Determinants of total factor productivity in Indian agriculture

Abstract

Past literature shows that technical change in agriculture is determined by non-price like government expenditure on R&D and infrastructure. But more recent literature also considers relative farm prices that would provide incentives for technical change. This has been reinforced by the present policy in the wake of reforms that reduce protection to trade and industry for advocating its prime role for technical change. This paper therefore develops a more comprehensive framework of price and non-price factors for studying this change. Among the non-price factors it separately considers government investment in R&D, inputs, credit, rural literacy, and marketing and banking infrastructure density in addition to land reforms. Contrary to the official view technical change is influenced more by non-price factors than relative farm prices. Moreover, these prices have deleterious impact on technical change as when they increase farmers consumption also increase with a consequent decline in their investment in acquiring new knowledge which seem to outbid their positive incentive effect. Among the non-price factors government expenditure on agricultural R&D is the single most important factor accounting for as much as 87 per cent of the variation in total factor productivity. And it has a marginal internal rate of return of over 20 per cent.