *-2.65* *0.35*22.6 *

23 Estimated Agriculture Income (Land Productivity) Equation Variables specified on per ha basis; public expenditure is per capita; GCA/worker dropped due to multicollinearity; NFSM dummy from extended agri-research variable correlated so the original variable (agri R&D is taken. Fertilize r Irrig ation LabourRain Agri cultu re R& D Agri. Electr icity Consu mptio n Educa tion Roa d NFS M Cons tant R2R * 0.14 * 0.09*0.04* 0.08 * 0.11*0.23* *7.8* s0.15* * 0.07 *** *** * s0.11* 0.05 *** *0.49* 0.16 * * s0.43*0.09 * 0.26* * -0.12*0.35* * 0.8 6

24 Estimated Agriculture Wage Equation Variables specified on per ha basis; public expenditure is per capita Agricultur e Income Agri. Electricity Consumptio n Road Density Educati on Health Expenditu re MGNR EGA GDP GNA C R2R * *0.43*0.29* * s0.23*0.03** * s0.24*0.03** *0.22* s0.25*0.02*** *0.17* ** 0.6 6

25 Estimated Non-farm Employment Equation Variables specified on per ha basis; public expenditure is per capita Non Farm Wage Agri. Electricity Consumpti on Road Density Educa tion Rural Devel opme nt MG NRE GA Villag e Indust ry GDP GNA Co nst ant R *0.09* *0.09* 0.17 * -0.12*0.43* s-0.32*0.06*0.42*0.39* * s 0.12** * * ** * 3.8 4* ** * 0.11* * *1.9 5* 0.97

26 Estimated Agriculture Price (TOT) Equation Agriculture Income World Price GDPGN A Trend Consta nt R2R *0.17*0.31* 0.03*-43.94* s-0.35* * 0.02*-37.61* s-0.11***0.13*** *26.93* s-0.21*0.29*0.17*** 0.02*-26.26*0.85

27 Estimated Agril. Production Equation (captured through Fertilizer Demand ) Variables specified on per ha basis; public expenditure is per capita; Multicollinearity between fertilizer and credit subsidy during Irriga tion Subsi dy Power Subsid y Fertilize r Subsidy Cred it Subs idy Agricu lture R&D TOT (-1) Roa d Den sity Irriga tion Tren d Const ant R2R * *--0.05**0.44* 0.36 * 0.06* * *0.47* 0.73 * 0.07* * s *0.46* 0.43 * 0.08** * * * ** ** s * ** 0.07*0.73* 0.12 * 0.07* * * s *0.04 * 0.07* * * * 0.8 8

28 Irrigation (Share of Irrigated Area in total) Equation Public expenditure is in stock terms and specified on per capita basis; Rainfall is correlated with other explanatory variables so dropped. Public Expenditure on Major and medium irrigation Power Subsidy Terms of TradeConstant R2R * 0.05*0.12**1.54* s 0.07* * s * s 0.10* **2.16* 0.96

29 Electricity (Share of Power Consumption in Agriculture in Total) Equation Public Expenditure on Rural Energy Constant R2R * -1.49* s 0.18* -2.05* s 0.11* -0.72* s * 0.97

30 Road (Road Density Total) Equation Public Expenditure on Rural Road and Transport Constant R2R * 5.16* s 0.18* 5.34* s 0.29* 4.89* s 0.10* 6.2* 0.95

31 Literacy (No. of Years of Schooling) Equation Public Expenditure on Education Constant R2R * -3.05* s 0.43* -1.98* s 0.46* -1.89* s 0.34* -0.91* 0.92

32 Broad Findings Investments in agriculture (both public and private) have increased at a much faster rate during 2000 compared to subsidies; subsidies not crowded out public investment Investment & subsidy distribution across states continues to be extremely unequal Relative decline in expenditure on economic heads – Agriculture, irrigation and rural development have born the maximum brunt Land productivity, non-farm employment and agriculture prices have significant impact on poverty reduction Road & electricity appear to have a decreasing impact on land productivity- Fertilizer, irrigation, education, Agriculture R&D and NFSM dummy significant Rural wages are increasingly affected by agril. productivity and education but decreasingly affected by road density Urban growth, education & non-farm wages have increasing impact on nonfarm employment Agricultural prices are negatively affected by agricultural growth and positively by world prices and urban growth Power and irrigation subsidies have relatively decreasing impact on production (captured through fertilizer use).

33 Returns in Agricultural GDP (Rs per million Rs Spent)Ranking Agriculture R&D Education Inv Health Investment Rural Road & Transport Inv Irrigation Investment Rural Energy Investment Rural Development Irrigation Subsidy Fertiliser Subsidy Power Subsidy Credit Subsidy Investments vs Input Subsidies based on Estimated Marginal Returns

34 Returns in Rural Poverty (Decrease in number of poor per million Rs spent)Ranking Agriculture R&D Education Investment Health Investment Rural Road & Transport Inv Irrigation Investment Rural Energy Investment Rural Development Irrigation Subsidy Fertiliser Subsidy Power Subsidy Credit Subsidy

35 Implications Absence of tradeoff between productivity and poverty reduction from public spending on various heads and subsidies Fertilizer and credit subsidies have large growth effects in 2000: No more unproductive and compete with public investment. If macro fiscal policy allows more funds towards more investments and subsidies, then no issue Returns are relatively higher from fertilizer and credit subsidies compared to rural energy and irrigation subsidies –Focus on their rationalisation rather reduction Marginal impact of investment in rural energy on agril productivity has declined High returns to investments from road and irrigation have subsided; but expenditure should be there for maintenance ; Regional impact may stand imp. Roads-transport investment holds importance for non-farm employment and hence poverty reduction. Agriculture research continues to be the most effective public spending item followed by health, education, irrigation & credit subsidy; to increase it and also the investment intensity Non-farm opportunities to be increased through agro-processing (not much effect of rural development and village industry)

36 Thank you!

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