Investigating the Structure, Magnitude and Trends of Capital Formation in and for Agriculture: Country Case Study of Nepal

Draft Report

Submitted to

Food and Agriculture Organization of the United NationsRome, Italy

ByKrishna Prasad Pant – Team Leader/Agricultural Economist

Pitamber Chettri - EconomistJishnu Mohan Bhattarai - Statistician

Peoples’ Agriculture Research and Development Center(PARC Nepal)

Kathmandu, Nepal

March 2010

Table of Contents

Table of Contents........................................................................................................................iList of Tables..............................................................................................................................iiList of Figures...........................................................................................................................iiiList of Acronyms......................................................................................................................iiiAcknowledgment......................................................................................................................ivAbstract.....................................................................................................................................iv1. Background ...........................................................................................................................1

1.1.Scope of the Study.........................................................................................................21.2. Nepal's Agricultural Development and Food Security.................................................21.3 Policies and Programmes..............................................................................................51.4. The Informal Sector ....................................................................................................71.5 Market Reform..............................................................................................................8

2. Analytical Framework............................................................................................................92.1 Indicators of capital formation......................................................................................92.2 Data and Sources...........................................................................................................92.3 Method of analysis......................................................................................................11

3. Stocks, Trends and Shift in Composition of Agricultural Investments................................133.1 Capital formation in Agriculture.................................................................................143.2 Determinants of Capital formation at National Level.................................................223.3 Capital formation for Agriculture ..............................................................................24

4. Impacts of Capital Formation on Agricultural Production and Productivity.......................255 Capital Formation at Farm Level..........................................................................................27

5.1 Capital stock at farm level...........................................................................................275.2 Capital formation at farm level...................................................................................305.3 Factors affecting capital formation.............................................................................33

6. Alternative Business Model for Promoting Investment in Agriculture...............................367. Conclusions..........................................................................................................................36References................................................................................................................................37Annex.......................................................................................................................................39

i

List of Tables

Table 1.1: Growth rate of Agricultural GDPTable 1.2: Productivity of Major Cereal Crops Table 1.3: Production of Cash Crops Table Table 1.4: Foodgrain (cereals) production and Balance Table 1.5: Food Import Capacity in Selected Years Table 1.6: Registered Cottage Industries and Their Investment Table 1.7: Status of Currently Employed (aged 15 years and over by gender) Table 2.1 Sampling and sample sizeTable 3.1: Public expenditure in agriculture Table 3.2: Public expenditure in irrigation Table 3.3: Agriculture credit disbursed by Agriculture Development Bank Limited Table 3.4: Agriculture Equipment Capital Table 3.5: Livestock capital formationTable 3.6: Fruit trees, tea and coffee Table 3.7: Farm inputs Table 3.8: Agriculture labour force and AGDP Table 3.9: GFCF in agriculture Table 3.10: Capital formation per unit of labour and land Table 4.1: Multifactor productivity in Nepalese agricultureTable 5.1 Family size of sample householdsTable 5.2 Land and irrigation capital stock per householdTable 5.3 Machinery capital stock per householdTable 5.4 Livestock and poultry capital stock per householdTable 5.5 Fruit and other tree capital stock per householdTable 5.6 Agricultural capital in aggregateTable 5.7 Land and irrigation capital formationTable 5.8 Capital formation of machineries and equipmentTable 5.9 Formation of livestock capitalTable 5.10 Capital formation in fruits and other treesTable 5.11 Capital formation in agriculturalTable 5.12 Description of the variablesTable 5.13 Descriptive statisticsTable 5.14 Factors affecting capital formation

ii

List of Figures

Figure 3.1 Agriculture expenditureFigure 3.2 Irrigation expenditureFigure 3.3 Credit disbursed to agricultureFigure 3.4 Farm equipmentFigure 3.5 Livestock and poultry capitalFigure 3.6 Farm inputsFigure 3.7 Gross fixed capital formationFigure 3.8 Capital to labour and land ratiosFigure 4.1Capital and labour productivityFigure 4.2 Multifactor productivityFigure 5.1 Capital formation in agriculture

List of Acronyms

AGDP Agricultural gross domestic productionAPP Agricultural Perspective PlanCBS Central Bureau of StatisticsCFC Consumption of fixed capitalCPI Consumers price indexDOLIDAR Department of Local Infrastructure Development and Agricultural RoadsGDP Gross domestic productGCF Gross Capital FormationGFCF Gross Fixed Capital Formation Ha hectare (10,000 square meter)IC Intermediate consumptionK CapitalL LabourMOAC Ministry of Agriculture and CooperativesNEA Nepal Electricity AuthorityNLSS Nepal Living Standard SurveyPIM Perpetual Inventory MethodRs Nepalese rupees (1 US$ = Rs 72) TFP Total factor productivityTon metric ton

iii

Acknowledgment

Abstract

iv

1. Background

Nepal with per capita income of US$ 400 is among the poorest countries. Two-thirds of the labour force engages in agriculture that contributes 32 percent in the gross domestic product (GDP). Nearly 31 percent of the population lives below the nationally defined absolute poverty line and a dollar a day population is still larger. Poverty, food insecurity and hunger remain endemic to the country particularly in rural areas. Persistent poverty and food insecurity are often associated with, and can largely be attributed to sluggish growth of agriculture hovering around two to three percent and low land and labour productivities. The key to reverse the situation lies in generate growth in agriculture sector increasing the land and labour productivities which needs an increase in investment in agriculture and formation of capital in and for agriculture.

The growth in agriculture is the outcome of the combined use of factors of production. The factors of production are direct and indirect. Land, labor and capital are the main direct factors of production and management is the main indirect factor of production. The contributions of the direct factors of production in growth can be measured directly and separately. Intermediate inputs such as feed and fertilizers are also the direct factors of production. Any improvement in the direct factors of production is considered as capital formation.The technological knowhow is the indirect input that makes direct inputs effective and efficient (Solow 1956). Investment in human resource development increases efficiency of not only the labour but also that of the other factors of production like land and capital. Educated persons can develop and adopt new and innovative techniques for making the agriculture labor and capital efficient. It decreases the costs of production and also enhances quality of the production from the given factors. Total factor productivity (TFP), the measure of the role of technology in the production process, is the portion of output not explained by the amount of inputs used in the production process.

Improvement of capital formation and the production capacity is more important for agriculture that has challenge to feed the increasing global population and reducing the mass poverty. The capital formation occurs in agriculture when savings are used for investment in agriculture production. Capital formation in agriculture is still more important is developing countries where capital base is very poor constraining the production capacity. It is widely recognized that per dollar invested in agriculture capitals yields more than the dollar invested to other sectors. Agricultural capital formation takes place in the farms and other agribusiness units. It consists of the net additions to the fixed assets (fixed capital formation) such as land improvement, skill enhancement, irrigation canals and machineries and the inventories of intermediate inputs such as fertilizers and improved seeds. For example, modern varieties of the seeds released are the fixed capital formation whereas annual production of certified seeds is the inventory of immediate input. Net addition is the total fixed capital added less their consumption through the loss of their productive capacity due to wear, tear or obsolescence. The Consumption of fixed capital (CFC) which is to be compensated by acquisition of an equal amount of fixed capital in the current year. Fixed Capital Formation computed without netting for consumption of fixed capital is known as Gross Fixed Capital Formation (GFCF). The term Gross Capital Formation (GCF) refers to the sum of GFCF and change in inventories of intermediate inputs. The GFCF implies to the domestic producers’ investments, deducting disposals, in fixed assets during a given period. It also includes certain additions to the value of non-produced assets realized by producers or institutional units. Fixed assets are tangible or intangible assets produced as outputs from production processes that are used repeatedly, or continuously, for more than one year.

The primary reason investment contributes to growth and development is that it contributes to domestic capital formation, i.e increases capital/labour and capital/land ratio. The nexus between capital formation in and for agriculture and agricultural growth, and agricultural growth and food security and poverty alleviation are very well articulated in the literature. Further, domestic capital formation is fundamental for increasing production and Total Factor Productivity (TFP) and consequently for sustainable development and reduction in poverty. The study will investigate the

1

factors contributing to capital formation and identify the type and sequence of investments that are likely to be more effective in generating the appropriate mix of productive capital formation.

The broader measure of agricultural capital formation includes the capital formation in agriculture and the capital formation for agriculture. The present system of the National Accounts Statistics confines itself in the former one. The latter includes all the activities contributing to the agriculture wholly or partially such as factories for production of fertilizers and pesticides, development of infrastructure for improving the agricultural marketing such as rural roads and communication, expansion of the facilities for agricultural credit, capacity improvement for agricultural education and research and development.

The process of capital formation involves interrelated activities like saving, finance and investment. The volume of capital formation depends on the intensity and efficiency with which these activities are carried on (Abramowitz 1955). First, the saving, the activity by which claims to resources, that might be exercised in favor of current, consumption, are set aside and so become available for other purposes. The difference between the income and expenses affords the power to save (Marshall 1938). As per capita income grows the savings is expected to increase more than proportionately (Abramowitz 1955). Second, the finance, the activity by which claims to resources are either assembled from among those released by domestic saving, or obtained from abroad, or specially created, usually as bank deposits or notes, and then placed in the hands of investors. Finally, the investment, the activity by which resources are actually committed to the production of capital goods is also important for the capital formation.

1.1. Scope of the Study

The overall goal of the country case study is to investigate the structure, magnitude and trends of capital formation in agriculture, ( i.e K/L and K/land ratio); analyze major determinants of agricultural investment and capital formation, and provide policy options for promoting appropriate agricultural investment and capital formation for stimulating sustainable food production. The study also estimates capital productivity, labour productivity and total factor productivity. It also attempts to identify the factors affecting the capital formation.

1.2. Nepal's Agricultural Development and Food Security

1.2.1 Domestic Economy and Agricultural Growth

Agriculture is the backbone of the economy of Nepal. About four fifths of all Nepalese households are farm households. They derive nearly half of income from agricultural sources consisting of farm income and agricultural wage income. Engaging two-thirds of labor force, this sector contributes substantially to the GDP, although its contribution to the GDP is declining over the years. Its share was 51 percent in 1990, which declined to 38 percent in 2004, to 33 percent in 2007 and 31 percent in 2009 (MOF, 2009).

Agriculture is the major sector of employment. The sector provides employment to 69 percent of the active labor force out of which 64 percent are engaged in subsistence agriculture (CBS, 2008). The majority agriculture households produce multiple crops. But as one moves from southern part of the country to the north, the number of crops cultivated declines to mono crop in the high mountains.

Table 1.1: Growth rate of Agricultural GDP (%)2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/103.01 3.32 4.72 3.45 1.67 0.94 5.80 3.00 1.05Source: Economic Survey, MOF, 2010

2

Agriculture registered an impressive 5.80 percent growth in 2007. However, the growth rate declined to 3.00 percent and 1.05 percent in the subsequent years. The sustenance of a moderate to high growth rate in this sector depends largely on the monsoon pattern. The late monsoon rains in the years 2008 and 2009 led to dismal agriculture growth rates in these two years.

The major agriculture produce include cereals like paddy, maize, wheat, barley, and millet. Apart from cereals production, others include sugarcane, oil seeds, tobacco, potato and jute. Milk, fruits and vegetables, meat, eggs, and fish are also produced. Agricultural production is mostly dominated by crop sub-sector which accounts for nearly two-thirds of AGDP. Cereal crops account for over 80 percent of annual cropped area wherein paddy alone occupies 40 percent followed by maize (about 20 percent) and wheat (about 17 percent). Cropping intensity is low at 1.8 on the average. Farms operate in a mixed farming system of crop and livestock interfacing forest. Large livestock population provides sources of meat, milk, draft power and farm yard manure. Production of staple food grains is the choice of common priority for the farms, especially production of paddy wherever it is possible to grow (MoAC, 2009). 1.2.2 Changes in agriculture and food security

Over the years the Nepalese economy has been undergoing some structural changes. These changes have led to the shrinkage of agriculture relative to the secondary and tertiary sectors of the economy. These changes have been seen in agriculture as well. The Commercialization and diversification taking place in recent years have been advantageous for this sector.

The productivity of especially the cereal crops has increased, albeit, marginally. Productivity of cereal crops, especially paddy is dependent largely on the monsoon, due to lack of irrigation facilities. The productivity of paddy has remained below 3.0 tons/ha, although marginal increments have been observed. Other major crops, maize and wheat also do not fare well. Their productivity levels are below 2.5 tons/ha.

