In our previous two posts, we examined agricultural policies that successfully promote growth (e.g. the US forestry and China fishing industries) and those that hamper growth. Governments across the world either provide or have provided subsidies to the farm sector. However, in most cases, these subsidies are complemented by investment, which then bring in real returns. In this post, we examine other areas in which the government should invest such as infrastructure and R&D.
Move from subsidies to real investment
There is a strong need for the Indian government to place equal, and possibly more, attention on capital formation using its financial resources. The government is pumping enough funds in this sector but not effectively. Total government spending on agriculture is 20-25% of our GDP. 80% of this spending is on subsidies, which offer no value or asset creation. Only the remaining 20% is spent on investments.
As the graph below shows, agricultural subsidies by the government are four times Gross Capital Formation, which is a country’s net amount of fixed capital accumulation such as investment in property, plant and equipment (excluding land purchase and depreciation).
Instead, the government should make capital intensive investments in areas such as irrigation pump sets and other farm machinery. Investments that help simplify the food value chain, establish infrastructure, and organise retail in food will only help accelerate the economy.
Improve the Research intensity ratio
The research intensity ratio measures a country’s spending on agricultural R&D. The ratio is based on the total spending on agricultural R&D as a percentage of Agricultural GDP (AgGDP). As seen in the chart below, India’s research intensity ratio is one of the lowest.
India’s research intensity ratio has been languishing at 0.4% of AgGDP for a number of years even though we are the second largest spender on agricultural R&D among developing countries.
In the 12th Five-year plan, the government committed to increasing the research intensity ratio from 0.4% to 1% of AgGDP. While maintaining the volume of investment, the government can ensure a significant increase in the value of return from such investments by simplifying processes and regulations in research and development.
The focus of central and state governments must broaden in order to spur agricultural development. There is a need to diversify investment beyond crop related R&D in areas like livestock, fisheries, natural resource management, and agricultural engineering. A better research intensity ratio will lay the groundwork for more sectors within agriculture to contribute to the overall ROI. Only then can the sector effectively begin to improve food and nutrition security, reduce poverty, and bring economic prosperity.