Relationship between public expenditure on agriculture and agricultural production in Nepal

Abstract

This study aims to investigate the relationship between the government expenditure on agriculture and agricultural production in Nepal from 1975/76 to 2021/22. The empirical research has applied Vector Autoregressive model for the time series data from 1975/76 to 2021/22. Agriculture is chiefly recognized as a mainstream economic sector in Nepal for the overall development and remained a major concern to the government, businesses, and to the general people in large. However, the share of agriculture in national GDP is reported to be in decreasing each year. The main objective of the study is to analyze relationship between public expenditure on agriculture and agriculture GDP. The study considers capital and recurrent expenditure on agriculture as the components of public expenditure on agriculture. The empirical research has applied Vector Autoregressive model for the time series data from 1975/76 to 2021/22. The study revealed that there is short run relationship between capital expenditure and recurrent expenditure in agriculture and agriculture GDP. The empirical results of the estimated model demonstrated that, for AGDP itself, first lagged period has significant positive influence on current period. The absolute value of coefficient of first period lag has a great influence on AGDP at current period than that of second period lag. Similarly, recurrent expenditure in first lagged period has positive influence on AGDP at current period. However, recurrent expenditure in second lagged period seems to have negative influence on AGDP at current period. Capital expenditure in first lagged period has positive influence on AGDP at current period. However, capital expenditure in second lagged period seems to have negative influence on AGDP at current period. The study concludes that expenditure on capital aspects plays a vital role to increase agricultural productivity and production whereas contribution of recurrent expenditure on AGDP is not statistically significant. Granger causality test showed that there is unidirectional relationship between public expenditure in agriculture and agricultural GDP. Thus, government should emphasize on increasing expenditure on agriculture along with their logical allotment and timely implementation. Keywords: Public expenditure, Capital expenditure, Recurrent expenditure, Agriculture GDP, VAR model, Granger Causality test, Residual test.