Table 1.2: Productivity of Major Cereal Crops (tons/ha) Paddy Maize Wheat Barley Millet

1995/96 2.39 1.68 1.55 0.95 1.09 1996/97 2.46 1.65 1.59 1.00 1.11 1997/98 2.42 1.71 1.55 1.00 1.09 1998/99 2.45 1.68 1.69 1.00 1.10 1999/00 2.59 1.76 1.79 1.10 1.12 2000/01 2.70 1.80 1.81 1.08 1.09 2001/02 2.73 1.83 1.89 1.11 1.09 2002/03 2.67 1.88 2.01 1.15 1.09 2003/04 2.86 1.91 2.09 1.09 1.09 2004/05 2.78 2.02 2.13 1.10 1.12 2005/06 2.72 2.04 2.07 1.06 1.11 2006/07 2.56 2.09 2.16 1.06 1.07 2007/08 2.77 2.16 2.22 1.07 1.09 2008/09 2.90 2.20 1.93 0.90 1.10 2009/10 2.72 2.12 2.13 1.04 1.12

Source: Economic Survey, MOF, 2010

Production of cash crops, namely pulses, fruits and vegetable registered increments over the years. The increase in the cash crops has led to the shift in agricultural practices – from food crops to high value items of fruits and vegetables.

3

Table 1.3 Production of Cash Crops (1000 tons) Pulses Fruits Vegetables1995/96 214.85 367.49 1,327.29 1996/97 223.00 428.23 1,350.00 1997/98 215.70 425.60 1,412.20 1998/99 228.84 456.00 1,342.57 1999/00 237.32 447.33 1,489.66 2000/01 243.24 487.33 1,652.98 2001/02 250.40 473.62 1,738.09 2002/03 256.90 518.86 1,799.97 2003/04 265.30 511.40 1,890.10 2004/05 271.30 548.00 2,081.79 2005/06 267.45 535.45 2,190.10 2006/07 274.37 575.09 2,298.68 2007/08 269.77 630.56 2,538.90 2008/09 255.38 686.21 2,754.40 2009/10* 262.35 705.00 3,001.00

Source: Economic Survey, 2010

Looking at the food availability against the food requirement based on the per capita calorie intake for the past seventeen years the country seems to be food surplus only in seven out of seventeen years.

Table 1.4: Foodgrain (cereals) production and balance (1000 tons)Year Production Requirement Balance1991 3373 3562 -1891992 3292 3634 -3421993 3585 3724 -1391994 3398 3883 -4851995 3914 3948 -341996 3973 4079 -1061997 4027 4178 -1511998 4098 4279 -1811999 4452 4383 692000 4513 4430 832001 4543 4463 802002 4641 4566 752003 4884 4671 2132004 4943 4780 1632005 4869 4891 -222006 4737 5005 -2682007 5195 5173 222008 5160 5293 -133

Source: MOAC,2009

1.2.3 Capacity to finance food imports

4

The role of imports is to fill the gaps between production and consumption. The capacity to finance food imports has been assessed through the ratio of value of net food imports to non-food exports. The ratio for Nepal indicates that the availability of foreign exchange to finance food imports is not a constraint and the country’s capacity to finance food imports through export earnings has improved after the country embarked on an active liberal trade policy regime (Table 1.5) The deteriorating situation in 2005/06 and 2006/07 could be explained by the domestic security and law and order situation which have adversely affected industrial production.

Table 1.5: Food Import Capacity in Selected Years (%)

Year 1990/91

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09

Net Food Imports/Non-Food Exports

13.03

2.39

2.96

7.46

4.78

5.47

11.51

11.16

5.80

0.70

Source: NRB, 2009.

1.3 Policies and Programmes

Government policies, strategy and priorities are reflected in the plan documents of Nepal. The Plan documents of Nepal have always given importance to the development of the agricultural sector. High priority has been given to (a) the provision of production inputs in irrigated areas for food production, and around the processing plants for supplying industrial raw materials; (b) concentration of efforts for the production of perishables such as fruits, vegetables, milk and fish in accessible areas; (c) protection of tenants through rent fixation; (d) expansion of irrigation, particularly hill irrigation; and (e) afforestation through a participatory approach (NPC 1985, 1992, 1998, 2002, 2008). Following the preparation of the Agriculture Perspective Plan (APP) and its endorsement by the government in 1995, the Three Year Interim Plan, 2008 has also emphasized on the crucial importance of the agricultural sector in the overall strategy of poverty alleviation and economic transformation by adopting an agriculture led growth strategy. The vision is to modernize and commercialize the agriculture sector as the central policy for the development of agriculture.

The overall goal of agriculture sector in the Interim Plan has been to achieve broad based, gender inclusive and sustainable agricultural growth. In achieving the overall goal, the agriculture sector emphasizes the five major objectives; (a) toincrease agricultural production and productivity; (b) to maintain food sovereignty by ensuring food security; (c) to make the agriculture and livestock sector competitive by transforming subsistence agriculture into commercial agriculture, (d) to increase employment opportunities for rural youths, women, Madhesis, persons with disability, Muslims and deprived groups, and (e) to conserve, promote and utilize agricultural bio diversities through the development and dissemination of environment friendly technologies.

1.3.1 Resource Allocation

In terms of allocation of public sector resources, the agricultural sector (broadly defined to include agriculture, forestry, fisheries and irrigation) was allocated about 13.84 percent of the total allocation in the Tenth Plan (2002-2007). The allocated share is maintained in the Three Year Interim Plan (2008-1010) at 12.2 percent of the total planned outlay. It is generally perceived that the public sector investment in agricultural sector is not increasing in real term. The particularly disadvantaged area is the agricultural research.

1.3.2 Rural Industrial Development

5

Cottage industries are one of the oldest industries in Nepal. For many years self-reliance had been a traditional practice for different communities living in far flung areas within the country. Because of the rough terrain and limited accessibility to different villages and communities, and closed nature of the rural economy the people required to produce their daily needs for self-reliance. Handicrafts and cottage industries dealing with consumer goods have been prevalent in Nepal since ancient times. Majority of cottage industries in Nepal are based on local resources. So such industries could utilize the rural resources. Moreover, such industries are run without formally educated highly skilled labor force. Skill has been developed through learning by doing approach. Village based cottage industries even today are the main suppliers of agricultural tools like ploughs, spades, sickles in the rural areas.

More recently cottage and small industries operating with locally available raw materials, own technology and small capital investment, have significantly contributed to economic and social upliftment at the local level. It seems that the role of such enterprises can be vital in improving the living standard of the extremely deprived groups, women, and the backward communities. In addition, these are expected to contribute to poverty alleviation by increasing self-reliance with the creation of opportunities for self-employment and employment. Cottage industries in rural areas are closely related to agriculture. Such industries cover silk production, horticulture and fruit processing, husbandry and dairy products. Poultry farming, fishery, tea and coffee gardening are some other important cottage industries types. Apart from agro based industries there are also energy based industries which generate energy from water resources, and bio-gas. Stone and sand excavation industries are located near urban areas. Small tourist lodges, motels, resorts, tea and eating places in the trekking routes are some examples of tourist related cottage industries

The Industrial Enterprise Act 1992 and Industrial Enterprise (Amendment) Act 2000, defines cottage and small-scale industries as the traditional industries utilizing specific skill or local raw materials and resources, and labor intensive and related with national tradition, art and culture. Small scale industries on the other hand operate mainly with the help of outside labor. The total capital investment ranges up to NRs.30 million. Such industries are located both in rural and urban areas. These are operated as full time occupation. Cloth and blanket weaving, wood carving, oil pressing and rice mills, agro-based industries are some examples of small–scale industries.

Table 1.8 gives information on the number of registered cottage and small industries. The information shows that the majority of cottage and small industries are registered as private firms. In rural areas registration practice is very much limited. This might mean that there may be more cottage industries than in the official statistics. The table further gives information on the registered units. But the data does not reflect the status of their operations. There exists no effective mechanism to ascertain the operation status of such registered units.

Realizing the importance of the sector for addressing the problems of rural poverty, inclusion, and unemployment the Government of Nepal had made provisions in the Three Year Interim Plan (2007-2010) for opening regional offices for an easy entry of small investors to the capital market along with simplification of company administration; trainings on entrepreneurship and skill development as a means of income generation; expansion of micro enterprise development program to all the 75 districts; programs to provide skill development training to 80,000 people in all the districts of the country; and establishment of Rural Industry Development Fund .

Table 1.6: Registered Cottage Industries and Their Investment

6

No of Industries Registered Fixed Capital Investment (Rs. in Ten Million)

Private PartnerShip

Total

Private PartnerShip

Total Firm Limited Firm Limited

1995/96 8638 544 468 9650 385.00 289.00 48.00 722.00 1996/97 7404 346 446 8196 408.00 136.00 60.00 604.00 1997/98 8669 511 470 9650 478.00 347.00 71.00 896.00 1998/99 8773 533 684 9990 510.00 364.00 88.00 962.00 1999/00 8889 689 549 10127 665.00 324.00 45.00 1,034.00 2000/01 8368 542 407 9317 455.00 238.00 39.00 732.00 2001/02 8851 513 526 9890 411.00 291.00 70.00 772.00 2002/03 6778 340 454 7572 502.38 53.14 35.48 591.00 2003/04 5985 600 548 7133 462.27 102.79 46.94 611.00 2004/05 6972 559 499 8030 879.03 153.28 68.42 1,100.73 2005/06 7322 536 372 8230 277.75 69.86 29.39 377.00 2006/07 4261 309 243 4813 255.60 56.80 43.25 355.65 2007/08 *5853 343 308 6504 344.80 64.22 58.49 467.51 2008/09 **10825 624 362 11811 734.00 149.00 109.00 992.00 2009/10 ** 4871 452 212 5535 373.00 77.00 57.00 507.00

* First eight months of fiscal year 2007/08 (based on the data of 75 districts)

** First eight months of fiscal year 2008/09 (based on the data of 75 districts)

*** First eight months of fiscal year 2009/10 (based on the data of 27 districts)

Source: Department of Cottage & Small Industries, 2010

1.4. The Informal Sector

The informal sector continues to play an important role in the absence of strong organized sector. The informal sector is characterized by unorganized, non-regulated mostly legal but unregistered small enterprises. This sector has large number of small scale production units and service activities that are individually or family owned. They use family labor and simple technology. The self-employed are unskilled have little formal education and lack access to financial services. Majority of the population engaged in the informal sector are self-employed. In the rural area households many work in sectors allied with agriculture like bee keeping, and livestock raising leading to small dairies. Other activities relate to operating small shops, tailoring, shoe repairing and black smithy. In urban areas individuals work as mechanics, carpenters, small artisans, barbers, tailors, vendors, and domestic helpers. Most workers entering this sector are migrants from rural areas who are unable to find work in the formal sector.

Table 1.7 shows the official statistics on the employment in the formal as well as informal sectors. The table reveals that the majority of the people are employed in the informal sector represented by market agriculture, subsistence agriculture, craft and elementary occupations.

Table 1.7: Status of Currently Employed (aged 15 years and over by gender)(in %)Employment Total Male Female

1 Legislators, senior officials 0.60 1.10 0.20 2 Professionals 1.70 2.80 0.80 3 Technician and assoc. profess. 2.00 2.70 1.30 4 Clerks or office assistants 1.00 1.80 0.30 5 Service workers 7.30 9.30 5.50

7

6 Market agriculture 3.10 2.70 3.50 7 Subsistence agriculture 64.00 52.90 73.70 8 Craft and related trades workers 8.40 11.60 5.50 9 Plant and machine operators 1.40 2.70 0.20 10 Elementary occupation 10.50 12.20 9.10 11 Armed forces 0.10 0.10 -

100.00 100.00 100.00 Source: Report on the Nepal labour force survey, 2008

1.5 Market Reform

Nepal developed an Agricultural Perspective Plan (APP) (1995 - 2014) with the assistance of the Asian Development Bank. The plan, however, does not include strategies and action plans for the development of agricultural market and strengthening of distribution system. Marketing of Agriculture products specially cereals are still controlled by big wholesalers or mill owners in the Terai where both petty farmers as well as big farmers sell their products. There are also weekly markets both in the Terai and the Hills where agriculture products are bought and sold. More recently there are collection centers near road heads as well as urban centers where horticultural products manly fruits and vegetables are collected and sold to the retailers as well as consumers buying in bulk. In the absence of any rules and regulations, there seems to be unnecessary tiers of intermediaries between producers and consumers. Under the circumstances benefits are reaped by the middlemen at the expense of the producers and the consumers.

The Terai is considered to be the bread basket of Nepal. This is where the majority of agricultural products are traded. The agricultural crops, mainly cereal, are either acquired by the wholesalers and/or the mill owners. The products reach the consumers through a myriad of middlemen. Small farmers also trade their products in weekly markets – the Hat Bazars organized throughout the Terai Belt.

