LECTURE 1

Nature and Scope of Economics: Importance, Subject matter: Science versus Art; and
Positive science versus Normative science; Approaches: Deductive method versus
Inductive method - Different economic systems: merits and demerits

ECONOMICS

Economics is a science that studies as to how people choose to use scarce productive
resources to produce various goods and to distribute these goods to various members of
society for their consumption.

Word economics derived from Greek word “OIKONOMICS”.

• “OIKOS” – household

• “NOMOS”- management

NATURE OF ECONOMICS

While discussing the nature of economics, one has to consider (1) the subject matter
of economics (2) Whether economics is a science or an art (3) Whether it is a positive science
or normative science,(4) Whether it is a social science and (5) Methods used to can solve
practical problems.

i. Subject matter or divisions of economics:

There are two approaches to study economics and they are: 1) Traditional approach
and 2) Modern approach.

Under traditional approach, the economic activities of man can be studied under five
divisions of economics. viz., (1) consumption (2)Production (3) Exchange (4) Distribution
and (5) Public finance.

Consumption: It is using up of wealth for satisfying the innumerable wants of human beings.
This division of economics deals with then consumer’s behaviour.
Production: It is the creation of utilities and values. This part of the subject deals with the
factors of production like land, labour, capital and management.
Exchange: It is the disposal of surplus wealth. This part deals with the mechanism of price
determination and disposal of products.
Distribution: It is concerned with the sharing of the fruits of production, among the factors
of production ie., rent for land, wages for labour, interest for capital and profit for
management.
Public finance: It deals with the Government’s income and expenditure and related policies
of the state.

The study of economics is under taken as two parts viz., Micro economics and Macro
economics in the modern approach

Micro economics: Micro economics is also called price theory. It deals with how relative
prices for individual commodities are determined. Thus, micro economics theory studies the
behaviour of individual decision making units such as individual consumers and house holds,
producing units (firm or farm ), individual industries (iron, cottage, textiles ).In the circular
flow of economic activity in an economy , micro- economics studies the flow of factors of
production from the resource owners to business firms and the flow of goods and services
from the business firms to the households . It studies the composition of such flows and how
the prices of goods and services are determined. Micro economics explains
1. The functioning of a free enterprise economy
2. It tells how millions of consumers and producers take decisions about the allocation
of productive resources.
3. It explains how through market mechanism goods and services produced in the
economy are distributed.
4. It also explains the determination of relative prices of goods and productive services.
5. It helps in the formulation of economic polices to promote efficiency in production
and welfare of the society.

Macroeconomics: Macro-economics is concerned with the analysis of the problems of the

economy as a whole. It is also termed as Income theory. It deals with aggregates of the entire
economy, such as national income, aggregate output, total employment, total consumption,
aggregate demand, aggregate supply, and general price level. Macro economics also deals
with how an economy grows i.e it analyses the chief determinants of economic development
and the various stages and process of economic growth.
 More over economic principles are applied to other fields and some of such applied
fields are : 1) Agricultural economics 2) Industrial economics (3) Marketing economics (4)
Public economics and (5)Transport economics.

ii. Economics - A Science or Arts

A science is a systematised body of knowledge, which traces the relationship between

cause and effect. To quote Poincare, “Science is built of facts as a house is built up of stones;
but all accumulation of facts is no more a science than a heap of stones in house.” In
any science, facts are to be collected systematically, then classified and analysed to bring out
the underlying relationships to frame concepts and laws. The economists collect facts
systematically and these facts are put under suitable classification, carefully analysed to lay
down general principles governing the facts and enunciated. Judged by this stand economics
is certainly a science.

An art is a systematized body of knowledge, but unlike science it lays its percepts. It
offers specific solutions to specific problems. Different branches of economics and its applied
fields offer solutions to various economic problems. Thus economics is not only a science,
but also an art. It is a science in its methodology and an art in its application.

iii. Economics- A Positive or Normative Science

A positive science is concerned with “what it is ” . It deals with the things as they are.
Positive science describes the theories and laws and explain the observed phenomenon with
cause and effect, but refuses to pass any moral judgement. But a normative science is
concerned with “what it ought to be” and it has no objection in discussing the moral
rightness or wrongness of a thing and it can pass moral judgement. In other words, positive
science describes, while normative science evaluates. The classical school of economists
were for positive economics, while the historical school advocated normative economics by
associating ethics with economics. Modern economist not only describes an economic
problem positively, but also prescribes for improving the situation normatively. Hence
economics is both a positive and normative science.
iv. Economics- A Social Science

Any study dealing with human beings living in groups may be called as a social
science. eg.,History, Ethics and Politics. Like all other social sciences, economics is also
concerned with human behaviour, but it does not study man as an isolated individual.

