Efficacy of public spending for agricultural development in India: a disaggregate analysis contextualizing subsidies vs investment debate

Abstract

PurposeThe primary objective of the present study is to figure out the relative effectiveness of alternate public expenditure with regard to agricultural development particularly in the context of input subsidies vis-a-vis investment. Besides, the authors also endeavour to test the applicability of crowding-out hypothesis in the present context.Design/methodology/approachInitially, unit root tests are applied for checking stationarity of the underlying data using Augmented Dickey-Fuller (ADF) and Kwiatkowski–Phillips–Schmidt–Shin (KPSS) tests. Further, the highly celebrated autoregressive distributive lag (ARDL) model is applied on annual time series data for the period 1991–2020 to investigate the long-run and short-run impact of the said relationship.FindingsThe authors observe that public investment is more productive than input subsidies for overall agricultural development. Besides, the findings document the existence of crowding-in hypothesis, i.e. complementarity between public investment and private investment in case of the agricultural sector in India.Research limitations/implicationsThe outcome of the research recommends to reprioritize state expenditure and reformulate agricultural policy regarding the public financing of agriculture. More to invest and less to subsidize seems a better policy intervention to achieve desirable outcomes from the Indian agriculture in the long run.Originality/valueThis study is novel in the sense that the subsidies vs investment debate is revisited in the current scenario of agricultural development so that resource allocation be optimized. To ensure robustness of the study, the authors specifically took four proxies of agricultural development, namely, productivity growth, private investment, food security and farmers’ income.

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“…Gautam [41] illustrated that in countries where subsidies are a major contributor to public spending, the effect on agricultural growth is negative. The study conducted by Zafar and Tarique [42] showed that public investment is a better alternative for agricultural development compared to subsidies. The analysis by Baig et al [43] on the effect of agricultural subsidies on agricultural productivity stated that the governmental focus should be on technological innovations in the agricultural sector to promote growth and development.…”