Public Policy for Less Favoured Agricultural States in India

1. Public Policy for Less Favoured Agricultural States in India
Seema Bathla
(with P.K. Joshi and Anjani Kumar)
TAAS-IFPRI-ICAR National Conference
‘Sustainable Development Goals: Preparedness and Role of Indian Agriculture'
May 11-12, 2017, New Delhi
Email: seema.bathla@gmail.com

2. Key Issue
How public expenditure trigger private investment and contribute to
agricultural productivity and rural poverty reduction?
-Based on welfare & basic needs appr. strong linkages identified
-Differential impact of various public investments & input subsidies
-Consensus to accelerate investments and cutdown subsidies (Fan,
Gulati, Thorat 2007; Fan & Brzeska 2010, Mogues et al. 2015)
 Need to extend the analysis at the disaggregate state level because
-A significant increase in both public investment (irrigation) & input subsidies from
2002-03 (>6% per annum 2000-2014)
-A higher rate of agriculture growth in many laggard states and reduction in the
incidence of poverty
-Large interstate disparities in investments & subsidies
-Puzzling issue of allocation of public resources into social and economic sectors
-Relatively higher public investment in the northern-southern states during the sixties
-Investment requirements for doubling the farm income (short and long term futuristic
requirements)

3. Methodology and Data Base
•Focus on six main heads of public expenditure falling within the
economic and social activities viz. roads-transport, education, health-
nutrition, energy, irrigation and agricultural R&D, four subsidies-
irrigation, power, fertilizer and credit (interest) and well irrigation
(private investment)
• Analysis from 1981-82 to 2013-14 based on SEM (Inclusion of
state and time effects)
• Finance Accounts (only states), NAS, Agril Stat. at a glance, NSS
rounds, AIDIS (schedule 18.2 for private investment in irrigation)
•Major 17 states (three new states merge with their parent state)
•States categorized into low, middle and high income based on per
capita income (Average from 2000-14).
LIS - Bihar, UP, Assam, J&K, and MP;
MIS- Odisha, Rajasthan, West Bengal, AP, and Karnataka;
HIS- Punjab, HP, Tamil Nadu, Kerala, Gujarat, Haryana, Maharashtra

4. Productivity & Poverty Effects of Public Spending based on a System of Equations
(1) Poverty = f1(Agri income, TT, NAWage, NFEmpl , Pop Density, RAIN)
(2) AY = f2 (Agri R&D, Land, Labour, WellIRRI, CanalIRRI, ELECT, EDU,FERT,
Road, RAIN, NFSM)
(3) NAWAGE = f3(GDPGNA, AY, ELECT, ROAD, EDU, Health Status, MGNREGS)
(4) NFEmpl= f4(GDPGNA, AY, NAWage/AWage, ROAD, EDU, ELECT, RurDev Exp,
MGNREGS)
(5) TT = f5(AY, World price, GDPGNA, ELECT, Trend)
(6) FERT = f6(Subsidies-fertilizer, credit,power,irrigation, TOT, IRRI, Agri R&D,
ROAD)
(7) CanalIRRI =f8(Irrigation Exp.)
(8) WellIRRI = f7(CanalIRRI, public Exp. minor irri.,Private Irri Exp., TT, Power
subsidy)
(9) ELECT = f9(Energy Exp.)
(10) ROAD = f10(Road-transport Exp.)
(11) EDU= f11(Education Exp.)
(12) Health Status (IMR)=f12(Health Exp.)
(13) RurDev Exp =f13(per capita income)

5. Relative Benefits of Additional Units of Expenditure
( )
( )
( )
Poverty Poverty AY AY FERT
AgRD AY AgRD FERT AgRD
Poverty TT AY AY FERT
TT AY AgRD FERT AgRD
Poverty AWAGE AY AY FERT
AWAGE AY AgRD FERT AgRD
    
 
    
    
 
    
    
 
    
Based on the estimated coefficients, marginal effects are expressed as
(a) increase in agricultural GDP (Rupees per unit of spending) and
(b) reduction in poverty headcount (number of rural poor brought out of
poverty per unit of spending)
The total effects (direct & indirect) of public spending ( agricultural
R&D) on poverty are estimated as:

6. 0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total Expenditure
Development
Economic
Social
Government Spending on Economic and Social Services (Rs. billion at
2004-05 prices)