The development of market systems in the Hills is limited to urban and semi-urban centers. Weekly Bazars (Hat Bazars) are a comparatively new form of marketing introduced in the Hill and Mountain population centers. The local produce of the small farmers are traded in such markets. The bulk of food items are brought to the established population centers from the Terai.

In Nepal agriculture market reforms does not exist in a strict sense. Although The national-level master plan was formulated with the focus on the areas of: (a) promoting commercialization of agricultural products; (b) systematization of distribution flow; (c) institutional strengthening; (d) improving international competitiveness. Subsequently, a short-term action plan was developed for selected priority areas. This action plan consists of 8 components: (1) establishment of marketing policy; (2) establishment of commercial zones; (3) promotion of external trade of agricultural products; (4) integration and streamlining of wholesale activities; (5) defining functions of the new wholesale market and distribution centers; (6) establishment of market management system; (7) research and test operation by a pilot project; (8) education/training. So far, however, the government has not come up with any specific legislation for reforms of the existing market structure.

Although, efforts have been made toward reforms of the existing marketing mechanisms in the country, such attempts are sporadic and donor driven focused on particular types of commodities. The Plan, although includes areas of reforms, the marketing channel of the country is yet not fully developed and still unregulated. This is because of the absence of an effective implementation system.

8

2. Analytical Framework

Major indicators of capital formation in agriculture and for agriculture are first identified. Then the data requirements are assessed and their sources explored. Finally the methods of analysis are proposed.

2.1 Indicators of capital formation

We use following indicators of capital formation in agriculture.

a) Contribution of agriculture to the GDP using the System of National Accounting (SNA 1993). National Accounts Statistics is the authentic source for estimates of capital formation in different sectors of the economy including agriculture.

b) Capital formation (K) is estimated from Central Bureau of Statistics (CBS) bench marking survey 2004/05, Nepal Living Standard Survey (NLSS) 2003/04, Statistical Information in Nepalese Agriculture published by Ministry of Agriculture and Cooperatives (MOAC) and household survey. A household survey of 461 households from three districts, Dolakha from high mountains, Gorkha from middle mountains (commonly referred as hills) and Kapilvastu from Terai, are used to measure the variables like land and irrigation, farm machineries and equipments, livestock and poultry and fruit and fodder trees. Capital decay rate of CBS is used for adjusting to the current level of capital.

c) Agriculture labour force (L) is obtained from CBS Nepal Labour Force Survey 1998 and 2008. Data on labour force is also obtained from Agriculture Census 2001/02 and Population census 2001 d) Capital labour ratio (K/L) – capital and labour indexes estimated above are used to estimate capital labour ratio (Rs/labour).

e) Agricultural land– data for agricultural land is obtained from MOAC and agriculture census 2001.

f) Capital land ratio (K/Land) - capital and agricultural land indexes estimated above are used for estimating the capital land ratio.

g) Public investment in agriculture - data from the government Red Book of Ministry of Finance are accessed for this purpose. The public expenditure is disaggregated into expenditure on capital expenditure and current expenditure.

h) Human capital formation - number of extension workers, educated persons weighted by year of education.

i) Productivity indices –are estimated for labour productivity, capital productivity, and total factor productivity (TFP) in agriculture.

We use agricultural roads constructed and rural electrification as the indicators of capital formation for agriculture.

2.2 Data and Sources

The data were obtained from secondary and primary sources. The major secondary sources include the publications of Central Bureau of Statistics (CBS), Central Bank and Ministry of Agriculture and Cooperatives (MOAC). Household level data are obtained from a survey of 461 farm households stratified into high mountain, middle mountains and terai in the proportion of the population under these strata. The data used for computing the TFP are annual crop production, average crop price, land

9

use by crop, total land available for farming, capital investment, cost of capital, rate of use inputs and per unit cost of inputs. Gross Domestic Product (GDP) and agriculture GDP are obtained from the System of National Accounting. Data necessary to estimate the total capital formation (K) are obtained from CBS bench marking survey (2004/05), NLSS (2003/04), and Statistical Information in Nepalese Agriculture published annually by the MOAC. Agriculture labour force (L) data are obtained from published information of CBS Nepal Labour Force Survey 1998 and 2008. Data on labour force are also obtained from Agriculture Census 2001/02 and Population census 2001. The proxy for the agriculture labor is often the economically active population in agriculture. Technical education in agriculture, school enrollment ratio and life expectancy of people are used for estimating labour force. The physical capital includes the number of tractor, iron plough, carts, thresher, irrigation instruments and sprayers. Since the agricultural census provides the number of agricultural capital, the historic prices of large capital such as for tractor and thresher are obtained from Department of Custom and retailer auto shop. The iron ploughs, tractors, thresher purchased within a year are valued at the prices at which the assets were acquired. For the assets purchased earlier the farmers are asked to value them.

Livestock capital includes number of cattle, buffaloes, milking cow, milking buffaloes, laying hen, laying duck etc. in given time at current price. Data on agricultural land are obtained from MOAC and agriculture census 2001.

Data on public investment in agriculture are obtained from the government Red Book from Ministry of Finance. The public expenditure are disaggregated into capital and current expenditures. It is hard to find data on private investment in agriculture. The loan disbursed by the Agriculture Development Bank Limited for agricultural purposes are taken as a proxy for the private investment. The bank credit is disaggregated into credit for agricultural tools and machinery, irrigation, agribusiness, forestry-herbs-horticulture and tea and coffee.

The data on agricultural roads are obtained from Department of Local Infrastructure Development and Agricultural Roads (DOLIDAR). Rural electrification data are obtained from Nepal Electricity Authority (NEA).

The farm level study is based on household survey of 461 households from three districts – namely Dolakha from the mountain, Gorakha from hills and Kapilvastu from Terai. These districts are selected for their typical nature among the districts in the respective regions. Following the population distribution pattern the sample size is distributed more to the district from the terai region than from the hills and mountains.

Table 2.1 Sampling and sample size

Physiographic region Sample district Sample size Percent

1 Mountain Dolakha 66 14.32

2 Hill Gorkha 183 39.70

3 Terai Kapilvastu 212 45.99

Total 461 100.00

The primary data are obtained from survey of 461 households from three districts, one in each physiographic region of the country. The survey measured the variables like farm machineries and equipments, irrigation structure, livestock and poultry and fruit and fodder trees. Land improvement and reclamation are also be surveyed. The machinery data like tractor, iron plough, tubewell, pump sets, thresher and sprayer are surveyed. Survey is also done for livestock capital like bullock, cows, buffaloes, goat, sheep and poultry. Fruit orchards, coffee plantations and tea garden are also surveyed.

10

2.3 Method of analysis

The gross capital stock of agricultural equipment is estimated from the Perpetual Inventory Method (PIM). The PIM generates an estimate of the capital stock by accumulating past purchases of agricultural equipment and deducting the value of agricultural equipment that have reached the end of their service lives.

There are different models to measure the contribution of productivity growth. However, three different types of economic models have been used widely to investigate production growth: index numbers or growth accounting techniques, econometric estimation of production relationships and nonparametric method (Zepeda, 2001). The basic concept in productivity measurement is total factor of productivity (TFP), the ratio of an index of aggregate output to an index of aggregate input. Changes in TFP can be decomposed into components such as change in technical efficiency, scale and state of technology. The growth accounting approach uses index number measure of TFP to quantify the components of productivity change. Alternatively, econometric methods can be used to estimate the components of TFP using production, cost and profit functions. Each approach can be used to measure aggregate agricultural output or TFP.

2.3.1 Inputs and production indices

The study constructs TFP estimates using secondary data from National Accounts Section of Central Bureau of Statistics (CBS) and Economic Analysis Division of Department of Agriculture. Official database are available from 1994/95 to 2008/09 in the yearly basis. The TFP can be estimated using index approach, econometric approach and linear programming. Among them the index approach is widely used due to its simplicity and straightforwardness for policy relevance. For the choice of index number, TFP is estimated using Laspeyres indexes.

Laspeyres index = Σ(PitQio)*100/(PioQio) (1)Where, Pit = price of item i (i=1, ……,m) in period tPio = price of item i (i=1, ……,m) in the base periodQio= Quantity of item I purchased in the base period

The index is used to examine agricultural investment, capital formation and its impacts on agricultural production and productivity. Since index number or growth accounting techniques imposes strong assumption about the technology, econometric approach will also be used in this study.

2.3.2 Method of Measuring the TFP

(a) Labour productivity based on gross output = Quantity index of gross output/Quantity index of labour input (2)

(b) Multifactor Productivity (TFP)= Quantity index of gross output/Quantity index of combined inputs (3)

The econometric approach has the advantage of being the statistical and it permits hypothesis testing and calculation of confidence intervals to test the reliability of the model estimated. Again, this method measures the marginal contribution of each category of inputs to aggregate agricultural output. For instance, we can determine the impact of a one-percent increase in fertilizer use on overall agricultural output, holding all other inputs constant.

After estimating the total factor of productivity for each year, this study focus on how one or several of these factors might be driving agriculture growth. For this purpose the change in TFP is the

11

dependent variable and it is regressed with the explanatory variable such as conflict, human capital, policy (budgetary policy that affects the R&D, political stability).

2.3.3 Gross Fixed Capital Formation

Gross Fixed Capital Formation (GFCF) in agriculture at government and private sector are obtained from Central Bureau of Statistics. CBS measured the GFCF by the total value of producer's consumption, less disposal of fixed assets1 during the accounting period plus certain addition to the value of non-produced assets realized by the productive activity of institutional units. The activity of GFCF is restricted to institutional units in their capacity as the producers. It includes the value of new or existing capital goods such as those purchased or acquired through the barter, produced on own account and acquired as a result of capital transfer in kind received by resident producers in the country during the accounting period. The GFCF includes in particular, the following (CBS 2010, personal communication):

a) Capital repair, major renovation, reconstruction or extensions that significantly change characteristics of capital goods, their size, capacity or normal life.

b) Capital goods and services incorporated into the land to improve it or prepare it, for productive use (clearing draining, planting, and drilling and so on).

c) Changes in livestock for milking, breeding and draught.d) Transfer costs that are incurred when ownership of existing capital goods, land or natural

assets is transferred (agents' or lawyers, fees)e) Purchases of dwelling by households irrespective of whether the dwelling are rented out or

occupied by the owners.f) Construction of military facilities that can be converted to civilian use such as airfields,

docks, roads, hospitals and so forth.g) Trees that are cultivated in plantation for the product they yield year after year such as fruits

trees, rubber trees, palm tree and so forth.

Farmer2 usually improves the land field or parcel to make productive and expansion of area. This type of activities must be kept under the repair and maintenance of field in agriculture. Ordinary maintenance and repair undertaken by any households to keep fixed assets (like land) in good working order are intermediate consumption (IC). However, major improvements, additions or extension to fixed assets, both machinery and structures, which improve their performance, increase their capacity or prolonged their expected working lives count as GFCF (CBS, 2004).

GFCF in animals is equal to the difference between the values of the entries and disposals of the asset. Animals for slaughter are recorded under changes in stocks.

GFCF in Animal = Birth of new livestock + natural growth of until the adulthood – disposal for slaughter + balance of external trade (Imports – exports) + balance of internal trade of live animal. (4)

GFCF is evaluated under the cattle, buffaloes, milking cows, milking buffaloes, Yak/Nak/Chauri, laying hen, laying duck. One the other hand, it excludes by definition such as poultry and other

1 Fixed assets are produced assets (mostly machinery, equipment, and building) that are used repeatedly or continuously in production over several accounting periods (more than one year). Hence the boundary includes not only produced assets used in production, but also non-produced and particularly natural assets (such as mineral and timber).2 A farmer is a person who either farms at least 125 sq meter of cultivated land, or keeps two livestock or 20 poultry birds.

12

animals such as rabbit since such animals live less than one year. GFCF for animal products is estimated at current prices.

CFGF for plantations is estimated from the cultivated fruits production and cultivated forest. In Nepal the GFCF in plantation is calculated from the following items.

GFCF in plantations = Number of Cultivated fruits production + Number of cultivated forest production + Number of Fodder trees. (5)

The National Section of Central Bureau of Statistics estimates GFCF from number of fruits trees by type of fruits from the data obtained from Ministry of Agriculture and Co-operatives in time series format. The cultivated fruits refers to the orange, lime, lemon, sweet orange, other citrus, mango, banana, guava, Jackfruits, pineapple, litchi, arecanut, coconut, apple, pear, plum, papaya, pomegranate, walnut peach, apricot, persimmon, and almond. Then, change in number of these fruits is computed from subtraction from previous year. After finding the value from subtraction for each year for each fruits tree, these values is multiplied by value of trees. Thereafter, annual value of fruits in current price is obtained from addition of each fruits types at the same year.

