Date : 25/12/2023

Relevance: GS Paper 3- Economy- Agriculture

Keywords: Gross Capital Formation in Agriculture (GCFA), Rashtriya Krishi Vikas Yojana (RKVY), Terms of Trade (ToT), Agri-tech Infrastructure Fund, Food Security, Monsoon

Context-

The state of capital formation in agriculture has become a significant concern, with Gross Capital Formation in Agriculture (GCFA) experiencing a consistent decline since 2013-14. Examining the broader economic context, policy changes, and global factors, this analysis aims to propose strategic measures for revitalizing India's crucial agricultural sector.

Reduction in Gross Capital Formation

The GCFA expressed as a percentage of the GDP of agriculture and allied sectors, has witnessed a decline from 17.5% in the three years ending 2013-14 to 15.7% in the three years ending 2020-21. While there is an overall deceleration in capital formation across the economy, the agricultural sector's decline is more pronounced. The Compound Annual Growth Rate (CAGR) of both Gross Capital Formation (GCF) and GCFA was a robust 9% during the period 2004-05 to 2013-14. However, the subsequent period from 2013-14 to 2020-21 saw a sharp drop in the CAGR of GCFA to 3%, while that of GCF recorded a slightly higher rate of 5%.

Understanding the Causes of Deceleration

Several factors contribute to the reduction in GCFA, demanding a comprehensive analysis:

• Compositional Shift in Public Investment: There is speculation that the deceleration in public investment is linked to a shift away from major and medium irrigation projects towards micro-irrigation. Over 90% of public investment in agriculture is associated with irrigation, and this change in focus might have led to an overall slowdown in capital formation.
• Changes in the RKVY Program: The Rashtriya Krishi Vikas Yojana (RKVY) has historically played a pivotal role in stimulating state investments in agriculture. However, since 2014, with States meeting 40% of RKVY expenditure, the incentive structure for consistent state investments in agriculture has been diluted.
• Exclusions from the Agriculture Sector: Crucial expenditures on rural electrification, power supply, rural roads, storage, agricultural research, and fertilizer and pesticide industries are not categorized under agriculture or allied sectors. This exclusion may lead to an oversight of the overall contributions of these sectors to agricultural growth.
• Reduction in Private Investment: More than 80% of the investment in agriculture comes from the private sector. Compared to non-agriculture, the Terms of Trade (ToT) in agriculture is a crucial determinant of private investment. The substantial deceleration in ToT in recent years may have dampened private investment in agriculture.
• The shift in Agricultural Practices: Modern and efficient methods, such as micro-irrigation, may have influenced the type and scale of capital investments in agriculture.
• Economic and Policy Factors: Broader economic factors, including changes in government policies related to subsidies, credit availability, or market access, could impact investment decisions.
• Global and Climate Factors: Global economic conditions, climate change, and external factors can impact agriculture. Changing weather patterns may affect the viability of certain agricultural investments due to reduced profitability and higher crop failure risks.

Impact of GCFA Reduction

Understanding the implications of reduced GCFA is crucial for devising effective strategies. The consequences include:

• Slower Agricultural Growth: Decreased capital formation leads to slower growth in the agricultural sector, impacting infrastructure, technology adoption, and modern farming practices crucial for improving productivity.
• Income Inequality: A sluggish agricultural sector exacerbates income inequality, with the poorest segments of the population experiencing the brunt of economic challenges.
• Job Creation Challenges: Agriculture is a major employer, and slower sectoral growth results in fewer job opportunities, contributing to higher unemployment or underemployment rates in rural areas.
• Impact on Food Security: A slow-growing agricultural sector hampers efforts to meet the increasing global demand for food, risking heightened levels of hunger and malnutrition.
• Reduced Competitiveness: India's agricultural sector may lose competitiveness globally due to insufficient capital investment, affecting efficiency, technology adoption, and export capabilities.
• Environmental Consequences: Agriculture contributes significantly to global greenhouse gas emissions. Investment in low-carbon and climate-smart technologies becomes imperative to address environmental concerns.
• Dependence on Monsoons: Reduced capital investment affects the development of irrigation systems, weather forecasting, and crop insurance, intensifying the agricultural sector's dependence on unpredictable monsoons.

Significance of Agriculture in India

Before looking into potential solutions, it is essential to recognize the pivotal role agriculture plays in India:

• Employment Opportunities: Agriculture provides jobs for approximately 54.6% of the total population.
• GDP Contribution: It contributes around 17% to the total GDP.
• Food Supply: Agriculture is a primary source of food for India's large and growing population.
• Raw Materials: The sector supplies raw materials for agro-based and food processing industries.
• Trade and Commerce: Agriculture influences internal and external trade and commerce.
• Capital Formation: It contributes to capital formation and government revenue generation.

Government Initiatives to Boost GCFA

The government has implemented several initiatives to counteract the decline in GCFA:

• Enhanced Institutional Credit: Schemes like Kisan Credit Card, Interest Subvention Scheme, etc., aim to provide farmers with increased access to institutional credit.
• Promotion of Warehousing Infrastructure: Schemes like Gramin Bhandaran Yojana, Warehousing Development, and Regulatory Authority focus on scientific warehousing infrastructure to enhance the shelf life of agricultural produce.
• Agri-tech Infrastructure Fund: Initiatives like Pradhan Mantri Kisan Sampada Yojana, and Agri-Market Infrastructure Fund, aim to create a competitive and profitable farming environment through the development of agri-tech infrastructure.
• Organic Farming Development: Schemes like Paramparagat Krishi Vikas Yojana, Mission Organic Value Chain Development focus on promoting commercial organic farming.
• Startup Ecosystem in Agriculture: Initiatives like Rashtriya Krishi Vikas Yojana, and Agri Udaan aim to foster a startup ecosystem in agriculture and allied sectors.

Strategies for Increasing GCFA

To reverse the trend of declining GCFA, the following strategic measures are proposed:

• Increased Public Expenditure: Prioritize public expenditure on critical areas such as irrigation, research and development, extension services, and market infrastructure. This can enhance productivity, and profitability, and create a conducive environment for private investment.
• Private Sector Participation: Encourage private sector participation through policy reforms like the Model Agriculture Produce and Livestock Marketing Act, Model Agriculture Produce and Livestock Contract Farming Act, and exemptions of Farmer Producer Companies from income tax. These reforms can create alternative marketing channels, facilitate contract farming, and encourage collective action by farmers.
• Leverage Climate Finance: Explore climate finance opportunities to support climate-resilient and low-emission agriculture. The Green Climate Fund (GCF) can play a significant role in promoting resilient agriculture, facilitating climate-informed advisory services, and reconfiguring food systems.

Conclusion

India's agricultural sector faces challenges in sustainability due to the slowdown in Gross Capital Formation in Agriculture (GCFA). Shifts in public investment, changes in agricultural practices, and global factors complicate the issue, impacting income distribution, job creation, and global competitiveness. Collaborative and strategic measures are imperative for ensuring a resilient, competitive, and sustainable future for India's crucial agricultural sector. The government's initiatives, coupled with increased public expenditure, private sector participation, and leveraging climate finance, can pave the way for a robust agricultural landscape that meets the demands of the present and the future.

Source- The Hindu Business Line