7. Table 3.2:Government Expenditures and Gross Domestic Product Rs. Billion at 2004-05 Prices
LIS MIS HIS All LIS MIS HIS All
Total Expenditure
Annual growth rate(%)
TE 1984 345.73 335.86 431.74 1108.57 7.52 6.71 7.11 7.16
TE 1994 632.71 595.99 826.94 2046.74 4.27 6.05 6.40 5.67
TE 2004 1167.30 1165.73 1531.11 3863.35 8.71 7.05 7.35 7.74
TE 2014 2643.23 2334.70 3230.95 8257.62
1981-2013 1087.70 1035.61 1395.50 3520.73 6.71 6.63 6.73 6.73
Social-Economic Expenditure (Development Exp.)
TE 1984 263.19 252.82 322.27 833.83 6.44 6.09 6.25 6.31
TE 1994 420.17 419.65 568.31 1402.26 2.40 4.68 4.87 4.10
TE 2004 693.11 679.43 878.82 2250.95 10.01 8.76 8.41 9.05
TE 2014 1733.90 1628.93 2100.55 5502.32
1981-2013 700.68 691.58 895.40 2289.53 6.04 6.08 6.05 6.10
Ratio of Expenditure to GSDP (%)
Capital Expenditure Share in Total
Expenditure (%)
TE 1984 15.88 13.14 13.12 14.00 18.60 14.76 14.45 15.80
TE 1994 18.30 14.55 14.53 15.52 9.33 11.85 8.64 9.76
TE 2004 19.76 16.26 15.29 16.69 11.56 9.72 8.74 9.90
TE 2014 22.12 15.85 13.82 16.47 15.41 12.86 13.49 13.93
1981-2013 22.97 15.42 16.23 15.68 14.72 12.35 11.95 12.93

8. 500
1500
2500
3500
4500
5500
6500
7500
Disparities in Real Per Capita Public Expenditure (Rs. Average 1981-2014)

9. Structure of Social and Economic Expenditure and Share, Average 2000-14
17.93
12.99
23.73
5.12
1.39
11.24
Agriculture & Allied Services
Rural Development
Irrigation & Flood Control
Rural Energy
Village & Small Industries
Rural Road & Transport
49.97
13.18
7.37
13.44
Education & Sports etc.
Medical & Public Health
Welfare of SC, ST & Backward Classes
Social Welfare & Nutrition

10. Table 3.3:Major Social-Economic Heads of Public Expenditure at 2004-05 Prices Rs. Billion (TE
2014)
Agriculture Irrigation
Rural
Roads
Rural
Energy
Rural
Development Education Health
Eco-
Social
Exp.
Total
Exp.
LIS 143.65 129.36 107.83 17.20 140.20 478.94 122.17 1289.56 2643.23
MIS 131.95 188.93 70.09 42.40 100.74 393.71 111.27 1159.54 2334.70
HIS 174.50 157.17 109.98 39.96 76.89 585.82 148.21 1496.54 3230.95
ALL 454.15 477.79 289.76 102.95 323.91 1463.80 384.13 3941.32 8257.62
Share in Total Expenditure (%)
LIS 5.40 4.87 4.09 0.66 5.30 18.14 4.62 48.77 100.00
MIS 5.60 8.11 2.98 1.82 4.29 16.89 4.76 49.62 100.00
HIS 5.40 4.88 3.40 1.25 2.38 18.14 4.58 46.34 100.00
ALL 5.47 5.79 3.50 1.25 3.91 17.75 4.64 47.72 100.00
Expenditure Intensity (Expenditure/GSDP)
LIS 1.20 1.08 0.90 0.14 1.17 4.01 1.02 10.79 22.12
MIS 0.89 1.29 0.47 0.29 0.68 2.68 0.76 7.87 15.85
HIS 0.75 0.67 0.47 0.17 0.33 2.51 0.63 6.40 13.82
ALL 0.90 0.95 0.58 0.21 0.64 2.92 0.77 7.86 16.47
Share of Capital Expenditure in Total (%)
LIS 7.82 60.19 71.84 77.34 25.39 2.80 12.77 22.92 15.41
MIS 4.41 61.47 59.82 21.76 2.79 1.84 7.38 19.79 12.86
HIS 14.98 70.45 48.81 21.36 27.21 2.31 10.23 21.50 13.49
ALL 9.57 63.83 60.40 24.66 18.32 2.69 10.12 20.91 13.93

11. 0 500 1000 1500 2000 2500 3000 3500 4000
0
50
100
150
200
250
300
350
400
450
500
Power Irrigation fertilizer LIS MIS HIS
Fig. 3.5: Trends in Input Subsidies (Rs.Billion) and Per Ha Subsidies (Rs.)
2000-13
1990-99
1981-89
MIS
2000-13
1990-99
1981-89
LIS
2000-13
1990-99
1981-89

12. 500
1500
2500
3500
4500
5500
6500 Assam
Odisha
Rajasthan
MPChat
HP
WB
BihJhar
Maharashtra
UP
Kerala
JK
Karnataka
UPUttra
Gujarat
AP
Haryana
Punjab
TN
Input Subsidy/ Crop Area
Regional Disparities in Input Subsidy Rs.Per Ha at 2004-05 Prices (Average
1981 to 2011)