1. It studies men who live in the society, affecting society by their actions and
themselves exposed to influences of the society.
2. It also studies man living in an organized society exchanging goods for those of
others. Production and exchange of different goods to takes place across regions,
states and countries to satisfy human wants. There is a close inter-dependence of
millions of people living in distant places. Thus, the process of satisfying wants
becomes a social process.
3. It also examines the social behaviour of men in groups.
4. In economics, the study of economy is considered with macro economic problems for
the society as a whole.
5. It is closely linked with all other social sciences

Considering the above said facts, economics can clearly be called as a social science.

v. Methods Used to Solve Practical Problems- Deductive or Inductive

Two scientific methods are available for solving the practical problems and they are:
1) Deductive method and 2) Inductive method.

Deductive method: This method is also termed as analytical, abstract or a priori method.
This method involves reasoning from a few fundamental prepositions and the truth of which
is assumed. This method starts with a few indisputable facts about the human nature and draw
inferences about individual cases. Essentially this method of inquiry works from ‘generals’
to particular. The classical economists like David Ricardo, J.S. Mill and Senior built up
economics based on deductive method. This method has the merit of being simple, effective
and certain only if the assumptions are valid. However,more often the assumptions turnout to
be untrue or partially true.
Inductive method: This method insists on the examination of facts and then lays down
general principles. Here facts are collected from individual cases, analysed and
generalizations are made which will be tested further with reference to new facts. This
method proceeds from ‘particular’ to ‘general’. The advantage of inductive method is that it
is based on facts and therefore having surer foundation. The disadvantage is that hurried
conclusions are possible. Modern economists use both methods in combination to solve
practical problems.

ECONOMIC SYSTEMS

Resources are limited in any economy and the scarcity of resources impedes the
production of goods and services needed for satisfying human wants. Each country is striving
hard to solve the common basic economic problems viz., What to produce, How to produce
and For whom to produce by following an economic system of their choice to add welfare to
the people. These three questions of What, How and For whom are fundamental in
economics.

What to produce? : This is related to allocation of scarce resources among competing uses,
to produce want satisfying goods and services. It is the question of product combination with
limited resources. It also refers to choice of resource use between present and future.

How to produce? : It refers to the organization of resources in such a way that products are
produced in an efficient way with least cost and it is a question of factor combination.

For whom to produce?: It means the distribution of goods and services among people and it
tries to answer who should get and how much.

Basically three economic systems are in vogue. They are: 1) Capitalism 2) Socialism
and 3) Mixed economy

I. CAPITALISM (OR) FREE PRIVATE ENTERPRISE SYSTEM (OR) FREE

MARKET ECONOMY (OR) LAISSEZFAIRE SYSTEM

“Capitalism is that economic system in which property is privately owned and central
economic problems regarding what, how and for whom to produce are solved by the free
play of market forces such as demand and supply “
Characteristics of Capitalism

1. Right of private property: An individual has a right to acquire and to use and
control the economic goods
2. Right of inheritance: The owner is free to dispose of his property in any way he likes
and also free to acquire property
3. Right of free enterprise: There is freedom of enterprise and everybody is free to
engage in whatever economic activity he likes .
4. Profit motive : Buyers and sellers are operating with profit motive.
5. Laissezfaire: Government will not interfere in the activities, except for some
restrictions and regulations imposed for maintaining social harmony and benefits to
society
6. Competition : Competition exists among sellers or produces of similar consumer
goods to attract customers, among buyers to obtain goods to satisfy their wants,
among workers to get jobs and so on.
7. Operation of Market forces: Market forces are reflected in price changes that
determine what goods are to be produced, how they are to be produced and for whom
they are to be produced. Demand arises from the consumption needs dictated by
wants. Supply comes through the production by employing scarce resources.
8. Price mechanism: Price mechanism plays a vital role in the working of a free
enterprise capitalist economy .The price mechanism has been termed as the ‘invisible
hand’ directing all the economic activities of a capitalist economy The basic
economic problems are solved by price mechanism.
Prices by themselves are indicators of the relative strengths of two opposing forces supply
and demand; and it is their interaction in the market place that determines the prices.
Demand arises from the consumption needs dictated by wants. Supply comes through the
production by employing scarce resources. Thus the economic activities of supply and
demand interaction can be represented as follows:
 Figure.1

