Supply response and investments in Andhra Pradesh agriculture

Slow growth of the agriculture sector in Andhra Pradesh and slowing down investment in agriculture in the last decade have raised concerns on the sustainability of agricultural growth in the state particularly against the backdrop of climate change. This study explores the effect of output prices and wages, technological change, public investments, and climatic factors on aggregate farm output, input use, and farm investment decisions. The study is based on district level panel data of Andhra Pradesh in 1970-1971 to 2007-2008. It uses the simultaneous equation model for estimating aggregate supply response and single equation fixed effect model for estimating investment behavior. Results confirm the low short-run aggregate output supply elasticity of Indian agriculture found in earlier studies. The study also confirms the hypothesis that the relationship between public investment, financial institutions, and farm investment of labor and capital in agriculture have not changed over the years. Specifically, the empirical estimates of aggregate output supply elasticities with respect to output price (0.2), road (0.2), market (0.11) and net irrigated area (0.05) are expected, but higher than earlier findings from aggregate supply response studies in India. Additionally, aggregate agricultural output increase with the increase in banks (0.01 elasticity) indicating the importance of credit. Also, public infrastructure like canal irrigation (0.01 elasticity) positively influences aggregate supply. Climatic factors such as rainfall affect fertilizer use and aggregate output significantly. The distribution of rainfall is critical since higher variation in rainfall negatively influences aggregate supply. Investments in tractors, pumpsets, and adoption of high yielding technology are strongly influenced by infrastructure variables like banks, market density, and literacy. To enhance long-term productivity growth and farm income of Andhara Pradesh agriculture, the study highlights the appropriate design of public investment strategy to relax infrastructure and production constraints facing the farm sector.