Agriculture

and
Economic Development

Dr. Amruta Suryawanshi

Gokhale Institute of Politics and Economics
 Economic Development

 Origin of the terms ‘development and growth’

 Meaning of economic development and growth

 “Economic growth is one aspect of the process of economic development".

– Dr.Amartya Sen

 According to Ranis, economic growth and development is a two-way

relationship,
 Comparison Chart

Economic Growth Economic Development

Concerned with increase in the economy's Concerned with structural transformation
output of social system
Brings qualitative and quantitative changes
Brings quantitative changes in the economy
in the economy
Indicators - HDI (Human Development
Index), gender- related index (GDI),
Indicators like – GDP, PCI, etc.
Human poverty index (HPI), infant
mortality, literacy rate etc.

Short term process Long term process requires sustained effort

Economic growth is a more relevant metric More relevant to measure progress and
for progress in developed countries. quality of life in developing nations.
Basic Characteristics of Indian Economy as
a Lower Middle Income Economy
1) Low per capita income:

Country Per Capita GNI(in US $)

United States 76770

Australia 60840

Germany 54030

United Kingdom 49240

China 12850

India 2390

Source: World Bank national accounts data, 2022

2) Occupational pattern:

Distribution (% of GDP)
Employment in
agriculture
Country
(% of total Agricultur
Industry Services
employment) e

U.K. 1.03 0.8 27 72.2

United States 1.66 1 21.4 77.6
Brazil 9.69 6.8 34.3 58.9
China 24.41 7.3 39.9 52.8
Sri Lanka 25.75 8.8 35.1 56.1
Pakistan 37.54 22 20.4 57.2
India
Source: 43.96 data, and 17
World Bank national accounts OECD National Accounts data
29.8 53.4files 2022
3) Poor quality of human capital:

Human Development
Country HDI Rank
Index (HDI)

Switzerland 0.962 1
Germany 0.942 9
United States 0.921 21
China 0.768 79
Bangladesh 0.661 129
India 0.633 132
Source: UNDP Human Development Report 2023
4) Heavy population pressure (Population Density - India’s in 2023 – 481 /
person sq km, USA -37, Australia/ Canada – 3-4. )

5) Prevalence of Unemployment and Underemployment

6) Rate of capital formation

7) Maldistribution of wealth/assets

8) Low level of technology

9) Low level of standard of living

Agriculture and economic development

What is the role of agriculture?

Can agriculture be a leading sector to induce faster growth?

Under what conditions ?

 What literature says
 Kuznets (1968) pointed out that in a successful development strategy,
technological progress must support both industrialization and agricultural
productivity. The revolution in agricultural productivity, according to
Kuznets, is an indispensable base of economic growth.
 Adelman and Mellor (1984) –

Agricultural Demand Led Industrialization (ADLI)

Emphasised the importance of agricultural growth in generating demand

for locally produced products and thereby stimulating overall production
and growth.
 Correlation between Agriculture and economic
growth

 Agriculture is deeply related to industrial growth and national income in

India.
 1% increase in agricultural growth leads to 0.5% increase in industrial
output and 0.7% increase in national income of India. This correlation has
been pointed out by many great economists in India since 1960s. Prof.
Rajakrishna (1976), Prof. S. Chakravarti (1974-1979) and C.Rangarajan
(1982) are some of the most important names.
 Earlier, the industrial sector was selected as prime moving force of the
economy by GOI. But , the sector failed to lead economy. The failure in the
agricultural front led to failure of economic planning.
 Without increasing income of people who depend on agriculture, the
market was not going to support industries.
 As a result, GOI announced agriculture as the prime moving force of
economy in 2002.

“ Agricultural development is central to economic

development of the country”
-10th Five year Plan
 Impact of Agriculture Growth
Impact on Micro-Economic level
 Inadequate and irregular access to food limits labour productivity.

– Fogel (1994)
(Fogel calculated that increases in food intake among the British population since
the late eighteenth century have contributed substantially to increased
productivity because of rise the energy available for work by those in the labour
force and explains about 30 percent of the British growth in per capita incomes
over the past two centuries”.)

