Supply Response and Investment in Agriculture in Andhra Pradesh

The study explored the response of aggregate farm output, input use, and farm investment decisions to output and input prices, wages, technological change, public investments, and climatic factors using district-level panel data of over 39 years from Andhra Pradesh. It confirms the low, short-run aggregate output supply elasticity of Indian agriculture as found in the literature. It validates the hypothesis that the relationships between public investment, financial institutions, and farm investment of labor and capital in agriculture have not changed over the years. The empirical estimates of aggregate output supply elasticity with respect to output price (0.2), roads (0.2), markets (0.11), and net irrigated area (0.05) are higher than previous findings for selected states in India. Aggregate agricultural output responds positively to credit availability (represented by banks) and canal irrigation, each with an elasticity of 0.01. The wage elasticity (0.3) on aggregate output is higher than price elasticity (0.2), indicating that the effects of rising wages outweigh the incentives offered by output price support. Climatic factors (e.g., rainfall) significantly affect fertilizer use and aggregate output while deviation from normal rainfall adversely affects aggregate output. The study substantiates previous findings that public investment in infrastructure and financial institutions respond to the agriculture potential and agro-climatic endowments of an area. A renewed focus, therefore, is required for better targeting of public investments in areas that are relatively resource poor and have harsh agro-climatic conditions for a more inclusive growth and rural poverty reduction.