Needed! A farm SPV to rescue agriculture

Now that the Budget-making exercise is underway, it may be relevant to examine a significant, yet largely unnoticed, recommendation of the National Commission on Farmers (NCF) headed by Professor M S Swaminathan.

It has suggested setting up of an infrastructure investment fund for farmers utilising the accumulated foreign exchange reserves or by raising resources through other means. This fund is suggested to be used chiefly for investment in infrastructure targeted at income generating schemes and improving marketability of farm produce.

The NCF has argued that a part of the huge reserves of foreign exchange can easily be used for creating the proposed fund. Besides, it has cited the example of how Rs 10,000 crore were made available in the 2005-06 Budget for funding viable industrial infrastructure projects through a special purpose vehicle (SPV).

As pointed out by the NCF, India is not the first country to use its foreign exchange reserves for infrastructure investment. China used foreign exchange worth $45 billion to fund a new institution called the Central Huijin Investment Company, like the Indian SPV, to fund the Bank of China and China Construction Bank for promoting infrastructure development.

In April 2005 again, China used these reserves for a $15 billion bailout package for a financially weak lending institution, the Industrial and Commercial Bank of China.

Of course, India already has a Rural Infrastructure Development Fund (RIDF), set up in 1995-96, being operated by NABARD. It is meant to provide loans to state governments for irrigation, electricity supply, marketing of agricultural products, rural roads and other rural development works. However, the corpus of this fund falls far short of the actual requirement of the rural sector of the size the country has.

Indeed, the need for a new fund to augment resources for creating supportive infrastructure for the farmers to enhance their business emanates also from the overall paucity of investment in agriculture. What is really worrisome is that private investment in agriculture, which had in the past been steadily growing, has now started to wane.

What is worse, this happens to be the result of another equally woeful trend of declining profitability of Indian agriculture. In the 1990s, the profitability of agriculture is reckoned to have fallen by 14.2 per cent due mainly to stagnation in yield growth and the prices of purchased inputs rising at a faster pace than those of the output.

As such, the private sector investment in agriculture, estimated in 2001-02 at Rs 38,215 crore (at 1999-00 prices) dropped steadily to Rs 38,018 crore in 2002-03, Rs 35,024 crore in 2003-04 and Rs 30,532 crore in 2004-05. The public sector investment during this period has, on the other hand, been fluctuating annually (See table).

Thus, the overall investment in agriculture decreased during this period from Rs 46,744 crore in 2001-02 to Rs 43,123 crore in 2004-05. As a percentage of the gross domestic product (GDP) at constant prices, the total investment in agriculture has witnessed a persistent downturn in these years, falling from 2.2 per cent of the GDP in 2001-02 to 2.1 per cent in 2002-03, 2.0 per cent in 2003-04 and steeply down to 1.7 per cent in 2004-05.

It is, therefore, essential not only to arrest and reverse the downtrend in investment but also to ensure that public and private investments complement each other.

The private sector can be efficient in areas like post-harvest produce management, processing, storage and minor irrigation (tubewells), but the government will have to invest in providing facilities needed to encourage it to invest in such ventures. A special fund devoted to this cause may, therefore, be useful.