As public and private investments had paralleled until the mid 1980s, public investment was said to induce private investment, and therefore, the ceiling, that capital formation by public investment might hit was feared to exert negative effect on the private investment7.
However, new theories have been required to explain the divergent trends of capital formation by public and private investments since the latter half 1980s. Special attention should be paid here to the fact that even though no significant changes were found in the terms of trade between agriculture and industry that were disadvantageous to the former in the latter half of the 1970s, agricultural fixed capital formation by the private sector has been increasing since the latter half of the 1980s.
The private sector's capital formation tentatively surged upward in the late 1970s. But if we regard that period as an anomaly, the increase has kept relatively constant. In 1977, the Janata Party came into power, and the Congress went out. The Janata Party was compelled to take strongly populism-oriented government policies due to its weak political base. Furthermore, in the core of the party was Charan Singh, the representative of the wealthy farming class of the western Uttar Pradesh granary belt8. He even served as the Vice Premier and Finance Minister, albeit for a short term. In those days, the government policies turned in favor of agriculture, especially the interests of commercial farmers. One typical example was the increase of subsidiaries for agriculture including credit9. Since such subsidies become vested interests for the beneficiaries once introduced, the ratchet effect impeded efforts to reduce them. After all, the New Congress Party, back in office, was not able to engineer any reduction, no more than their predecessor. How much impact the political measures had on private capital formation in the agricultural sector has not been identified. However, in view of the proportion of the agricultural-institutional loans to the total of private fixed-capital formation for the agricultural sector, which surged to 60% in the 1980s, up from 29% in the 1970s, it is obvious that the Government's financial support to private sector capital formation has increased (Figure 1-12)10.
