Indian economy booms, not agriculture

[Ulhas Joglekar <joglekarulhas@xxxxxxxx>]

The Asian Age
http://www.asianage.com/

22 April 2006

Op-Ed

Economy booms, not agriculture

- By Jayati Ghosh

Strange things are happening in the Indian economy. While GDP growth in
India touches new highs, the divergence in sectoral growth rates only
increases. While industry and, particularly services record creditable or
remarkable rates of growth, the agricultural sector performs poorly.

Thus, income from agriculture and allied sectors grew at an annual rate of
1.5 per cent during the Seventies, which increased to 3.43 during the
Eighties, and then declined to 2.97 per cent during the Nineties. Over the
same periods the rate of growth of non-agricultural GDP accelerated from
4.38 per cent to 6.37 per cent and 7.14 per cent respectively.

What is particularly remarkable is that the acceleration of non-agricultural
growth during the Nineties was accompanied by a decline in the rate of
agricultural growth. And this disproportionality has actually increased in
the current decade.

These trends suggest that domestic agricultural growth is now no longer a
constraint on the growth of the non-agricultural sector. If this is true,
then it is a major structural shift in the pattern of economic growth. In
the first three decades of post-Independence development, the agricultural
bottleneck was seen as an important factor responsible for the failure of
the strategy of the import-substituting industrial development.

There were three ways in which agriculture was seen to affect
non-agricultural growth. The first reflected the sheer size of the
agricultural sector, which in 1950 accounted for more than 60 per cent of
GDP and 76 per cent of employment. As a result, demand from the agricultural
sector was seen as crucial to sustaining the demand for non-agricultural
products and services, especially manufactured products.

The second reflected the role of agriculture in providing inputs for
industrial growth. Since agricultural commodities constituted a significant
share of input costs in some industries and of the wage basket in all
industries, increases in agricultural prices obviously affected industrial
costs directly and indirectly. If such increases in costs were not
neutralised by increases in final product prices, profits could be squeezed
and manufacturing investment would then be affected adversely.

The third mechanism was through increases in agricultural prices
constraining the growth of demand for manufacturing goods. This would happen
because consumers would allocate a larger share of their incomes to food
consumption and a smaller share to manufactured goods. Further, the
government might reduce public expenditure so as to reduce absorption and
dampen price increases.

In the mid-Sixties, all these factors came into play, and were compounded by
the system of support pricing to agricultural production. This in effect
offered a floor price that encouraged speculation, since hoarded stocks
could always be disposed at the cost-plus support price, which reduced the
risk of large losses. As a result, increases in demand relative to supply
inevitably raised prices, whereas increases in supply in years of a good
harvest did not result in any significant decline in market prices.

Of course all these mechanisms can operate mainly in a context in which
there are clear limits on imports of agricultural commodities only if there
are limits on changing domestic supply conditions with imports. During the
Fifties and early Sixties, India faced a binding balance of payments
constraint. Yet, the economy witnessed rapid non-inflationary growth in
manufacturing even when agricultural growth was moderate because of access
to food imports through the PL 480 route, which enhanced supplies and helped
dampen price increases. It was when access to such imports tapered off that
the agricultural constraint proved binding, leading to the deceleration of
manufacturing growth during the late Sixties and Seventies.

Circumstances changed substantially in the Eighties and especially in the
Nineties. The most significant change was the transformation of the world of
international finance that, for the first time, provided "emerging markets"
like India access to private international finance. It is now widely held
that the Indian government exploited that opportunity during the Eighties,
to overcome the development impasse of the earlier decade.

Deficit-financed expenditure was used to accelerate non-agricultural growth,
and the resulting imbalance between non-agricultural and agricultural growth
was managed by using imports financed largely with external debt to change
the structure of domestic supplies and dampen inflation. This has been even
more true in the Nineties.

But there has also been a change in the pattern of demand and production,
involving a reduction in the direct agricultural-input dependence of the non
agricultural sector. This is even greater once we take account of the
growing share of services in non-agricultural GDP, which has reduced the
dependence upon agricultural inputs even more sharply.

The fact that economic growth is associated with less employment generation
has also played a role. The evident phenomenon of "jobless growth" has meant
that employment growth has been increasingly short of economic growth and
output per worker has risen significantly in the non-agricultural sector
where output growth has been particularly high. There has also been
increased wage inequality, largely because of increases in managerial
salaries and profits. Both these tendencies imply that the indirect demand
for agricultural wages goods would grow at a much lower rate than output
partly because of the slower growth in employment and partly because
increases in per capita incomes accrue to those whose demand for food is
satiated.

What is more, the most recent NSS data suggest that even among the
relatively poor, the share of income allotted to food consumption is being
squeezed by the growing requirements set by expenditures on health, fuel,
transportation and education. The collapse of public provision in some of
these areas, requiring purchases from private suppliers, and the increase in
prices in others, is responsible for the enforced shift away from food
consumption in the household budget.

The net result of all this is that agriculture is increasingly faced with a
growing demand constraint at a time when input costs are rising. This is a
reversal of the situation prevalent till the Eighties when the agricultural
supply constraint constituted a barrier to rapid non-agricultural growth.
The consequence of these recent trends is that the Indian economy can record
the observed creditable rates of growth of aggregate GDP even when the
agricultural sector languishes. So it is not just that farmers can
effectively be excluded from the growth process - it is also that a very
deep and widespread agrarian crisis and effective economic destruction of
peasant cultivation can be accompanied by what appears to be a booming
national economy.

This can also lead to industry, opinion makers and even government ignoring
the huge problems in agriculture since they do not seem to affect aggregate
economic growth. The problem, of course, is that agriculture still provides
the basic livelihood for around 60 per cent of our population, so that we
cannot afford to ignore the stagnation and crisis of this sector.