The GFCF for forest is estimated from the community, private and leasehold forest. The community and lease forest was computed from community and lease forest survey under benchmarking surveys 2004/05. The GFCF was estimated from sample from 13394 community forest and leasehold forest from sampling method. In the case of private forest, it was estimated from the tea, coffee, fodder and bamboo (CBS 2010).

The bureau computed the private Gross Fixed Capital Formation for agriculture sector under the following headings. It includes the equipment (tractors, handling equipment, other equipment, engine, green house equipment, and metal hanger), buildings (cattle sheds, stables, sheep folds, pig units, green houses and other buildings), irrigation, drainage of the land. These data are obtained from the National Census of Agriculture.

2.3.4 Factors affecting capital formation

The factors affecting capital formation at the farm level are assessed using following linear function.

Capital formation (Rs) = ao + β1M + β2H + β3E + β4C + β5I + β6N + β7R + β8L + β9K + v (6)

Where M is for mountain areas; H for hill areas; E for education in the household; C for loans taken by the household; I for agricultural income of the household (other than household consumption of farm produce); N for non-agricultural income; R for remittance (and current transfer from abroad); L for agricultural labour force and K for capital stock in the farm including the land irrigation structure, livestock, poultry, fruit trees and fodder trees. As usual, v is the error term and the β i‘s are the coefficients to be estimated.

3. Stocks, Trends and Shift in Composition of Agricultural Investments

This section deals with the trends and stocks of investment, and likely sequence or shifting composition of investment in agriculture. The analysis is based on the concept and definition of the capital formation discussed above and the secondary data obtained from national level statistics. The household level capital formation in and for agriculture are presented in Section 5 using farm household data. The secondary data were collected on agricultural investments by both public and private sectors at aggregate level.

13

3.1 Capital formation in Agriculture

The agricultural expenditure that was Rs 1.56 billion in 1990 has increased to Rs 6.27 billion in the year 2007/08 at current price (Table 3.1). The growth of the public expenditure in agriculture remained stagnant till the year 2005/06 and the growth occurred only during the last three years. The agricultural expenditure was 13.0 percent in 1990/91 which decreased to minimum (3.2 percent) in 2003/04 and tuned up slowly to 51.2 percent in the year 2007/08. It means in recent years agricultural expenditure is regaining its earlier position after one and a half decades of low investment.

The agricultural investment is categorized into current expenditures and capital expenditures. The regular nature of the expenditures like salary and maintenance are under current expenditures whereas the expenditures on the durables that last more than one year are categorized into the capital expenditure. Most of the budget on the capital expenditure goes to the computers, photocopy machines, furniture, vehicles and buildings mostly for official purposes.

The capital expenditure was 20 percent of the total agricultural expenditures in 1990/91 and decreased continuously to only nine percent in 2004/05. Then it tuned up growing rapidly to over 50 percent in the year 2007/08. The agricultural expenditure and its deseggration to current and capital expenditures are presented in Figure 3.1.

Table 3.1: Public expenditure in agriculture (Rs million)Year Saving Agriculture current

expenditureAgriculture capital expenditure

Total Agriculture expenditure

1990/91 11514 1254 314 15681991/92 16207 1053 263 13161992/93 23172 1698 425 21231993/94 29276 1870 467 23371994/95 32465 2162 541 27031995/96 34426 1834 458 22921996/97 39162 1572 393 19651997/98 41438 1780 445 22251998/99 46505 1696 323 20191999/00 61027 1695 544 22392000/01 51501 1882 552 24342001/02 43600 2191 505 26962002/03 42141 1784 187 19712003/04 63064 1856 160 20162004/05 68110 2117 218 23352005/06 58757 2438 265 27032006/07 71902 2766 1374 41402007/08 91716 3058 3212 6270

14

Figure 3.1 Agriculture expenditure

The public expenditure that was Rs 1124 million in 1990/91 increased to Rs 4089 million in the year 2007/8 at current price (Table 3.2). Over 80 percent of the public expenditure goes to capital expenditure and the current expenditure is small.

Table 3.2: Public expenditure in irrigation (Rs million)Current expenditure in irrigation

Capital expenditure in irrigation

Expenditure in irrigation

1990/91 146 977 11241991/92 289 1932 22211992/93 263 1763 20271993/94 421 2819 32411994/95 344 2305 26491995/96 389 2600 29891996/97 268 1796 20641997/98 330 2212 25421998/99 327 2725 30521999/00 362 2799 31622000/01 400 3685 40852001/02 271 2914 31852002/03 504 1841 23452003/04 401 2071 24722004/05 411 1922 23322005/06 404 2463 28662006/07 451 3013 34642007/08 484 3605 4089

The high level of fluctuations in capital expenditure in irrigation are presented in Figure 3.2. The current expenditure does not fluctuate much.

15

Figure 3. 2 Irrigation expenditure

The public expenditure in agriculture is expected to raise the private expenditure and capital formation in agriculture. The private sector capital formation depends on the investment by the private sector. But, records of private sector expenditure in agriculture and irrigation are not available. The agriculture credit disbursed by Agriculture Development Bank Limited to the private sector is taken as a proxy for the private sector capital formation. The agricultural credit disbursed to agribusiness, machine tools, irrigation and tea coffee plantation are presented in Table 3.3. The agricultural credit that was Rs 3,434 million in the year 1994/95 increased to Rs Rs 21,136 million in the year 2008/09 at current price. But, the increase is mainly for farming of non-capital nature. The credits on irrigation and tea coffee plantations have gone drastically down indicating that the capital formations in these areas are going down over the years. Another important area of capital formation is agriculture is purchase of machine and tools. The loan disbursement in agribusiness is increasing over the years. It means there is some capital formation in agribusiness.

Table 3.3: Agriculture credit disbursed by Agriculture Development Bank Limited (Rs million)Agribusiness credit

Machine tool credit

Irrigation credit

Tea coffee credit

Others Agriculture credit

1994/95 564 417 257 52 2143 34341995/96 625 463 183 44 2582 38971996/97 724 436 158 45 2660 40231997/98 829 472 108 42 2978 44301998/99 947 707 116 84 3709 55621999/00 1182 854 173 138 4738 70852000/01 1301 1016 54 151 5568 80902001/02 1600 877 91 97 6224 88892002/03 1844 744 37 73 7418 101152003/04 1690 582 13 41 7824 101492004/05 1485 517 18 36 9761 118172005/06 1550 366 15 24 10902 128562006/07 1802 434 17 27 12370 146502007/08 1961 502 10 5 16052 185302008/09 1961 502 10 5 18659 21136

16

The credit disbursements by the Agricultural Development Bank Limited to different areas in agriculture are presented in Figure 3. It is clearly seen that the loan disbursement in agribusiness stagnated and that in other areas decreased after the year 2002/03. The decrease in the rate of private sector capital formation during this period can be attributed to the heightened armed conflict.

Figure 3.3 Credit disbursed to agriculture

During nearly last two decades the capital formation in agriculture is not encouraging. The agricultural capital expenditures are not increasing much and those in the irrigation are fluctuating. The capital formation is agriculture through the private sector is stagnant in recent years.

3.1.1 Farm equipment and machineries

The farm equipments and machineries are important capital in agriculture for increasing land and labour productivity. The important farm equipments and machineries included in the study are tractors, ion ploughs, shallow tube wells, deep tube wells, rower pumps, threshers, pumping sets, animal drawn carts and pesticide sprayers. On the basis of the market price, weights are given. The highest is weight (98.60 percent) is received by the tractors. The index of the farm machineries and equipments taking 1990/91 level as the 100 are presented in Table 3.4. The number of tractors increased 5.48 times during 18 years. Other machineries and equipment, though have much smaller weight the index has gone up. For example, the sprayer and thresher increased 12 times during the same period. Pumps and iron plow also increased considerably.

Table 3.4: Agriculture Equipment Capital (1990/91=100)Equipment Weight 1994/95 1999/00 2004/05 2008/09

1 Tractor 98.60 158.09 335.59 522.13 548.682 Iron ploughs 0.02 156.21 237.27 304.55 342.423 Shallow tube well 0.21 148.00 216.89 297.78 444.444 Deep Tube Well 0.34 184.83 308.97 455.17 620.695 Rower Pump 0.01 247.37 484.21 763.16 1000.006 Thresher 0.01 310.00 630.59 952.94 1194.127 Pumping set 0.09 190.79 328.95 471.05 563.168 Animal drawn cart 0.11 100.20 100.45 103.59 107.639 Sprayer 0.01 315.26 638.95 963.16 1215.79

10 Others 0.60 107.89 119.12 130.32 138.85

The indexes of capital formation of machinery and equipment are presented in Figure 3.4. Except the animal drawn carts all other machineries and equipments are increasing considerably after 1990/91.

17

This increase shows that the capital formation is encouraging. But, it is not the case. The sharp rise is seen due to very low base level figures.

Figure 3.4 Farm equipment

3.1.2 Livestock and poultry capital

The livestock and poultry are also important capital for agriculture. But, none of these productive capitals has doubled during the last 18 years. The largest growth is seen in fowl (1.8 times) followed by pigs (1.76 times). The number of cattle is almost stagnant (Table 3.5). Moreover, there is negative capital formation in case of sheep and duck.

Table 3.5: Livestock capital formation (1990/91=100)Weight 1994/95 1999/00 2004/05 2008/09

1 Cattle 29.03 109.32 112.28 111.83 114.712 Buffaloes 21.19 107.70 115.84 134.09 153.773 Sheep 4.21 101.37 93.98 90.10 88.584 Goat 24.91 105.26 117.85 133.29 157.885 Pigs 2.75 107.51 148.36 160.19 176.556 Fowl 2.52 103.72 137.32 168.10 180.567 Duck 0.09 103.06 108.54 100.03 97.808 Milking Cow 2.43 111.13 121.89 130.83 135.269 Milking Buffaloes 11.84 108.12 121.39 140.08 161.4810 Laying Hens 0.98 104.73 134.74 157.93 169.3611 Laying Duck 0.05 104.62 109.88 90.51 88.53

The capital formation in agriculture through the livestock is not encouraging and the indixes are presented in the Figure 3.5.

18

Figure 3.5 Livestock and poultry capital

3.1.3 Fruit trees and tea

Fruit trees are also important capital in the agriculture sector. The important fruit trees that can be considered as the capital in Nepal are temperate, subtropical and tropical fruits. The important temperate fruits are apple, pear and plum. Similarly, the important subtropical fruits are orange, lemon, lime, and sweet orange. The tropical fruits important for Nepal are mango, banana, guava, jackfruit, pineapple, pomegranate, papaya and litchi. Beverage like tea and coffee are also widely cultivated in Nepal. In recent years planting few fruit trees in the homestead garden is getting popular. Though large plantations are not coming up except in tea, fruit orchards are being developed by better off farmers.

During the last 18 years the coffee plants and sweet oranges increased over 80 times of the base year 1990/91 (Table 3.6) but their weights are very small. The number of tea plants has also grown by 20 times. However, the numbers of pineapple, jackfruit, lemon, pomegranate and plum have gone sharply down.

Table 3.6: Fruit trees, tea and coffee (1990/91=100)Fruit trees Weight 1994/95 1999/00 2004/05 2008/09

1 Orange 18.20 126.47 154.19 201.91 324.112 Lemon 2.56 68.63 21.37 26.01 54.903 Lime 1.48 131.48 171.67 219.76 231.044 Sweet Orange 0.16 2125.14 4804.31 6174.30 8090.515 Mango 30.15 88.14 125.57 418.88 540.906 Banana 12.76 84.96 60.54 64.57 101.637 Guava 3.20 114.41 133.84 135.08 139.108 Jackfruit 2.64 76.62 41.86 46.28 47.569 Pineapple 0.84 74.70 37.80 37.80 38.7710 Litchi 0.83 189.87 306.85 354.93 392.0711 Apple 3.18 288.90 351.40 391.70 450.8212 Pear 0.82 279.18 527.67 580.44 596.1013 Plum 2.92 95.46 87.51 93.88 97.01

19

14 Papaya 2.22 276.05 525.17 534.37 552.2215 Pomegranate 0.40 78.37 46.13 49.20 53.2516 Tea 17.12 246.70 1229.66 1896.33 2043.7717 Coffee 0.52 150.00 1815.13 6139.44 8505.56

If we take the fruit trees as the capital, they are increasing very fast. But, their contribution to the overall capital formation is very small.

