People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


Vol. XXX

No. 21

May 21, 2006

Economy Booms, Not Agriculture

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.

 

STRUCTURAL SHIFT

 

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.

 

SIGNIFICANT CHANGES

 

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.