 Through the “Fogel linkages” increased food security of the poor

contributes substantially to long-run economic growth.
Impact on Macro-Economic level
 Unstable food prices can decrease level and efficiency of investments.

i. Consumers save to protect themselves against the effects of a possible

increase in food prices.

ii. Farmers save to ensure themselves against a sudden drop in crop prices.
 These precautionary savings are kept in liquid form, to be called upon in
event of a sudden change in food prices. It affects the quantity of
investment.
 Instability can induce speculative rather than productive investment and
slow down economic growth.
 Role of Agriculture
in
Economic Development
 1. Product Contribution

In a developing economy, growth in agricultural sector can be expected to

lag behind growth of non- agricultural sector for three reasons:

1) Engel effect

2) Changing resource structure of agriculture effect

3) Urbanization effect

But, in most LDCs, development based on structural diversification of

economy is constrained by the r.o.g. in marketed output of domestic
agriculture.
 1.1 Food Contribution
 As industrialization proceed, productivity of those remaining in agriculture
should rise fast enough to provide the migrants with a higher level of per
capita food consumption.
 Edel, 1969:
a = rate of growth in domestic agricultural supply
a* = rate of agricultural growth required for price stability
The model postulates inflation if a < a*, and general price stability if a ≥ a*.

 Food inflation:

1) Social and political instability which is inimical economic growth.

2) Deterioration of industry's terms trade

 Food Imports:
1) constrained by the scarcity, and high cost of foreign exchange.
2) opportunity costs of food imports and domestic food production.
 Inflationary Spiral

Because of the time-lag, agricultural prices may appear to ‘lead’ other

prices at one stage of the inflationary spiral whereas non-agricultural
prices appear to be leading at a later stage.
 Diversification of the economy is contingent upon domestic food producers
producing a surplus; which is large enough to feed a growing number of
non-food producers.
 1.2 Raw material Contribution

Backward linkage = Intermediate input purchases from other industries

Total value of production of particular industry

Forward linkage = Intermediate output sales to other industries

Total sales of particular industry

Total linkages = Backward linkage + Forward linkage

Hirchman, 1958:

In traditional agriculture,
Weak forward linkages
Lacks backward (production goes
linkages Agriculture directly for
(self sufficient) consumption without
processing)

In modern agriculture,

Agro processing
Industrial Inputs Agriculture
industries
 2. Market Contribution

 Kuznets 1964:

1) Marketization of the production processes

2) Marketization of agricultural net product

 In the long term, although the absolute magnitude of the market

contribution continues to grow but its relative importance in fostering
economic growth and development naturally decreases as agriculture's
share of national product declines.
Absolute and relative share of agriculture in GDP

Food Production
Year % in GDP
(mt)
1950-51 50.8 57.7
1960-61 82 53.0
1970-71 108.4 46.3
1980-81 129.6 39.7
1990-91 176.4 32.2
2000-01 196.8 24.6
2011-12 257.4 15.58
2021-22 315.61 18.80
Source: Economic Survey of India 2021-22
 3. Factor Contribution

The factor contribution derives from resource transfers to other sectors

(Kuznets, 1961). The resources transferred are capital and labour.

3.1 Capital contribution:

Arguments in favour of transferring capital out of agriculture.:

1) Demand for non-A products > demand for agricultural products.

2) Capital / output ratio.

3) Sole domestic source of saving in initial stage of development.

4) Farmers benefit indirectly from non-A investments.

The conditions governing the free market transfer of capital from the
agricultural to the non-agricultural sector given by Griffin are as follows:
(i) Production > Subsistence.
Marketable surplus of agricultural products must exist.
(ii) Consumption < Income.
Farmers must be net savers.
(iii) Savings > Investment in agriculture.
Farmers’ savings must exceed their investment in agriculture.
(iv) Network of financial institutions is needed to channel agricultural
savings into industrial development.
3.2 Labour contribution:
 Transfer of Labour from agriculture to industry subject to the constraints of
'Quality' of rural migrants as potential industrial workers.
 It involves obvious (transport, rehousing) and less obvious (training) costs
of transferring.
 The costs of training for some types of work is enhanced by:
1) Low formal educational qualifications of many migrant
2) Cost of adjusting to the standards of punctuality and regular working hours
inherent in the factory system.
3) Hidden cost of employing migrants.
 Labour redundancy in LDC agriculture is supposed to take the form of
disguised unemployment:
 i) MPL = 0
 ii) 0 < MPL < SW
 So, many development models favour mobilization of redundant
agricultural workers for socially productive employment outside agriculture
 But if, Rate of rural exodus > r.o.g. of Urban employment.