3.1.4 Farm inputs

The farm inputs are the use of labour, machineries, seed, fertilizers and pesticides. Indixes of these farm inputs are calculated (Table 3.7) for estimation of the totl factor productivity (TFP). Among the farm inputs in Nepal, nearly 50 percent weight is on human labour followed by bullock labour (12.73 percent). The human and bullock labour together contributes to two-third (66.64 percent) of the total farm inputs. The use of human labour has slightly decreased from the 1990/91 level. In spite of the increase in the tractor use over the years, the use of bullock labour has doubled in 18 years. This is due to increase in cropping intensity in the country. Among other inputs te use of chemical fertilisers and pesticides increased but, seed and manure use have gone down.

Table 3.7: Farm inputs (1990/91=100)Inputs Weight 1994/95 1999/00 2004/05 2008/09

1 Human Labour 53.91 70.70 77.51 83.80 99.512 Bullock Labour 12.73 98.18 82.19 123.13 201.023 Tractor Use 4.57 66.67 150.00 212.82 213.334 Pumpset Use 6.75 80.56 33.33 33.33 48.895 Seed 6.87 102.67 99.73 90.31 92.026 Manure 4.74 82.59 97.52 91.14 91.147 Fertilizer 5.15 146.06 164.37 159.22 165.598 Pesticides 5.28 50.37 94.11 106.51 111.39

The use of the farm inputs are graphically presented in Figure 3.6. The figure show that the uses of farm inputs fluctuate from year to yearThe increase in the fertilizer use is very slow and the pesticide use is hovering at the 1990/91 level. There seems to be transition of bullock labour to tractor and thresher use in production and harvesting process. But, the bullock labour is still continued to be used for production process. Human Labour occupies approximately 53 percent weight in total intermediate inputs (excluding capital) followed by bullock labor, fertilizer and manure. It means our agriculture production heavenly depend upon human labour. It seems that we need labour productivity and TFP increases to maximize the poverty reduction. Thus, improvements in skills of agricultural labour, better quality fertilizers, tractors with greater horse power and better seed varieties are few examples of technical input quality that has direct influence on productivity.

Figure 3.6 Farm inputs

20

3.1.5 Agricultural labour

Human labor remains the single most important input to many production processes. In the case of agriculture production, it is traditional in most respects. Table 3.7 below reveals that human labor involvement in agriculture has been continuous but slowly increased over the decades indicating that modern production technology are not getting imbibed in the agriculture to increase productivity. The contribution of the agriculture to the GDP that was nearly a half in the year 1990/91 has declined to less than one-third in the year 2008/09. Though the per capita GDP is much higher in other sectors of the economy than agriculture, there may not have a brighter opportunity for uneducated agricultural labour force in other sectors of the economy. One of the surprising things to note is that the labour earning per days (eight hours working days) increased almost three times in the same decade. It should be remembered that agriculture production is still labour intensive and additionally some technology development are not applicable because of the soil or topographical conditions or the pattern of share of holdings which is characterized by higher proportions of farmer holding smaller size of land. But, we should remember that changes in agricultural labour in any country context are dependent on demographic changes.

Table 3.8: Agriculture labour force and AGDPYear Agricultural labour AGDP as percent of GDP1990/91 5,990,038 47.681991/92 5,961,788 44.961992/93 6,020,533 42.391993/94 6,079,277 42.061994/95 6,138,022 40.751995/96 6,196,766 40.481996/97 6,255,511 40.361997/98 6,314,255 38.821998/99 6,373,000 40.111999/00 6,489,200 39.632000/01 6,605,400 36.582001/02 6,721,600 37.402002/03 6,837,800 36.492003/04 6,954,000 35.932004/05 7,070,200 35.19

21

2005/06 7,186,400 33.592006/07 7,302,600 32.512007/08 7,418,800 32.602008/09 7,535,000 32.82

Though the output per hour is the best indicators of aggregate labor productivity trends, in Nepal output per hour is not much good to estimate labour productivity rather than output per worker because number of part-time employment is negligible in comparison to the labour per day (assuming days are homogenous and every days working).

The fig 9 reveals that low labor productivity growth in agriculture sector continued over the decade. Possible explanation of low productivity may be most of the people are working in agriculture sector though it has known low level of productivity. There might be strong one reason. Most of the labors are self-employed in own agriculture field and they may have willing to work for low return. Again, smaller holdings farmers are not increasingly used hired labour and fit for traditional family farming. Moreover, the conflict situation aroused starting at middle of the study period may force people to migrate nationally or internationally, resulted fertile land appeared barren.

The analysis of the capital formation in the agriculture based on the secondary data shows that the physical indexes of fruit trees and some small machines have increased many fold in the last two decades. But, their weights in the contribution to agricultural production are still very small. Two-thirds of the total farm inputs are from human labour and bullock labour and contribution of the others are very small. It means, the agriculture in Nepal is still traditional driven by muscle power.

3.2 Determinants of Capital formation at National Level

The determinants of capital formation is analysed in this sub-section based on the secondary data. The total gross fixed capital formation (GFCF) in agriculture was Rs 4,312 million in the year 1990/91. This figure increased to Rs 20,559 million in the year 2008/09 at current price (Table 3.9). About 55 percent of the total GFCF comes from private sector GFCF. The time series estimates of public, private and total GFCF are presented in Figure 3.7.

Table 3.9: GFCF in agriculture (Rs million)GFCF (public) GFCF (private) Total GFCF

1990/91 2198.16 2114.77 4312.941991/92 2352.71 2750.76 5103.471992/93 2242.64 3151.03 5393.671993/94 2662.92 3530.18 6193.111994/95 2876.40 4426.35 7302.751995/96 3938.24 5078.57 9016.811996/97 4450.81 5738.35 10189.161997/98 4824.40 6220.90 11045.301998/99 4448.58 6150.85 10599.441999/00 5541.55 7147.09 12688.642000/01 5044.04 6504.81 11548.852001/02 5498.85 7091.07 12589.922002/03 6155.89 7936.68 14092.572003/04 6831.87 8809.47 15641.342004/05 7281.31 8866.63 16147.942005/06 8309.29 9652.34 17961.632006/07 8698.17 10129.41 18827.58

22

2007/08 9087.05 10606.48 19693.532008/09 9475.93 11083.55 20559.48

Source: Central Bureau of Statistics, internal record.

Figure 3.7 Gross fixed capital formation

The major indicators of the capital formation are capital to labour ratio and capital to land ratio. The capital to labour ratio (K/L) that was Rs 720 per labour in 1990/91 increased to Rs 2,729 per labour in the year 2008/09 (Table 3.10). The K/L ratio is very small in Nepal indicating that the agriculture is labour intensive. Similarly, the capital formation per unit of land was Rs 1,644/ha in 1990/91 and that increased to Rs 6,651/ha in the year 2008/09 at current price. The capital formation of Rs 6,651/ha is very small and land potential is virtually not exploited due to lack of modern technology.

Table 3.10: Capital formation per unit of labour and landCapital labour ratio (Rs/labour) Capital land ratio (Rs/ha)

1990/91 720 1,6441991/92 856 1,9231992/93 896 1,9741993/94 1,019 2,2031994/95 1,190 2,5271995/96 1,455 3,0381996/97 1,629 3,4331997/98 1,749 3,7211998/99 1,663 3,5711999/00 1,955 4,2752000/01 1,748 3,8912001/02 1,873 4,2422002/03 2,061 4,7482003/04 2,249 5,0602004/05 2,284 5,2242005/06 2,499 5,8112006/07 2,578 6,0912007/08 2,655 6,3712008/09 2,729 6,651

The capital to labour ratio (K/L) and capital to land ratio (K/Land) are presented in the Figure 3.8. The figure shows that both of the ratio (at current price) are increasing but slowly.

23

Fig 3.8 Capital to labour and land ratios

3.3 Capital formation for Agriculture

The capital formation for agriculture includes construction of agricultural roads and rural electrification.

3.3.1 Agricultural roads constructed

The agricultural roads are short (up to 5 km) rural roads linking the agricultural production areas to the market. They link potential agricultural production pockets to other major roads. This programme was initiated by Agricultural Perspective Plan (1997 to 2016) and perceived as one of the main catalytic inputs required to attain high growth rates in the agriculture sector. The road is multipurpose but the criteria for selecting alignment are of the agricultural interests. The agricultural roads are constructed by the Department of Local Infrastructure Development and Agricultural Roads (DOLIDAR).

These earthen roads are constructed with local labour at low cost. Due to its seasonal in nature the agricultural products of rainy season can not get benefitted from agricultural roads.

3.3.2 Rural electrification

Rural electrification is very limited in Nepal. Only 40 percent of the households in Nepal are getting electricity mostly covering urban areas. Due to scattered settlements of the rural areas linking to the national grid is costly. The responsibility of the rural electrification is of Nepal Electricity Authority (NEA). The rural electrification it aimed to support the development of year-round irrigation in the Terai by operating shallow and deep tubewells. The electrification also helps in promoting agro-processing industries and commercialization in the potential pocket areas.

Addressing the problem of rural electrification is not easy. Due to scattered settlements the distribution line becomes long and beyond standards. In the areas where electricity is available, direct hooking and other fraudulent practices of energy pilferages have weakened the endeavour of rural electrification.

24

4. Impacts of Capital Formation on Agricultural Production and Productivity

Based on the analysis above, assessments are done to explore the linkages between capital formation in agriculture and the transformation of agriculture over time in terms of rural incomes, labour productivity and labour movement out of agriculture. In addition, the analysis also examines the relationships between capital formation (in terms of both quantity and quality) and the type of policies and strategies adopted by the Government.

The gross output of agriculture at the current price was Rs 73,639 million in the base year 1990/91 that increased to Rs 401,306 million in the year 2008/09 (Table 4.1). At the same period the index of the gross output increased to 545 percent. During the period, the capital productivity increased to 2.96 meaning thereby the capital formation increased three times. The labour index is not increasing bu decreasing slightly. The labour productivity increased to 5.48 in the 18 years.

The index of capital, labour and intermediate inputs increased to 186 in the year 2008/09 as compared to the baseline 1990/91. The multifactor productivity, also known as total factor productivity, increased to 2.92 during the same period of time. Table 4.1: Multifactor productivity in Nepalese agriculture

Gross output at current price (Rs million)

Index of gross output

Capital Productivity

Labor input index

Labor Productivity

Capital, Labor, Intermediate Input index

Multifactor Productivity

1990/91 73639 100.00 1.00100.0

0 1.00 100.00 1.001991/92 86657 117.68 1.16 99.32 1.18 101.85 1.161992/93 93220 126.59 1.24 98.64 1.28 101.87 1.241993/94 107183 145.55 1.37 80.65 1.80 105.94 1.371994/95 113807 154.55 1.40 70.70 2.19 110.07 1.401995/96 128872 175.00 1.54 85.89 2.04 113.42 1.541996/97 144684 196.48 1.63 77.51 2.53 120.36 1.631997/98 149618 203.18 1.64 77.51 2.62 123.52 1.641998/99 176056 239.08 1.85 77.51 3.08 129.41 1.851999/00 193024 262.12 1.94 77.51 3.38 135.26 1.942000/02 207604 281.92 1.98 75.42 3.74 142.44 1.982001/02 219129 297.57 2.02 75.42 3.95 147.11 2.022002/03 228720 310.59 2.05 73.32 4.24 151.81 2.052003/04 244288 331.74 2.07 73.32 4.52 159.94 2.072004/05 260524 353.78 2.19 83.8 4.22 161.23 2.192005/06 275307 373.86 2.65 86.41 4.33 141.14 2.652006/07 296424 402.53 2.18 94.27 4.27 184.39 2.182007/08 326144 442.89 2.01 96.89 4.57 220.84 2.012008/09 401306 544.96 2.92 99.51 5.48 186.32 2.92

The capital and labour productivity is presented in Figure 4.1. The labour productivity continuously increased till the year 2003/04. Thereafter, it got stagnated. This can be attributed to the armed conflict that was severe during the period of 2003 to 2008. The capital productivity is much lower than the labour productivity.

Figure 4.1Capital and labour productivity

25

Total factor of productivity (TFP) growth is often described as the rate of technological progress. The Figure 4.2 below for multifactor productivity reveals that the country for agriculture production experienced a rate of technological progress from 1990/91 to 2008/09 has been tripled. There is positive relationship between labour productivity and TFP. Analyzing agriculture production combined input index, we find that growth in tractor use index increased slowly meaning that our production methodology has not been labour displacing yet. There has been limited progress in mechanization during the study period. Similarly, slow growth of fertilizer used indicates that it may not be available at time of paddy plantation and prices hike annually could not be affordable for such agrarian rural farmers. Pesticides input captured in chemical index have been relatively stable than other inputs.

