Investment in agriculture: a cost-benfit analysis

Abstract

In a recent article in the Reserve Bank of India Bulletin (January, 1970), V M Jakhade and M V Gadgil have furnished some valuable data on costs and returns relating to farm investments in five districts selected from four States. The purpose of their study was to examine, from the viewpoint of commercial banks which are expected to finance this activity, the economic feasibility of investments in wells, pumps and tractors and the repayment capacity of the fanners undertaking these investments. The cost-benefit analysis done by Jakhade and Gadgil would lead one to the conclusion that in a surprisingly large number of cases, investments in wells, pumps and tractors were not economically worthwhile in the districts surveyed. If banks were asked to finance these investments, they would tend to reject many of these projects on economic grounds. Yet we know that there has been a boom in these investments. Are the farmers irrational? Or is the Reserve Bank study in error? It is argued below that it is the Reserve Bank study which is at fault, both in terms of its objectives and approach, and that if banks are asked to follow the criterion of project feasibility proposed in the study, the interests of neither private nor social welfare will be served.