Functioning of Free market economy

Product market

Determination of product prices

(What to produce)

Product market

Business firms Households

1. Organisers of production 1. Consumers

2. Buyers of factors 2. Supply of factors

Factor market

(How to produce)

Factor market

Determination of factor prices

The upper part of this diagram shows the product market where in demand and supply of
various goods and services determine their prices. The household represents the whole
population of the society, which serve two functions in the cycle of economic activities.
First, they represent the consumers from whom the demand for various goods and services
emanate. Second, they are the owners of all productive resources and thus supply resources
of factors of production. Similarly, the firms act as suppliers of products and buyers of
inputs. The lower part of the diagram represents the factor markets where in the prices of
factors such as land, labour, capital are determined in terms of rent wages and interest.
While, the outer arrows represent the physical flows, the inner arrows represent financial
flows between the firms and households.

The invisible market forces viz., supply and demand through prices, regulate the
capitalist economy. Demand arises from consumption needs. Supply comes through
production. Essentially they operate through exchange in factor and product markets,
through payments. Finally, there is no role for government to play and market forces alone
will influence the decision making. Eg. United States of America, United Kingdom and
France.

Merits of Capitalism

1. The system works automatically and no need for state intervention

2. Flexibility and adaptability is more.

3. Market mechanism fixes the price and there is no unnecessary intervention.

4. Optimum utilization of resources.

5. Induces hard work by providing incentives.

6. Results in higher per capita income, higher rate of capital formation and development.

7. Creates demand for new goods and services and also economise the production by
increasing the scale of production

Demerits of Capitalism

1. The distribution of wealth is inequitable

2. Human welfare is ignored, as there is a chance for moving towards materialism due to
monetary consideration of every economic activity.
3. Waste of resources due to severe competition as all the activities are duplicated (e.g.
Advertisements., Salesmen) to capture the market share
4. May lead to economic instability and unemployment
5. It leads to concentration of economic power with a few persons and emergence of
monopolies.
6. Misallocation of resources is possible since more profit for luxuries than in consumer
goods.
7. Chances for class-conflict between haves and havenot’s.

II. SOCIALISM

Characteristics of Socialism

1. It is an economic system in which the ‘means of production’ (capital equipment,

buildings and land) are owned by the state.
2. Socialism does not mean all the productive resources should be owned by the state. Only
the
major instruments of production should be under the state control so that economy is run
for
social benefit rather than for private profit.
3. A central planning authority will decide on the resource allocation and products to be
produced and the distribution of goods and services.
4. It implies equality of incomes and equality of opportunities for all. In this system
redistribution of income and assurance of minimum standard of living with housing and
medical care will be provided.
Eg : Soviet Russia.
Merits of Socialism

1. Avoids wastes of all kinds

2. Leads to economic and trade stability

3. Effective planning leads to optimum utilization of resources

4. Productive efficiency is improved

5. Pressure of social security and welfare

Demerits of Socialism

1. Leads to corruption, inability, nepotism in the administration (redtapism etc.)

2. Rigid and inflexible.

3. No freedom for consumers to make their choice on goods.

4. Concentration of power lies with the state.

5. Failure to bring economic equality among the community.

6. Lack of incentives to hard work.

III. COMMUNISM

Characteristics of Communism

1. Communism is an extreme form of socialism

2. It is an idealistic system in which all means of production and other forms of property
are owned by the community as a whole, with all members of the community sharing its
work and income.
3. It is the system in which all are expected to work and no one lives by owning capital.
4. Exploitation has been eliminated and thus there is a class less society.
5. The main difference between communism and socialism is that the former believes
and adopts
violent revolutionary methods to capture the machinery of the government while the latter
believes in peaceful and parliamentary methods. Example - China and Cuba.
IV. MIXED ECONOMY