Figure 4.2 Multifactor productivity

The consistent increase of the TFP till 2005/06 in agriculture after 1990/91 base level shows that there must be a linkage between agricultural productivity and poverty reduction. The NLSS survey (1995/96) NLSS reported 42 percent of people living under the poverty line whereas it got reduced to 32 percent at the end of 2003/04 (NLSS 2003/04). Subsequently, by indirect estimate, it was found 25 percent people lies under the poverty line at the end of three years plan (2006/07-2010/11).

26

5 Capital Formation at Farm Level

This section focuses on farmers’ own investment in agriculture. The potential determinants of investment having impacts on farmers’ investment in agriculture are measured at the household level. At farm household level the study also considers some farm specific factors such as farm’s household characteristics. On an average, a farm household has over seven persons and more than three persons work in the farming (Table 5.1). The dependency ratio in the farm household is 42.5 percent.

Table 5.1 Family size of sample householdsAge (years) Male Female Involved in agriculture

1 0 to 15 1.31 1.29 　2 16 to 60 2.13 2.08 2.68 3 Over 60 0.30 0.21 0.39

Total 3.74 3.58 3.07

Source: Household survey 2010

With an average farm size of 0.58 ha and two-thirds of which being unirrigated, it is hard to provide full employment to three persons and support for seven persons in a household.

5.1 Capital stock at farm level

The main capital stocks of the farm are land and irrigation infrastructures, machineries and equipments, livestock and poultry and fruit and fodder trees. There is no doubt that larger the capital stock better is the farm household.

On an average, a farm household in Nepal is having land capital of one million rupees and irrigation infrastructure of about Rs 17,000 only (Table 5.2). As a result, only one-third of the farm land is irrigated. The farmland being the main source of livelihood for the rural people, the average price of the irrigated farmland is Rs 1,442,479 per ha. The productivity of the unirrigated farm land being lower than those of the irrigated, such lands are cheaper. Therefore, the price of the unirrigated land is quite low (Rs 721,859). The survey data show that five percent of the households buy land in a year and only three percent sell. It means the lands are getting fragmented.

Table 5.2 Land and irrigation capital stock per household

Capital Value (Rs)

1 Farm land 1,033,152

2 Irrigation infrastructure 16,880

Total 1050,032Source: Household survey 2010

The productivity of the land depends on irrigation. Assuming the land price as an indicator of the land productivity, a land without irrigation produces a half of that produced by an irrigated land. In addition to the irrigation, the productivity of the land also depends on the mechanization. The farms in Nepal are poorly mechanized. Most of the farms depend mainly on simple tools and implements made by local black smith. The stock of such tools per farm household is of nearly five thousand rupees.

Only 2.17 percent of the farm households are having a tractor. Ploughing is mostly done by animal drawn wooden ploughs. Recently, iron ploughs are getting popular. Over 52 percent of the farm households are having iron plough (Table 5.3). The shallow tubewell as an irrigation structure is only

27

suitable for the areas with high underground water table, particularly in terai region. Only 0.43 percent of the households are having shallow tubewell and only 0.22 percent are having the facility of deep tubewell. Thresher, a machine for threshing rice and wheat, is available only with 0.87 percent households. But, the thresher is rented to other farmers during the harvesting season. Similarly, only 0.43 percent of the households are having water pumps. Handheld and backpack sprayers are getting popular in recent days. At present 1.08 percent of the households are having such sprayers. All together, the capital stock of the machinery is of nearly Rs 15,000 per household.

Table 5.3 Machinery capital stock per household

Capital Value (Rs)

1 Tractor 8893.71

2 Iron plough 467.79

3 Shallow tube well 47.72

4 Deep tubewell 43.38

5 Thresher 357.92

6 Pump 73.75

7 Sprayer 57.70

8 Other machineries (tools) 4843.87

9 Total 14,786.00Source: Household survey 2010

It is clear from the machinery capital stock in the farm households that the farming in Nepal still depends on human labour and animal drawn ploughs and not on the machinery. This is the main reason for the low productivity of the farm and poverty of the farmers.

After the land, livestock is the main capital of the farm households in Nepal. Cattle and buffaloes are the major livestock capital highly integrated to the farming system. On an average a farm has 1.41 cattle and 0.94 buffaloes. Only 11.08 percent of the cattle are milking cattle whereas the buffaloes perform better. Over 31.38percnet of the buffaloes are milking at the time of survey. The higher ratio of non-milking cattle is due to the religious taboo that non-performing cattle can not be disposed off. Buffaloes are dual purpose. It serves for milk as well as meat. The other major meat animals are goat, sheep and pig. A farm household has 4.39 goats, 0.07 sheep and 0.10 pigs. Goats are the most common among the small ruminants. The sheep is generally reared in high altitude areas and pigs only by some communities. Another source of meat is the poultry birds. On an average, a household keeps 5.39 chicken and 0.05 duck. Among them the laying hen is 1.21 and laying duck is 0.01. The livestock and poultry supplements the food and income in rural households without adding much costs in their keeping.

On an average, a farm household has livestock capital of nearly Rs 44,000 and large part of which is contributed by buffaloes and goat (Table 5.4). Buffaloes are of Rs 18,000 and goats of Rs 15,000. The cattle contributes less than Rs 8,000 to the agricultural capital.

Table 5.4 Livestock and poultry capital stock per household

Livestock and poultry Value (Rs)

28

1 Cattle 7,727.12

2 Buffalo 18,536.88

3 Sheep 214.75

4 Goat 15,114.97

5 Pig 668.11

6 Chicken 1,529.39

7 Duck 29.07

8 Milking cow# 1,511.06

9 Milking buffalo# 9,127.98

10 Laying hen# 620.50

11 Laying duck# 4.34

Total 43,820.29

Note: # indicates double counting and hence excluded from the total.Source: Household survey 2010

Fruits and fodder trees are also important capital stocks supporting subsistence agriculture in Nepal. The most popular of them are fodder trees, banana and orange. On an average, a household has 26 fodder trees, 14.90 banana plants, 6.08 orange trees and 0.99 mango trees. Two thirds of the banana plants, nearly a half of the orange trees, and most of the banana trees are at fruiting stage. The capital stock of the fruit and fodder trees is to the tune of nearly 35,000 per household (Table 5.5). The trees support the subsistence agriculture through food, fodder and some income.

Table 5.5 Fruit and other tree capital stock per household

Trees Value (Rs)

1 Mandarin orange 7,387.47

2 Lime 70.28

3 Sweet orange 46.64

4 Other citrus 275.05

5 Mango 1,952.28

6 Banana 3,483.51

7 Guava 315.84

8 Jackfruit 759.22

9 Pineapple 115.73

10 Litchi 100.65

11 Apple 26.03

12 Plum 255.75

13 Pear 186.12

14 Papaya 426.79

15 Pomegranate 13.02

16 Tea 0.36

17 Coffee 8.24

18 Neem tree 1.63

29

19 Fodder trees 19,283.62

Total 34,708.23Source: Household survey 2010

The capital stock in the farm is summarized in Table 5.6. As described earlier, the most important capital stock in the farm is the land followed by irrigation. The land and irrigation contributes nearly 92 percent of the capital stock in the farm. The second most important capital stock is the livestock and poultry contributing nearly four percent to the capital stock. Fruits and fodders trees also contribute three percent to the farm capital stock. It is sad to see that the machineries and equipment, that are the icons of the modern agriculture contribute only one percent in the farm capital stock.

Table 5.6 Agricultural capital in aggregate

Capital Value (Rs) Percent

1 Land and irrigation 1,050,032 91.84

2 Machineries and equipments 14,786 1.29

3 Livestock and poultry 43,820 3.83

4 Fruits and fodder trees 34,708 3.04

Total 1,143,346 100.00

Source: Household survey 2010

The analysis of the capital stock shows that the Nepalese agriculture is highly traditional with unirrigated land, livestock and poultry combined with fodder trees with a few fruit trees. It is interesting to see which capital stock is increasing or decreasing.

5.2 Capital formation at farm level

Capital formation, that is increase in the stock of capital by the time, gives important clues for the trends in agricultural development. The capital formation is anaysed for four major types of capitals in the farm. These types of the capital stocks in the farm are (a) land and irrigation infrastructures, (b) machineries and equipments, (c) livestock and poultry and (d) fruit and fodder trees. The rate of capital formation is analysed on the annual basis. The amount of the capital formation in the last one year is compared with the capital stock in the farm.

Purchase of land is capital formation for an individual farm, but not for the economy. The amount of the land purchased by a farmer is equal to the amount of the land sold by the other. Therefore, investment in land improvement is taken as the formation of land capital. It is estimated by about seven percent of the farms invest in land improvement and the amount averages to be Rs 2,119 per household. Therefore, the formation of the land capital is very slow with a rate of 0.21 percent per annum (Table 5.7).

Table 5.7 Land and irrigation capital formation

Capital Value (Rs) Capital formation (Rs) % capital formation1 Land 1,033,152.0 2,119.33 0.21

30

0

2 Irrigation infrastructure 16,880.00 1,709.65 10.13

Total1,050,032.0

0 3,828.98 0.36Source: Household survey 2010

The gross capital formation in irrigation infrastructure is more than 10 percent per annum. However, this is very small as compared to the stock of the land capital. Taking the land capital formation and irrigation infrastructure, the rate of capital formation is very slow, only 0.36 percent per annum. This is the main reason for the stagnation of the agricultural growth in the country.

Machineries and equipment are becoming the major icons of the commercial agriculture in developed countries. But, in Nepal, the stocks of machineries and equipment capitals are very small. The rate of capital formation is higher in case of thresher, iron plough and tractor (Table 5.8).

Table 5.8 Capital formation of machineries and equipment

Capital Value (Rs) Capital formation (Rs) % capital formation

1 Tractor 8893.71 3036.88 34.15

2 Iron plough 467.79 205.97 44.03

3 Shallow tube well 47.72 0.00 0.00

4 Deep tubewell 43.38 0.00 0.00

5 Thresher 357.92 162.69 45.45

6 Pump 73.75 0.00 0.00

7 Sprayer 57.70 0.00 0.00

8 Other machineries 4843.87 206.72 4.27

Total 14786.00 3612.00 24.43Source: Household survey 2010

As the livestock and poultry are most important for the integrated crop-livestock agriculture in Nepal, the capital formation in livestock and poultry indicates the future trends in livestock farming and Nepalese agriculture. As the livestock and poultry are self regenerating natural capital some of them like pigs and chicken are growing fast. This growth is due to poverty reduction programmes in the rural areas focused on the pigs and poultry that are instrumental for poverty reduction. On aggregate, the rate of capital formation in livestock and poultry is 7.61 percent per annum.

Table 5.9 Formation of livestock capital

Capital Value (Rs) Capital formation (Rs) % capital formation

1 Cattle 7727.12 485.90 6.29

2 Buffalo 18536.88 1847.29 9.97

3 Sheep 214.75 21.69 10.10

4 Goat 15114.97 403.47 2.67

5 Pig 668.11 170.07 25.45

6 Chicken 1529.39 361.28 23.62

7 Duck 29.07 0.00 0.00

8 Milking cow 1511.06 46.64 3.09

9 Milking buffalo 9127.98 845.99 9.27

31

10 Laying hen 620.50 8.68 1.40

11 Laying duck 4.34 0.00 0.00

Total 55084.17 4191.01 7.61Source: Household survey 2010

Capital formation in fruits and fodder is also important for future performance of the agriculture. The capital formation in absolute term is highest in fodder trees, followed by orange and banana (Table 5.10). The fruit and fodder tree capitals are growing at 14 percent. The capital formation comes from mandarin orange, jackfruit, litchi, pomegranate, tea and fodder trees.

Table 5.10 Capital formation in fruits and other trees

Trees Value (Rs) Capital formation (Rs) % capital formation

1 Mandarin orange 7387.47 1024.95 13.87

2 Lime 70.28 6.07 8.64

3 Sweet orange 46.64 0.00 0.00

4 Other citrus 275.05 0.43 0.16

5 Mango 1952.28 53.69 2.75

6 Banana 3483.51 155.10 4.45

7 Guava 315.84 1.74 0.55

8 Jackfruit 759.22 112.80 14.86

9 Pineapple 115.73 0.67 0.58

10 Litchi 100.65 13.02 12.93

11 Apple 26.03 0.00 0.00

12 Plum 255.75 7.81 3.05

13 Pear 186.12 7.81 4.20

14 Papaya 426.79 2.17 0.51

15 Pomegranate 13.02 3.90 30.00

16 Tea 0.36 0.07 18.18

17 Coffee 8.24 0.00 0.00

18 Neem tree 1.63 0.00 0.00

19 Fodder trees 19283.62 3533.62 18.32

Total 34708.23 4923.85 14.19Source: Household survey 2010

In the aggregate, the capital formation is highest in fruits and fodder trees (Rs 4,923 per household) followed by livestock and poultry (Table 5.11). The lowest growth is found to be in land and irrigation infrastructures.