Then it results in prevalence of high urban un-employments needs

appropriate policy
 To increase employment in agriculture,

or

At least slow down the rate of out-migration in order to contain the number
of urban unemployed.
 This is main policy conclusion of Todaro’s celebrated rural-urban
migration model (Todaro, 1969).
 4. Foreign Exchange Contribution

Whether the foreign exchange contribution conflicts with the market and
factor contributions?

1. Food/Raw material that is sold abroad is not available for domestic

consumption (inflation).

2. Resources utilised in producing agricultural products for export are not

available for transfer to the non-farm sector.
 In a country with a lagging agricultural sector and a large and
unmanageable food import bill it might make better economic sense to
expand food production for the domestic market than to encourage
agricultural export.
 But once domestic agriculture is able to meet the basic requirements of the
domestic market, and the food import bill is reduced to a manageable size,
it may be sound policy to exchange agricultural products- for imported
goods.
 Development in most LDCs is constrained by scarcity of foreign exchange
agriculture may contribute to relax that constraint, selling agricultural
products abroad is a feasible and practical method of earning foreign
currency to purchase 'essential imports’.
 Exchanging, surplus agricultural goods for imports of capital goods, may
be seen as a first step in the industrialisation process (Nicholls, 1963).
 Another potential advantage of agricultural export trade is that developed
countries may provide technical advice on production and product
improvement.
 Foreign Exchange Contribution
Dilemma

Open economies with a pronounced comparative advantage in agricultural

production face a dilemma:

Should they continue to take benefits of existing short-term comparative

advantage as agricultural exporters?

or

Should they shift their comparative advantage in long term by diverting

their resources away from agriculture to industrial investment ?
 A Trade-off

 Trade-off between:

Static comparative advantage and dynamic comparative advantage

i.e. short-term gain from holding back sectoral diversification and long term
gains from the process of diversification into new industries.

 Optimum point of trade-off:

Value of existing short-term loss = the present value of long-term gains

 Conclusion

There are four major reasons why a growing surplus of agricultural products
is needed:

(1) to increase supplies of food and agricultural raw materials at null

inflationary prices;

(2) to widen the domestic market for industrial goods through increased
purchasing power within the rural sector;

(3) to facilitate inter-sectoral transfers of capital needed for industrial

development (including infrastructure); and

(4) to increase foreign exchange earnings through agricultural exports.

 Role of agriculture in Indian economy

1) Food contribution:

First FYP accorded the highest priority to agriculture to tide over the
difficult food problem. Agriculture has occupied an important place in
every successive plan.

2) Raw material contribution:

Agriculture is source of raw material for agro based industries like

vanaspati, textiles, sugar, paper, processed food etc.

3) Market contribution:

Agriculture provides market for capital goods, inputs and consumer goods.
4) Foreign exchange contribution:
Agricultural products like rice, tea, coffee, cashew, spices, tobacco, leather are
important items of India’s foreign exchange earnings.
Composition of Agricultural & Allied
Exports : 2021-22
Products % Share in Agricultural Exports
Tea 1.49 (25% of Global Production)
Coffee 2.03
Wheat 4.22
Basmati Rice 7.02
Pulses 0.71
Spices 7.73 (75% of Global Production)
Sugar 9.14
Oil meals 2.05
1.62 (Mango 50% of Global
Fruits and vegetables
Production)
Cotton 5.59
Marine products 15.42
 India’s Contribution to World

 The country is world’s fifth largest producer of eggs, sixth

largest producer of fish and second in inland fisheries.
 Fishing aquaculture and allied activities provide livelihood to
over 8 Cr. people and also remained a major foreign exchange
earner
 Animal husbandry output constitutes about 25.6% of the
country’s agricultural output.
 Globally India is second largest producer of Silk and contributes about
25% to the total world raw silk production
 India holds first position in the world in production of sugarcane and
sugar
 India ranks fourth in production of natural rubber in the world with a
share of 5.8 % in world production.
 India is the largest milk producing country in the world.
 To sum up:
 Food security can influence economic growth in two ways:

1) Through the impact on labour productivity – Fogel linkages

2) Through quantity and efficiency of investment – Stability linkages

 There is close and direct correlation between agriculture and economic
development.
 Any change in agricultural sector – positive or negative – has multiplier
effect on entire economy.

Therefore agriculture is an engine of economic development