People's Democracy(Weekly Organ of the Communist Party of India (Marxist)
May 21, 2006
Booms, Not Agriculture
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.
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.
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
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.
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
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
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.
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.
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
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.
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.
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.
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.
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
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.
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.
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.