Table 5.11 Capital formation in agricultural

Capital Capital stock (Rs) Capital formation in the reference year (Rs)

% capital formation

32

1 Land and irrigation 1050,0322,119.33

14.28

2 Machineries and equipment

14,7863,612.00

24.33

3 Livestock and poultry 43,8204,191.01

28.23

4 Fruits and other trees 34,7084,923.85

33.17

Total 1,143,34614,846.19

100.00

The capital stock and capital formation in land and irrigation infrastructure, machineries and equipment, livestock and poultry and fruits and vegetables are presented in Figure 5.1. Though the capital stock is the highest in land, the rate of the capital formation is the lowest.

Figure 5. 2. Capital formation in agriculture

Figure 5. 3. Capital formation in agriculture

The analysis shows that the capital stock is very poor in Nepalese farm households and formation of capital is poor. Agriculture particularly relies on human and animal powers and mechanization is very low. Low levels of irrigation and mechanization are the major reasons for low productivity, slow growth in agriculture, and lingering poverty among the rural farmers in Nepal. It is now necessary to understand the factors affecting the capital formation to devise effective policy measures for capital formation in agriculture.

5.3 Factors affecting capital formation

Factors affecting capital formation in agriculture is analysed in this subsection using cause and effect analysis. Capital formation is the last 12 months is taken as the response and social economic

33

variables are used as the predictors. The predictors and response variables are described in Table 5.12. The predictors are geographic location of the farm such as mountain, hills and terai; education of the farm household members, loans taken by the farm households, income of the household by source, agricultural labour and the stock of the capital.

Table 5.12 Description of the variables1 Mountain Households in mountain areas in northern Nepal taking the households in the

Terai areas in the southern Nepal as the base category 2 Hill Households in hills areas in central Nepal taking the households in the Terai

areas in the southern Nepal as the base category3 Education Number of persons in the household with an education of at least

matriculation4 Loans Amount of loan taken by the household5 Agricultural income Income from agricultural sources6 Non-agricultural income Income from non-agricultural sources 7 Remittance Amount of remittances and current transfer received from the family

members working abroad8 Agricultural labour Number of persons above the age of 15 working in the agriculture9 Capital Capital stock owned and used by the household in agriculture

The descriptive statistics show that 14 percent of the sample households come from the mountains and 40 percent from the hills (Table 13). The rest are from terai areas. The education status shows that 0.85 persons have done matriculation from a household. On an average, a household has an outstanding loan of Rs 86,000. The largest income source of the farm household is non-agriculture (Rs 47,633) and remittance (Rs 25,370). The agriculture is meant for household consumption and income from this source is Rs 25,246. The agriculture labour is more than three persons per household. The stock of capital is 1.13 million. These variables are taken as the predictors of the capital formation in last 12 months.

Table 5.13 Descriptive statistics (n=461)

Variable Unit Mean Standard Deviation Minimum Maximum1 Mountain Dummy 0.14 0.35 0 12 Hill Dummy 0.40 0.49 0 13 Education Number 0.85 1.27 0 74 Loans Rs 86,498.92 213740.80 0 25000005 Agricultural income Rs 25,246.22 49333.68 0 6150006 Non-agricultural income Rs 47,633.62 76841.38 0 6000007 Remittance Rs 25,370.93 82620.21 0 10000008 Agricultural labour Number 3.07 2.34 0 329 Capital Rs 1131,987.00 2779992.00 0 45,000,000

Source: Household survey 2010

The factors affecting capital formation is analysed using ordinary least square method. The results (in the Table 5.14) show that the capital formation is negatively affected by the geographic difficulties. The capital formation is significantly low in the mountains and hills as compared to those in terai region. A farm household being in mountains decreases its annual capital formation by Rs 29,166. Similarly, a household being in hills can form capital Rs 12,475 less as compared to those in the terai regions. This is because of the limited transportation and irrigation facilities in hilly and mountainous areas. The amount of loan is negatively affecting the capital formation. It means indebted households

34

find difficulties in capital formation and forms significantly less capital as compared to those non-indebted households. Every rupee loan decreases the capital formation by Rs 0.049. Another predictors significantly reducing the rate of capital formation is the capital stock itself. The larger the capital stock, that reduces the rate of capital formation. It is because of the fact that the farmers with larger stock of farm capital are not finding further investment in agriculture profitable and investing in non agricultural sectors. The income from the non-agriculture sectors (other than the remittance) is not affecting the capital formation in agriculture.

Table 5.14 Factors affecting capital formation

Predictors Coefficient Standard Error.

t P>|t| 95% Confidence

Interval

1 Mountain -29166.520*** 7110.419 -4.100 0.000

-43140.180 -15192.850

2 Hill -12475.300** 5120.586 -2.440 0.015

-22538.470 -2412.133

3 Education 2053.066 1946.476 1.050 0.292

-1772.224 5878.355

4 Loans -0.049*** 0.011 -4.380 0.000

-0.072 -0.027

5 Agricultural income 0.927*** 0.059 15.700 0.000

0.811 1.043

6 Non-agricultural income -0.012 0.032 -0.370 0.710

-0.074 0.051

7 Remittance 0.108* 0.027 3.930 0.000

0.054 0.162

8 Agricultural labour -591.737 973.587 -0.610 0.544

-2505.068 1321.594

9 Capital -0.006*** 0.001 -6.170 0.000

-0.008 -0.004

10

Constant 8503.412* 4817.704 1.770 0.078

-964.523 17971.350

n= 461, Adjusted R2=0.386, F(9, 451) = 33.10 (p=0.000)

The only factors that increase the capital formation in agriculture significantly are the agriculture income and remittances. Every rupee increase in agriculture income increases the capital formation in agriculture by Rs 0.92. Similarly, every rupee increase in remittance increases the annual capital formation by Rs 0.10.

In summary, the capital formation is higher in terai than in hills and higher in hills than in mountains. Geographic difficulties with poor transportation facilities are the major hurdles in capital formation in Nepalese agriculture. Though there are several schemes of the banking sector to provide loans for capital formation, the indebtedness of the farmer is a major hurdle in farm level capital formation. This is because the most of the loan amount goes to consumption and such indebted farmers find less opportunity to invest in capital formation. A ray of hope is that a small fraction of the money coming from the remittance is going to the farm through capital formation. Increase in the farm income increases hope for the farmers leading to increased capital formation in the farm ultimately leading to the increase in the farm income.

35

6. Alternative Business Model for Promoting Investment in Agriculture This section presents alternative policy framework for stimulating sustainable food production in the country. The role of the government in policy making, infrastructure development, research and development, technology extension, information dissemination are discussed.

The most of the public expenditures on the agricultural sector go to current expenditures and that portion allocated to the capital expenditure most part goes to office maintenance and other logistics than in the production structure in the farm. Investment in the infrastructure is not reaching much of the poor people in the country. For example, investment if large canals for irrigation benefits the landlords more than the tenant farmers who have little or no land.

The credit disbursement is more effective than the public expenditure. But, the credit facilities also go more to the better off farmers than the poor farmers. Therefore, micro credit together with low cost technology is more suitable to reach to the poor. Furthermore, targeted programmes are also good for the poor to increase the productivity of the limited resources owned by the poor people.

The household level analysis of the capital formation shows that the capital stocks particularly the machineries and equipment is very small casing the poor productivity of the farm. Increasing the capital formation in the form of the machineries and equipment can increase the farm productivity thereby increasing the farm income. The increased income will get back the way to the farms in the form of capital formation.

7. Conclusions

Capital formation is important for increasing the agricultural production in the country. The capital formation increases the production by increasing the productivity of labour and land. Agricultural labour during 1990 to 2009 has been slightly decreased in spite of the increase in the population. This is possible due to the shifts of agricultural labour to secondary and tertiary sectors of the economy and more importantly for unskilled labour, due to foreign employment. The labour productivity is increasing very slowly. The major capitals in agriculture in addition to land are irrigation structure, machineries and equipments, livestock and fruit and fodder trees. Some of the fruit trees have increased very fast and some machinery are also increasing somehow, but the livestock is not increasing much over the years.

The land and labour productivity, though increasing, are not catching the speed. The total factor productivity is increasing slowly. The analysis of the secondary data available shows that the capital formation in and for agriculture in Nepal is not satisfactory. The study gathers enough evidences to suggest the government to invest in the capital formation in agriculture. The investment can either be through the public expenditure or through the credit disbursement. The credit disbursement is found to be more effective for private sector capital formation than through the public expenditures.

The results of the household level capital formation show that a household, on an average have capital stock of Rs 1.14 million. The largest part of the capital is in the form of land and smallest part in the form of machineries and equipment. The rate of capital formation per annum is Rs 14,846 per household that comes mostly from increase in fruits and fodder trees and livestock. The geographic conditions and limited income is found to be the greatest hurdle in the capital formation. Increased agricultural income and remittance increases the rate of capital formation. Policies are necessary to attract non-agricultural income to agricultural capital formation. This is possible only through making the agricultural business more profitable and attractive and reducing the risks in agricultural businesses. Developing irrigation, helping in land improvement, facilitating the input supply and

36

agricultural marketing along with the opportunities in value addition can attract the private sector in investing in agriculture that increases the capital formation and productivity of the agriculture.

References

Abramowitz M 1955. Introduction to Capital Formation and Economic Growth. In: National Bureau of Economic Research 1955, Capital Formation and Economic Growth, a Conference of the Universities-National Bureau Committee for Economic Research, Princeton University Press, Princeton, http://www.nber.org/books/univ55-2, pp 1 – 16.

CBS 2001. Rebasing and linking national account series 1984/85 – 1999/00, Seminar Paper, Occasional Paper 1/01, Central Bureau of Statistics Kathmandu.

CBS 2008. National Labour Survey, Central Bureau of Statistics, Kathmandu CBS 2010. National Account Section, Central Bureau of Statistics, Kathmandu

Cobb, C. W.; Douglas, P. H. 1928. A Theory of Production. American Economic Review 18 (Supplement): 139–165.

Department of Cottage & Small Industries, 2010 Internal records, Kathmandu Marshall Alfred 1938, Principles of Economics, 8th ed., London, Macmillan, p. 229.

MOAC 2009 Statistical Information in Nepalese Agriculture, Ministry of Agriculture and Cooperatives, Kathmandu

MOF, 2009 Economic Survey, Ministry of Finance, Kathmandu

MOF, 2010 Economic Survey, Ministry of Finance, Kathmandu

National Bureau of Economic Research 1955, Capital Formation and Economic Growth, a Conference of the Universities-National Bureau Committee for Economic Research, Princeton University Press, Princeton, http://www.nber.org/books/univ55-2

NPC 1985 Seventh Five Year Plan, National Planning Commission, Kathmandu

NPC 1992 Eighth Five Year Plan, National Planning Commission, Kathmandu

NPC 1998 Ninth Five Year Plan, National Planning Commission, Kathmandu

NPC 2002 Tenth Five Year Plan, National Planning Commission, Kathmandu

NPC 2008 Three Year Plan, National Planning Commission, Kathmandu

Solow, R. M. (1956), A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics, 70(1), 65-94.

37

Zepeda Lydia, 2001 Agriculture Investment, Production Capacity and Productivity, Agriculture investment and Productivity in Developing Countries, FAO.

38

AnnexHousehold Survey Questionnaire for Capital Formation

1. District3 ……….., V.D.C./Municipality …………………., Ward Number …….2. Holder's Name …………………………………… Age ……. Education3. Name of the respondent …………………….. Age …….

4. Name of Enumerator ………………………...., Date of Enumeration ………………………

5. How many members you have in the family? …………

6. Age and genderAge (years) Male Female Involved in

agriculturea) 0 to 15b) 16 to 60c) Over 60

7. How many in your family have got education of SLC and above? …………..

8. How much land do you own? (Fill in the cell with appropriate unit)Bigha Katta Dur Ropani Ana Paisa Sq m

a) Total land holding

b) Cultivated land

c) Irrigated land

9. If you buy this much of land today, how much it would cost? Rs …………… Price for irrigated ………………….. Price for non-irrigated ………………..

10. Did you purchase land in last 12 months? □Yes, No□ If yes, how much? …………., How much you paid? …………..

11. Did sell land in the lst 12 months? □Yes, No□ If yes, how much? …………., How much you received? …………..

12. Did you improve your land in the last 12 months? □Yes, No□ If yes, how much you expend (including your own labour)? …………….

