Targeting Public Investment in Agriculture for Higher Private Investment in Eastern India

India’s eastern states comprising Bihar, Jharkhand, West Bengal and Odisha are way behind the agriculturally developed states in increasing public and private capital formation in agriculture. A significant upturn in the budgetary outlays in agriculture and irrigation (on both investments and input subsidies) has taken place from mid-2000 in each state. However, the value of Agriculture Orientation Index remains less than one from 1981–82 to 2013–14, albeit the lowest in West Bengal, indicating that the share of agriculture and irrigation in public expenditure does not commensurate with the weight of this sector in economic value-added. The eastern states must prioritise expenditure towards agriculture and irrigation and also raise the capital intensity in these sectors to stimulate private investment and improve crop productivity. The results obtained from a two-stage least squares regression analysis verify that public capital formation in agriculture in eastern states, determined by the availability of funds, per capita income and revenue deficit, ‘crowds in’ private investment in agriculture. Favourable terms of trade, support to agriculture through input subsidy and institutional credit are other important factors that have positive bearing on private capital formation. The per hectare public expenditure on input subsidy is double than that on capital formation in agriculture and irrigation. The respective states must balance expenditure between investment and input subsidy to facilitate agricultural growth and also synchronise such expenditure with farmers’ changing asset preference towards machinery, tractors and livestock.