13. Fig.3.1: Development Expenditure (Rs. Billion at 2004-05 Price) & Rural Poverty (%)
0
5
10
15
20
25
30
35
40
45
50
200
400
600
800
1000
1200
1400
1600
1800
2000
1983-1984
1993-1994
2004-2005
2011-2012
1983-1984
1993-1994
2004-2005
2011-2012
1983-1984
1993-1994
2004-2005
2011-2012
LIS MIS HIS
Develoment Exp Rural Poverty

14. 0
5
10
15
20
25
30
35
40
45
50
5
15
25
35
45
55
65
75
1981-891990-992000-13 MIS 1981-891990-992000-13 HIS 1981-891990-992000-13
Investment 'in' Investment 'for' Land Productivity Rural Poverty
Fig.3.4: Public Investment ‘in’ and ‘for’ Agriculture (Rs.00/ha), Land productivity (Rs.000/ha)
and Rural Poverty (HCR)

15. Table 3: Investment Outcomes at 2004-05 Prices (1981-2014)
Indicators Unit
Low Income
States
Middle
Income States
High
Income
States
Irrigation Rs./ha 1530 1916 2051
Agriculture R&D Rs./ha 1038 511 1345
Private (rural
household)
Investment in
Agriculture Rs./ha 528 556 1517
Public Expenditure/Capita (rural population):
Education Rs. 613 584 922
Health & Nutrition Rs. 427 475 708
Rural Energy Rs. 52 66 116
Rural Road-
Transport Rs. 173 138 345

16. Physical Indicators Unit
Low Income
States
Middle Income
States
High Income
States
GSDPAgriculture
Rs.
Billion 1593 1667 1606
Land Productivity Rs. 44867 40196 54656
Canal Irrigation % 17 13 14
Well Irrigation % 83 87 86
Infant Mortality Rate
(rural)
per
thousan
d live
births 82 77 57
Road density
Km Per
'000
sq.km 776 896 1250
Agriculture Electricity
consumption/ha Kwh 219 452 847
Literacy rate (rural) % 42 45 57
Years of schooling of
3.34 3.22 4.44

17. All States HIS MIS LIS
Observations 495 198 155 151
Log likelihood 3019.21 874.27 1900.64 369.77
1. Rural Poverty :
Land Productivity -0.30*** -0.31 -0.32*** -0.52*
Non-farm Employment -0.94* -2.61* -0.21 -1.10*
Wage Rate -0.55* -0.92*$ -0.54* -0.08$
Terms of Trade -0.98* -1.99* -1.91*$ -0.62*
Constant 13.8* 20.9* 9.56* 14.6*
R2 0.71 0.72 0.84 0.75
2. Land Productivity:
Well Irrigation 0.89* 1.13* 0.93*$ 1.87*
Canal Irrigation 0.18* 0.23* -0.07 0.17*
Fertilizer Consumption 0.14* 0.22* 0.41*$ 0.088***
Employment 0.08* 0.05 0.33* 0.08**
Agriculture R&D 0.083* 0.11* 0.10* 0.28**
Power Consumption 0.10* 0.19* 0.13* 0.13*
NFSM 0.085* 0.15* 0.18* 0.05
Rainfall 0.06* 0.16* 0.21* 0.05**
Constant 2.8* 1.01 6.69* -0.71*
R2 0.96 0.96 0.96 0.95
3.Rural Wage Rate:
Land Productivity 0.12** 0.24** 0.003 0.01
Education 0.31* 0.59* 0.28* 0.37*
Health -0.56* -0.40* -0.24* -0.64*
GSDPG Non-Agr 0.29* 0.28* 0.77* 0.17*
Table 4.2: Determinants of Poverty and Agriculture Income: 1981-82 to 2013-14