13. What irrigation structure do you have? ………………If you have, how much it costs if we buy now? Rs ………………………

14. Did you constructed/installed irrigation structure in the last 12 months? □Yes, No□ If yes, how much you expend (including your own labour)? …………….

15. Do you have outstanding loan to pay? □Yes, No□ If yes, how much is for less than one year? Rs ………………How much is for one year or more? Rs ………………

16. Did you take loan in past 12 months? □Yes, No□

3 Notes: Fill up ………………….. and cells. Texts in italics are instructions for enumerators

39

If yes, Purpose (please tick √ all applicable) Sources (Bank=1, Cooperative=2, Village money

lender =3, Friends=4, Other=5)A Purchase of farm machinery and

equipmentB Purchase of livestockC Fruit plantationD Crop cultivationE Land improvementF IrrigationG Other (specify)

17. Farm equipments and machineries

Equipment

How many you have now?

For how much could you sell them all today?

How many you purchased in the last 12 months?

How much did you pay for this?

1 Tractor2 Iron ploughs3 Shallow tube well4 Deep Tube Well5 Rower Pump6 Thresher7 Pumping set8 Animal drawn cart9 Sprayer

10 Others

18. Livestock and poultry capital

Livestock and poultry

How many you have now?

For how much could you sell them all today?

How many you purchased in the last 12 months?

How much did you pay for this?

1 Cattle2 Buffaloes3 Sheep4 Goat5 Pigs6 Fowl7 Duck8 Milking Cow9 Milking Buffaloes10 Laying Hens11 Laying Duck

19. Fruit and fodder trees

Fruit trees

How many trees do you have?

How many trees are at fruiting stage?

What may be the price of a fruit tree?

How many fruit trees did you plant in the past 12 months?

1 Orange 2 Lemon 3 Lime 4 Sweet Orange

40

5 Mango 6 Banana 7 Guava 8 Jackfruit 9 Pineapple 10 Litchi 11 Apple 12 Pear 13 Plum14 Papaya 15 Pomegranate 16 Tea17 Coffee18 Fodder trees

20. Sources of incomea) What was your income from agriculture in the last 12 months?

a. From livestock Rs …………..b. From fruits Rs …………..c. From other agriculture Rs …………..

b) If you had to purchase the agricultural production you consumed what amount would you have paid?

a. From livestock Rs …………..b. From fruits Rs …………..c. From other agriculture Rs …………..

c) How much was from non-agriculture (within the country)? Rs …………..d) How much from foreign countries? Rs …………..

*********Thank you for your help*********

41

Annexes

Combined Input Weight

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/02 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09

Agriculture inputs

HumanLab 0.00000914 100 99.32 98.64 80.65 70.70 85.89 77.51 77.51 77.51 77.51 75.42 75.42 73.32 73.32 83.80 86.41 94.27 96.89 99.51

BullockLab 0.00000216 100 99.96 99.91 99.23 98.18 98.18 88.60 86.47 84.33 82.19 84.46 85.46 69.78 100.51 123.13 153.28 163.33 201.02 0.00

TractorUse 0.00000077 100 100.00 133.33 183.33 66.67 175.00 144.44 85.71 158.33 150.00 126.67 88.41 150.00 183.33 212.82 213.33 0.00 0.00 0.00

PumpsetUse 0.00000114 100 100.00 91.67 149.22 80.56 80.56 103.33 80.00 56.67 33.33 34.56 35.78 37.00 30.56 33.33 37.00 36.11 44.44 48.89

Seed 0.00000117 100 100.54 102.24 227.76 102.67 102.67 100.31 100.13 99.92 99.73 96.58 96.19 95.99 93.36 90.31 92.02 0.00 0.00 0.00

Manure 0.00000080 100 98.15 81.48 109.88 82.59 109.79 114.30 108.70 103.11 97.52 97.90 94.93 91.32 91.14 0.00 0.00 0.00 0.00 0.00

Fertilizer 0.00000087 100 113.68 129.23 128.68 146.06 146.06 164.02 164.14 164.25 164.37 148.19 155.34 149.92 153.04 159.22 165.59 0.00 0.00 0.00

Chemical 0.00000090 100 86.56 73.65 49.93 50.37 51.04 52.73 66.52 80.32 94.11 94.36 95.47 95.47 101.10 106.51 111.39 0.00 0.00 0.00Agriculture Equipment Capital

Tractor 0.84527745 100 103.80 100.89 124.59 158.09 200.26 220.69 241.32 285.01 335.59 399.67 461.64 513.80 532.45 522.13 485.80 531.11 5362.61 548.68

Iron ploughs 0.00014422 100 107.42 123.79 140.00 156.21 172.42 188.64 204.85 221.06 237.27 253.48 269.70 287.88 295.45 304.55 310.61 319.09 336.36 342.42Shallow tube well 0.00178784 100 107.11 120.44 134.22 148.00 161.78 175.56 189.33 203.11 216.89 230.67 244.44 262.22 275.56 297.78 333.33 344.44 400.00 444.44Deep Tube Well 0.00288041 100 108.28 135.17 160.00 184.83 209.66 234.48 259.31 284.14 308.97 333.79 358.62 386.21 423.45 455.17 482.76 510.34 548.28 620.69

Rower Pump 0.00005284 100 100.00 152.63 200.00 247.37 294.74 342.11 389.47 436.84 484.21 531.58 573.68 618.42 710.53 763.16 815.79 868.42 947.37 1000.00

Thresher 0.00010131 100 117.06 181.76 245.88 310.00 374.12 438.24 502.35 566.47 630.59 694.71 759.41 825.88 888.24 952.94 1011.76 1058.82 1129.41 1194.12

Pumping set 0.00075487 100 108.68 135.53 163.16 190.79 218.42 246.05 273.68 301.32 328.95 356.58 384.47 413.16 442.11 471.05 473.68 505.26 536.84 563.16Animal drawn cart 0.00098282 100 100.10 100.10 100.15 100.20 100.25 100.30 100.35 100.40 100.45 100.51 100.61 101.57 102.58 103.59 104.60 105.61 106.62 107.63

Sprayer 0.00010568 100 123.16 185.79 250.53 315.26 380.00 444.74 509.47 574.21 638.95 703.68 767.89 836.84 900.00 963.16 1026.32 1094.74 1152.63 1215.79

Others 0.00517282 100 101.20 103.40 105.65 107.89 110.14 112.38 114.63 116.88 119.12 121.37 123.58 125.77 128.08 130.32 132.40 134.82 136.89 138.85Livestock Capital

Cattle26.6519215

6 100 99.85 99.72 104.66 109.32 112.05 112.31 112.69 112.40 112.28 111.57 111.17 111.38 111.38 111.83 111.96 112.62 113.36 114.71

Buffaloes19.4553152

7 100 100.47 100.94 104.32 107.70 108.49 110.46 112.33 114.02 115.84 119.06 121.58 126.15 129.85 134.09 138.14 143.46 147.72 153.77

Sheep 3.86258664 100 100.65 100.53 100.82 101.37 94.76 95.93 95.88 94.34 93.98 93.79 92.68 91.37 90.92 90.10 89.59 89.75 89.30 88.58

Goat22.8686751

4 100 100.72 101.58 102.94 105.26 107.75 110.34 113.29 115.61 117.85 120.71 123.10 126.55 130.05 133.29 13.82 146.22 151.59 157.88

Pigs 2.52082916 100 101.24 102.25 103.45 107.51 113.31 122.31 129.43 139.47 148.36 154.25 157.95 157.57 158.06 160.19 162.41 167.25 171.29 176.55

Fowl 2.31098643 100 99.54 100.31 102.18 103.72 107.10 114.88 122.91 131.26 137.32 145.96 157.61 164.18 169.81 16.81 171.26 176.45 181.92 180.56

Duck 0.08345702 100 99.44 100.00 100.67 103.06 106.22 106.14 106.44 107.58 108.54 105.03 104.30 104.23 103.44 100.03 100.30 100.78 99.75 97.80

Milking Cow 2.23345986 100 100.79 101.34 107.11 111.13 113.81 118.35 119.81 120.09 121.89 123.62 123.65 126.23 128.78 130.83 130.98 131.76 132.73 135.26Milking Buffaloes

10.86927151 100 100.22 100.77 104.76 108.12 109.42 114.28 117.58 119.48 121.39 124.87 127.76 131.69 135.38 140.08 144.59 149.88 154.39 161.48

42

Laying Hens 0.89619072 100 99.54 100.27 102.11 104.73 108.12 116.17 123.19 128.87 134.74 142.60 153.43 157.44 158.73 157.93 160.92 165.51 170.05 169.36

Laying Duck 0.04312389 100 99.97 101.18 102.12 104.62 107.82 107.73 108.04 108.89 109.88 106.41 105.77 105.60 104.66 90.51 90.75 91.20 90.29 88.53Fruits and Planted Tea Capital

Orange 1.33679988 100 109.84 115.38 120.93 126.47 132.01 137.56 143.10 148.65 154.19 162.57 172.47 182.02 190.65 201.91 205.91 216.32 282.11 324.11

Lemon 0.18784856 100 96.98 87.53 78.08 68.63 59.18 49.73 40.28 30.82 21.37 22.54 23.88 25.21 25.96 26.01 26.52 29.95 50.33 54.90

Lime 0.10888500 100 107.37 115.40 123.44 131.48 139.52 147.56 155.59 163.63 171.67 181.05 192.08 202.47 212.40 219.76 224.11 228.23 192.01 231.04

Sweet Orange 0.01203998 100 517.64 1053.48 1589.31 2125.14 2660.98 3196.81 3732.64 4268.48 4804.31 5068.33 5378.09 5675.37 5939.39 6174.30 6296.56 6415.60 7933.88 8090.51

Mango 2.21489370 100 133.99 80.94 83.84 88.14 88.01 94.31 98.24 101.43 125.57 185.56 245.16 286.05 361.08 418.88 476.97 799.95 491.16 540.90

Banana 0.93733357 100 99.61 94.73 89.84 84.96 80.08 75.19 70.31 65.43 60.54 61.36 61.72 62.31 63.68 64.57 65.85 101.95 88.79 101.63

Guava 0.23474147 100 102.76 106.64 110.53 114.41 118.30 122.18 126.07 129.95 133.84 134.26 134.48 134.69 134.90 135.08 137.75 190.10 137.88 139.10

Jackfruit 0.19420127 100 97.48 90.53 83.58 76.62 69.67 62.72 55.77 48.81 41.86 42.82 43.58 44.48 45.38 46.28 47.20 66.75 47.38 47.56

Pineapple 0.06189143 100 96.84 89.46 82.08 74.70 67.32 59.94 52.56 45.18 37.80 37.80 37.80 37.80 37.80 37.80 38.55 51.64 38.55 38.77

Lychee 0.06101423 100 119.68 143.07 166.47 189.87 213.26 236.66 260.06 283.45 306.85 320.80 330.64 338.68 346.73 354.93 361.96 669.26 370.63 392.07

Apple 0.23348938 100 119.78 201.07 282.36 288.90 313.99 322.24 426.97 344.32 351.40 357.83 363.30 370.69 381.41 391.70 399.46 902.06 425.62 450.82

Pear 0.06047878 100 130.09 179.79 229.49 279.18 328.88 378.58 428.28 477.97 527.67 543.81 559.33 566.78 574.23 580.44 591.93 765.88 595.48 596.10

Plum 0.21467863 100 100.22 98.63 97.05 95.46 93.87 92.28 90.69 89.10 87.51 89.61 91.71 92.41 93.25 93.88 95.74 118.06 96.52 97.01

Papaya 0.16315865 100 126.59 176.41 226.23 276.05 325.88 375.70 425.52 475.34 525.17 526.44 527.72 530.28 532.84 534.37 544.95 713.89 547.81 552.22

Pomegranate 0.02930178 100 97.72 91.27 84.82 78.37 71.92 65.47 59.03 52.58 46.13 47.15 47.15 48.18 49.20 49.20 50.18 74.24 50.18 53.25

Tea 1.25771068 100 136.67 173.35 210.02 246.70 332.69 642.05 667.45 992.70 1229.66 1466.63 1511.61 1545.60 1835.21 1896.33 1957.46 2007.33 2028.61 2043.77

Coffee 0.03843859 100 105.56 122.22 138.89 150.00 159.72 991.88 1484.50 1274.71 1815.13 2355.56 3312.78 4244.44 5140.00 6139.44 7138.89 7752.78 8055.56 8505.56Weighted average 100 100 101.85 101.87 105.94 110.07 113.42 120.36 123.52 129.41 135.26 142.44 147.11 151.81 159.94 161.23 141.14 184.39 220.84 186.32

43

44