Characteristics of Mixed Economy

1. It is neither pure capitalism nor pure socialism but a mixture of the two
2. It is an economy in which both the private enterprises and the public enterprises co
exist.
3. The decisions as to what to produce, how and for whom will be taken together by
private owners and government,
4. The government acts as a watch dog and regulates the activities of private
entrepreneurs by way of issuing licences, permits in such a way to add maximum
welfare to its people.
5. The basic and heavy industries like industries producing defense equipments, atomic
power, heavy engineering goods etc. are put in the public sector. The consumer goods
industries, small and cottage industries, agriculture etc. are assigned to the private
sector
6. Consumer sovereignty is protected
7. Exploitation of labour by capitalists is controlled by Government
8. It is realized that in the under developed countries, like India, economic development
cannot be achieved at the desired rate of growth without any active government help
and guidance.
Eg. India follows Mixed economy.

Merits of Mixed Economy

1. In a mixed economic society the state has launched the projects, which are meant for
societal welfare, and the projects, which cannot be implemented by individuals due to
huge investment requirement.
2. The private initiative had not been killed. Both the sectors are acting complementary
to each other. The state also encourages the individual entrepreneur to start new units
by providing incentives.
3. If the private sector is faulty in resource utilization, the state can enter in the particular
enterprise by means of giving competition, and also effectively correct the mistakes
done by the individual entrepreneur.
Demerits of Mixed Economy

1. Inefficient operations: The private sector may be made defunct by the Government
rules and regulation and the public sector may be made inefficient due to lack of
initiative and responsibility among the enterprises. Sometimes each sector may be
acting as competitor for all items among themselves.
2. Instability: The changing attitudes and expansions of public sector will override the
private sector and becomes monopoly. In this system private sector may not co-
operate with public sector, which may result in capitalistic outlook for the industry.
3. Economic fluctuations: The private sector industries may not be controlled
effectively and also they depend on market forces. This will result in economic
fluctuations and unemployment.

Comparison of the three economic systems

1. In capitalistic economy, the entrepreneurs utilize the available resources efficiently, as

they have strong initiative to earn profit. But the free functioning of private
enterprises results in extreme inequalities of income and wealth.
2. In socialistic economy, the inequalities in income and wealth get reduced to the
minimum and the national income is more equitably distributed. But the socialistic
economy suffers from the problem of lack of private initiative that results in the lack
of inventive ability and enterprising spirit which ultimately lead to inefficient use of
available resources.
3. The mixed economy aims at achieving the goals of both capitalism and socialism (i.e.,
efficient use of resources and equitable distribution of income and wealth) and at the
same time, it emphasizes on the reduction of evils of capitalism and socialism
 LECTURE-2

DEFINITIONS OF ECONOMICS

Wealth definition

The early economists defined economics as the science of wealth. Economics was
regarded as the science, which studied the production and consumption of wealth. According
to Adam Smith,(1776) the father of economics, economics was concerned with “An Inquiry
into the Nature and Causes of Wealth of Nations”. In this definition, a key position was
assigned to wealth.

J.S. Mill (1860) also defined economics as the practical science of production and
distribution of wealth. The term wealth in both definitions stands for the collection of
exchangeable goods, which have the capacity to satisfy human wants. Moreover, unlimited
free goods like air, sunshine do not constitute wealth since they do not involve choice. Other
characteristics of wealth are:

1. Wealth is external to man and transferable.

2. Wealth should be capable of being appropriated: that is some person or persons
should be able to possess or enjoy it to the exclusion of others.
3. Man’s internal qualities and aptitudes are not wealth, though they may be a source of
wealth.
Criticisms

1. Adam smith’s definition of economics confines the branch to an inquiry into how
country acquires wealth and what sort of wealth it creates. This was rejected by
Alfred Marshall, Pigou and cannon on the ground that wealth is a means to an end and
the end is welfare of the people.
2. This definition was severely criticised by Ruskin and Carlyle (Moralists) since it tried
to teach selfishness and restrict economics to a man – degrading, sordid inquiry on
personal wealth accumulation. They called economics based on wealth as dismal
science.
Welfare definition

After Smith, for a long time, the accepted view was that economics is concerned with
those human activities, which center around wealth not for its own sake, but for the sake of
material welfare (improved standard living) that it promotes.
Marshall defined, “Political Economy or Economics is a study of mankind in the
ordinary business of life; it examines that part of individual and social action which is most
closely connected with the attainment and with the use of the material requisites of well being
”.