18. Table 4.3: Marginal Effects of Additional Investments and Subsidies on Agriculture Income and Rural
Poverty:1981-2014
Income (Rs.per Rs.Spent) Ranking
All States HIS MIS LIS All States HIS MIS LIS
Rural Development 0.14 0.01 0.02 0.01 12 12 11 12
Irrigation Investment (Canals) 0.15 0.19 0.01 0.64 11 10 12 10
Road Investment 0.42 0.06 1.42 0.21 10 11 5 11
Power Subsidy 0.69 0.94 1.31 3.60 9 8 6 4
Credit Subsidy 0.92 0.51 1.21 1.28 8 9 7 8
Fertilizer Subsidy 1.07 1.05 3.18 1.34 7 7 2 7
Irrigation Subsidy 1.67 2.71 0.41 6.48 6 2 10 3
Energy Investment 1.73 1.57 1.18 1.01 5 5 8 9
Health Investment 1.83 1.55 0.84 1.74 4 6 9 5
Education Investment 2.39 1.74 2.27 1.50 3 3 4 6
Agriculture R&D Investment 2.47 3.23 4.44 9.92 2 1 1 2
Well Irrigation (Private investment) 9.72 1.66 2.87 19.80 1 4 3 1
Poverty:Decrease in No. of Rural People Per Rs.Million of Spending
All States HIS MIS LIS All States HIS MIS LIS
Irrigation Investment (Canals) 3 5 21 43 12 12 9 9
Fertilizer Subsidy 11 11 585 114 11 10 1 6
Irrigation Subsidy 19 47 15 441 10 8 10 3
Power Subsidy 23 52 5 302 9 7 11 4
Credit Subsidy 24 9 105 103 8 11 3 7
Road Investment 35 18 55 28 7 9 6 12
Agriculture R&D Investment 45 85 136 1231 6 4 2 2
Education Investment 88 214 88 31 5 2 5 10
Energy Investment 97 68 30 66 4 5 8 8
Health Investment 109 115 43 30 3 3 7 11
Well Irrigation (Private investment 166 55 88 1286 2 6 5 1
Rural Development 605 253 92 124 1 1 4 5
Note: Based on averages from 2011-12 to 2013-14 using direct and indirect effects

19. 0 200 400 600 800 1000
IrrigationInv (Canals)
Irrigation Subsidy
Credit Subsidy
Agriculture R&D Inv
Energy Inv
Private Irri Inv
No.of Rural Poor Reduced-HIS
0 2 4 6 8 10 12 14
Rural Dev
Road Inv
Credit Subsidy
Irrigation Subsidy
Health Inv
Agriculture R&D Inv
Returns to Agriculture Income - HIS
0 200 400 600 800 1000
IrrigationInv (Canals)
Irrigation Subsidy
Credit Subsidy
Agriculture R&D Inv
Energy Inv
Private Irri Inv
No.of Rural Poor Reduced-LIS
0 2 4 6 8 10 12 14
Rural Dev
Road Inv
Credit Subsidy
Irrigation Subsidy
Health Inv
Agriculture R&D Inv
Returns to Agriculture Income - LIS
0 200 400 600 800 1000
IrrigationInv (Canals)
Irrigation Subsidy
Credit Subsidy
Agriculture R&D Inv
Energy Inv
Private Irri Inv
No.of Rural Poor Reduced-MIS
0 2 4 6 8 10 12 14
Rural Dev
Road Inv
Credit Subsidy
Irrigation Subsidy
Health Inv
Agriculture R&D Inv
Returns to Agriculture Income - MIS

20. Key Messages
•Relative decline in expenditure on economic heads – agriculture, irrigation and rural
development have borne the maximum brunt; subsidies much lower in eastern states
•Land productivity, non-farm employment & agriculture prices have significant
impact on poverty reduction (NF empl. effect more in HIS)
•Marginal returns from incremental public spending on various heads are somewhat
higher in LIS. (diminishing marginal returns have set in from additional investment in
HIS).
•Topmost ranked public investments are agriculture R&D, education, energy, health
and well (minor) irrigation (private investment). Only in the case of rural
development, poverty effect tends to be much larger than the productivity effect.
•Spending on irrigation and power subsidies holds more importance in LIS.
•High returns to investments from road and irrigation have subsided; but expenditure
should be there for maintenance
•Health, education, rural dev. agriculture R&D continue to be the most effective
public spending along with fertilizer –power subsidy
•A small tradeoff between productivity and poverty reduction from public spending
on various heads and subsidies within each group of states
•A strong need for location specific public expenditure policy

21. Some Policy Implications
Why underinvestment in less developed states & in rural areas?
-Important to study the political and institutional context of public investments
and conditions for efficient provision of public goods and services
-Relook at the investment strategy, that has favoured a few states and within the
states urban areas.
-Find ways to mobilize resources as per priority investments -
framework/regulations/fiscal systems to mobilize resources into rural areas
-To evaluate interdependencies between investments across states and of different
types
-To increase private investment in agriculture and find which investment will
have high productivity/income and also equity effects.
How to improve efficiency of various public investments, especially
canal irrigation?
-Pressure pumps to withdraw canal water for tail end users
Possibility of technological interventions?
-Higher marginal returns from well irrigation at the cost of lowering of water
table & high electricity subsidy
– SRI and micro irrigation through investment subsidies

22. Policy Implications contd….
•Whether to focus on rationalisation or reduction of input subsidies
-Investment contributes to growth but subsidies incentivise farmers
-If macro fiscal policy allows more funds towards more investments and subsidies,
then no issue
-Political economy, which often trumps economic reasoning
Assessment of each circumstance and an analysis of implementation experience
Three Key Concerns:
-Targeting,
-Effectiveness, and
-Sustainability
•Market Smart Subsidies implemented in African countries (Jayne Chirwa &
Dorward 2013);
•Investment subsidies on micro irrigation under the RKVY