Does input subsidy discourage public investment in Indian agriculture? Evidence from ARDL applications

• Published date: 01 May 2022
• Author: Nusrat Akber
• Date: 01 May 2022
• DOI: http://doi.org/10.1002/pa.2337

ACADEMIC PAPER

Does input subsidy discourage public investment in Indian

agriculture? Evidence from ARDL applications

Nusrat Akber

ICSSR Fellow, School of Economics, Shri Mata

Vaishno Devi University, Katra, India

Correspondence

Nusrat Akber, ICSSR Fellow, School of

Economics, Shri Mata Vaishno Devi University,

Katra, Jammu and Kashmir 182320, India.

Email: nusratakber807@gmail.com

Funding information

Indian Council of Social Science Research,

Grant/Award Number: RFD/2018-19/GEN/

ECO/14

Public investment through its long term benefits is one of the significant contributors

to agricultural growth in India. Despite the fact, the public sector investment in

Indian agriculture declined over the years and the researchers have considered

increasing input subsidy as the main cause of its decline. This paper tries to empiri-

cally examine the claim that input subsidy discourages public investment in Indian

agriculture. Applying an “auto-regressive distributive lag”(ARDL) model to time-

series data at the national level and panel-ARDL model to sub-national level panel

data the study confirms that input subsidies do negatively affect public investment in

Indian agriculture and results in discouraging the public sector investment. Therefore,

the policy implication of the study suggests that for more efficient and sustainable

growth in Indian agriculture, the need of the hour is the careful analysis of all these

input subsidies and gradual removal of unproductive ones so as to make resources

available for farm investment in social and physical infrastructure. This may help to

accelerate and sustain the growth dynamics of Indian agriculture.

1|INTRODUCTION

The burgeoning input subsidies in Indian agriculture has become a

crucial policy debate in recent times due to its increasing fiscal burden

over the years, creating confusion in the Uruguay round of WTO

whether Indian agriculture is net subsidized or taxed, its negative

impact on the agricultural growth rate and also being responsible for

declining public investment (Chand & Kumar, 2004; Gautam, 2015;

Gulati & Bathla, 2001; Gulati & Sharma, 1994,1995,2002;

Singh, 2014; Vyas, 2001).

1

The government of India incentivizes the

primary sector by subsidizing agricultural inputs, ensuring a support

price for output, facilitating direct institutional credits, and making

investments on infrastructures like minor, medium and large irrigation

projects, storage facilities, funding research and development (R&D)

activities and so on. This public sector investment as the prime driver

of agricultural growth has continuously declined since the 1980s

while the input subsidies mounted over the years. This declining trend

of public investment continued even after the economic reforms in

the country.

2

The input subsidy program was originally introduced

during the 1960s with the objective of stimulating agricultural growth,

employment, and investment by supplying inputs to the farmers at

lower costs (Gulati & Sharma, 1995). During the initial phase of the

“green revolution,”these input subsidies helped the farmers, espe-

cially the smallholders for adopting new technologies (Fan, Gulati, &

Thorat, 2008). Those input subsidies have successfully kept the nomi-

nal input prices (especially that of fertilizers) unchanged over the years

against the backdrop of inflation and rising real-world prices of those

inputs leading to a fall in real prices (Grossman & Carlson, 2011). So

the perceived benefit of heavy subsidization of farm inputs is that it

keeps the cost of production low and production high which enables

the farmers to pass on some benefits to the consumers in the form of

food price subsidies. But of late, it has been argued by many

researchers that ever-increasing trends of those subsidies actually

divert funds which otherwise could have been utilized for building

social and physical infrastructures for the farm sector (Gulati &

Sharma, 1995, p. A94). Hence, there is a widely prevalent claim that

provisioning of input subsidies has drained-off funds leading to declin-

ing public farm investments (Gautam, 2015; Gulati &

Narayanan, 2003; Gulati & Sharma, 1995,2002; Gulati, Terway, &

Banerjee, 2018; Singh, 2014). Besides, the recent spell of growth stag-

nation in the agricultural sector has raised serious questions about the

effectiveness and rationality of those input subsidies against public

Received: 19 February 2020 Revised: 18 April 2020 Accepted: 28 July 2020

DOI: 10.1002/pa.2337

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https://doi.org/10.1002/pa.2337