Implications of Marshall’s definition

1. Economics does not regard wealth as the be- all and end-all economic activities.
Wealth is sought for promoting human welfare. Hence, wealth is considered as a
secondary position.
2. Economics is not concerned with ‘Economic man’ - a man whose only motive is to
acquire wealth. But economics deals with ordinary men and women who are swayed
by love, affection and fellow feelings and not merely motivated by the desire to get
maximum monetary advantage.
3. Economics is a social science and not one, which studies isolated individuals. It
studies persons living in society influencing other people and being influenced by
them.
4. Economics studies only material requisites of well being. It has thus a material aspect
and ignores non-material aspect.
Criticism
Lionel Robbins criticised the Marshallian definition of economics on the following
grounds.

1. Welfare definition is too restrictive since it excludes non-material things like services
of doctors, teachers etc. which also add to the welfare
2. It is classificatory because it makes a distinction between material welfare and non-
material welfare and says that economics is concerned only with material welfare.
3. It unduly restricts the scope of economics.
Scarcity definition
Lionel Robbins in his book “Nature and significance of Economic Science “( 1931),
defined economics as “ Economics is the science which studies human behaviour as a
relationship between ends and scarce means which have alternative uses”

This definition has the following propositions

1. Ends refer to wants, which are unlimited in number.

2. Means refer to the resources like land, labour and capital used in the production of
commodities to satisfy human wants. Means are strictly limited, even though
wants are unlimited.
3. The scarce means are capable of alternative uses. Thus, in Robbinsian sense,
economic activity lies in man’s utilization of scarce means having alternative uses,
for the satisfaction of multiple ends.
4. Scarcity is used in a relative sense in accordance with the requirement. A
commodity may exist in a small quantity but if nobody has any use for it, it is not
scarce in the economic sense (eg) rotten fruits. Alternatively larger reserves of
coal may be scarce related to demand.
Criticisms
1. The concept of welfare is implicit in scarcity definition also.
2. The greatest defect in Robbins definition is that it is abstract and static in content and
suffers from inadequateness. Robbins has taken an entirely static view of the scarcity
problem. His definition deals with the adjustment of given scarce means with given
ends or wants. But in a dynamic society, the ends and means are subjected to change.
3. An economic problem does not always arise from scarcity as suggested by Robbins. It
can arise from abundance as well.
4. Economics, not only deals with how resources are allocated and how prices are
determined, but also study how total income is generated. Keynesian economics,
which explains the determination of national income and employment, is excluded
from Robbins definition, which merely assigns an ‘allocative role’. to economics.
5. The theory of economic growth on economic development has recently become a very
important branch of economics, which is not covered by scarcity definition.
6. It does not explain the problem of unemployment.
Growth definition
Robbins definition excluded the problem of economic growth and took a static view
of an essentially dynamic problem. This inherent defect has been removed by Prof.
P.A.Samuelson – a USA economist and a Nobel laureate, who defined economics in a
dynamic setting taking into account the income, employment and economic growth along
with the contents of scarcity and welfare definition. This is the modern definition having
universal acceptance. This definition has wider scope compared to all other definitions.
Samuelson defined economics as

“Economics is the study of how men and society choose, with or without the use of money,
to employ scarce productive resources, which could have alternative uses, to produce various
Commodities over time, and distribute them for consumption now and in future among various people
and groups of society.

AGRICULTURAL ECONOMICS

Agricultural Economics is a branch of economics in which primary attention is given

to scientific analysis of the economic problems associated. with agriculture . In India
economic problems of agriculture were studied as a part of generalized rural economics as a
well defined field of study. .The subject gained importance in the post independence era in
view of pressing need for the rapid economic development and the importance of
agricultural development a achieve all around economic growth through planning

Famous economists like A.W. Ashby from United Kingdom and Prof J. D. Black and
Stewart from U.S.A. visited India on invitation by the Government of India and stressed the
importance of developing agricultural economics as a new branch of science in India. In
response to this recommendation a separate Department of Agricultural economics was
created in the Indian Council of Agricultural research during the early sixties.

