Fiscal Policy and Agricultural Growth in India
Authors: Shaikh Mohd Mouzam

Fiscal policy has special significance in India, because it has a major impact on the economic development. Every year all citizens do eye on Central Budget of India. The main role of fiscal policy was to transfer private savings to cater to the growing consumption and investment needs of the public sector. Other goals included the reduction of income and wealth inequalities through taxes and transfers, encouraging balanced regional development, fostering small scale industries and sometimes influencing the trends in economic activities towards desired goals.

India's expenditure norms remained conservative till the 1980s. From 1973-74 to 1978-79 the central government continuously ran revenue surpluses. Its gross fiscal deficit also showed a slow growth with certain episodes of downward movements. In consonance with the tax reform plans, the sources of central government revenue shifted from indirect taxes towards direct taxes. In 2011-12, the share of direct taxes was about 47 percent of the central government's projected revenue while the indirect taxes contribution was around 37 percent.

Public investment in agriculture is the responsibility of the States, but many States has neglected investment in infrastructure for agriculture. By the end of the year 2010-11, the share of public investment in agriculture amounted to only about a quarter of the total investment. So, primarily, it was the investment by the private sector, by the farming community itself that drove growth.

The percent of fund allocation in five years plans for agriculture sector is decreasing and fund allocation for industry & other sector is increasing. The study conducted by Fan et. al (2008) suggests that the marginal returns to public investments are at least 5 to 10 times higher than through subsidies such as on fertilizers, power, and so on, insofar as the objective function is either agricultural growth or poverty alleviation. For the last two decades, we have seen a declining trend in government investment in the agricultural sector and an increasing trend in government subsidies. These subsidies, including those on fertilizer, irrigation and power amounted to about 2 per cent of the national GDP and 8-10 per cent of agricultural GDP (Gulati and Narayanan 2003). These outlays are in direct competition with more long-term capital investment in roads, rural education, and agricultural research.

To sustain long-term growth in agricultural production and therefore achieve a long-term solution to poverty reduction, the government should cut subsidies and increase investments in agricultural R&D, rural infrastructure, and education.


1. SHENGGEN FAN, ASHOK GULATI AND SUKHADEO THORAT., 2008, Investments, Subsidies and Pro-Poor Growth in Rural India, Agricultural Economics 39.
2. GULATI, A., AND NARAYANAN, S., 2003, 'The subsidy syndrome in Indian agriculture'. New Delhi: Oxford University Press.
3. Reserve Bank of India. 2014. Database on the Indian Economy.

About Author / Additional Info:
I have submitted my PhD thesis for external submission