Definitions

According to professor gray agricultural economics is the science in which the

principles and methods of economics are applied to the special conditions of agricultural
industry.. O’Brian was also gave a similar definition as “Agricultural Economics is the
application of general economics to the craft and business of agriculture”
 G.W. Forster and Marc Leager in their Elements of Agriculture have defined
agricultural economics as an applied science and as such is concerned with the identification,
description and classification of the economic problems of agriculture to the end that these
problems may be solved.

H.c. Taylor have given a definition to agricultural Economics with farm

management perspectives as “Agricultural economics treats of the selection of land, labour
and equipments for a farm, the crops to be grown, the selection of live stock enterprises to be
carried on, and the whole question of the proportion at which all these agencies should be
combined. These questions are treated primarily from the point of view of costs and prices.

To get better understanding of the scope of the subject ,” Agriculrural Economics

can be defined as that part or branch of economics which deals with the problems arising out
of man’s use of natural resources relating to agriculture.

Scope of Agricultural Economics

The scope of the Agricultural Economics can be studied under two headings such as 1)
the subject matter of Agricultural Economics and 2) The importance of Agricultural
Economics

I. Subject Matter of Agricultural Economics

It may be observed from the definitions that the subject of Agricultural Economics covers
all the aspects of the complex agricultural industry. Originating as a science of farm
management and land tenure, the science has developed and broadened to embrace all the
major areas or problems of economic analysis associated with agriculture such as land
economics, agricultural labour and tenancy, agricultural credit, agricultural marketing,
agricultural cooperation and agricultural planning and politics. The subject matter can
generally be studied under the following headings

a) Farm Management: It is concerned with the efficiency in farm production, returns

that will result from the application of various inputs at different levels in farming and
determination of best combination of products and the best farm production
alternatives under physical and economic conditions. In other words it is the input-
output analysis.
 b) Land economics : It deals with the study of unit of cultivation, land tenure, land use
pattern and land reform measures and their impact on the agricultural production.
c) Agricultural labour : This deals with the problems of agricuItural labour, demand
for and supply of agricultural labour, pattern of employment, income and
Government's protective measures.
d) Agricultural finance : Under this heading the extent of rural indebtedness, demand
for credit and various sources of rural financing agencies and their merits, demerits to
the society will be analysed.
e) Agricultural Marketing: Agricultural Marketing is the major area in he study of
agricultural Economics. The various problems of The various problems of marketing
agricultural commodities and lines of improvement made will be pursued in this field
f) Agricultural Cooperation: History of co-operation and role played by co-operatives
in financing agriculture and marketing of agricultural commodities and problems of
co-operative movement forms the major part of this field.
g) Agricultural Development : Basic principles of Planning for the use and
development of resources pertaining to agriculture and overall growth of agriculture
to support economic development of the country will be studied
The above titles indicate the important fields of the science of agricultural economics.
These can also be studied by classifying them according to the classical economists as
divisions of economics such as consumption, production, exchange, distribution and public
finance. Since some of the titles cannot strictly be placed under anyone of the above said
divisions of economics, these may be. placed into either Micro-Economics or Macro-
economic analysis

II. Importance of Agricultural Economics

Agriculture is the mother of all industry and maintainer of human life. Agriculture being a
basic industry besides, supplying food, produce raw materials for the industries. An increase
in farm income raises the purchasing power of rural people and create demand for new
industrial goods. Agricultural progress is a pre-requisite for industrial development. It offers
opportunity for the unemployment during industrial recession and releases surplus man
power to the industries during economic progress.
 1. In India agriculture is the main stay of the people. More than 70 per cent of the
people are dependent on land. It contributes nearly 49 per cent of the national
income. The Indian agriculture has certain special features of its own.
2. The average yield of crops in India is very low compared to other countries. This
leads to a scope for better use of land and adoption of scientific method s off
cultivation.
3. In India agriculture is carried on as a way of life at subsistent level. This increases
the scope for educating the farmers in the economic aspect of farming and make them
business minded.
4. The primitive mode of cultivation of agriculture has to be changed and
mechanization has to be developed. Modern science and technology must be applied
to agriculture for improving the agricultural production.
5. Pressure of population on land increases with increase in landless labourer. The
scope of increasing the area under cultivation is limited. Hence there is scope for rural
planning to provide employment opportunity for the displaced agricultural labour and
improving the productivity of agricultural labour.
6. The size of holding is becoming less and less due to the sub-division and
fragmentation. Here again the problem warrants a study of effective land reform
policy with agricultural base
7. Problems of agricultural marketing: Due to the neglect of marketing side in the
agricultural development programs the Green Revolution has neither improved the
standard of living of agricultural workers nor decreased the price level of
agricultural commodities to benefit the urban consumers. This needs a special
attention of agricultural economists.
8. Rural indebtedness. In the absence of reliable government agencies to finance rural
folk, the local money lenders are exploiting the innocent and ignorant farmers and
cause instability of ownership and thus in production also. This is one of the major
drawback in Indian agricultural economy which needs more attention of the
Government.
Faced with above problems and difficulties the Government and the farmers realised the
importance of agricultural economics. The Agricultural Universities have also felt the
importance of developing this science by organizing separate Division of Agricultural
Economics for intensive research on problems of agriculture, production, farm income and
welfare of the farming community.
Role of agriculture in economic development

1. Contribution to National Income:

From the very beginning, agriculture is contributing a major portion to our national income.

In 1950-51, agriculture and allied activities contributed about 59 per cent of the total national

income. Although the share of agriculture has been declining gradually with the growth of

other sectors but the share still remained very high as compared to that of the developed

countries of the world. For example, the share of agriculture has declined to 54 per cent in

1960-61, 48 per cent in 1970-71, 40 per cent in 1980-81 and then to 18.0 per cent in 2008-09,

then to 16% in 2020 whereas in U.K. and U.S.A. agriculture contributes only 3 per cent to the

national income of these countries.

2. Source of Livelihood:

In India over two-thirds of our working population are engaged directly on agriculture and

also similarly depend for their livelihood. According to an estimate, about 66 per cent of our

working population is engaged in agriculture at present in comparison to that of 2 to 3 per

cent in U.K. and U.S.A., 6 per cent in France and 7 per cent in Australia. Thus the

employment pattern of our country is very much common to other under-developed countries

of the world.

3. Source of Food Supply:

Agriculture is the only major source of food supply as it is providing regular supply of food

to such a huge size of population of our country. It has been estimated that about 60 per cent

of household consumption is met by agricultural products.

4. Role of Agriculture for Industrial Development:

Agriculture in India has been the major source of supply of raw materials to various

important industries of our country. Cotton and jute textiles, sugar, vanaspati, edible oil

plantation industries (viz. tea, coffee, rubber) and agro-based cottage industries are also

regularly collecting their raw materials directly from agriculture.

About 50 per cent of income generated in the manufacturing sector comes from all these

agro-based industries in India. Moreover, agriculture can provide a market for industrial

products as increase in the level of agricultural income may lead to expansion of market for

industrial products.

5. Commercial Importance:

Indian Agriculture is playing a very important role both in the internal and external trade of

the country. Agricultural products like tea, coffee, sugar, tobacco, spices, cashew-nuts etc. are

the main items of our exports and constitute about 50 per cent of our total exports. Besides

manufactured jute, cotton textiles and sugar also contribute another 20 per cent of the total

exports of the country. Thus nearly 70 per cent of India’s exports are originated from

agricultural sector. Further, agriculture is helping the country in earning precious foreign

exchange to meet the required import bill of the country.

6. Source of Government Revenue:

Agriculture is one of the major sources of revenue to both the Central and State Governments

of the country. The Government is getting a substantial income from rising land revenue.

Some other sectors like railway, roadways are also deriving a good part of their income from

the movement of agricultural goods.

7. Role of Agriculture in Economic Planning:

The prospect of planning in India also depends much on agricultural sector. A good crop

always provides impetus towards a planned economic development of the country by creating

a better business climate for the transport system, manufacturing industries, internal trade etc.

A good crop also brings a good amount of finance to the Government for meeting its planned

expenditure. Similarly, a bad crop lead to a total depression in business of the country, which

ultimately lead to a failure of economic planning. Thus the agricultural sector is playing a

very important role in a country like India and the prosperity of the Indian economy still

largely depends on agricultural sector. Thus from the foregoing analysis it is observed that
agricultural development is the basic precondition of sectoral diversification and development

of the economy.