Table of Contents
ba llb economics notes
Q.3. Elaborate on the following :
(a) Contribution of Agriculture to Economic Growth.
(b) Agriculture’s Dependence on Industry.
(c) Role of, Agriculture in the lndian Economy.
(d) Interdependence between Agriculture and Industry.
Ans. (a) Contribution of Agriculture to Economic Growth
Agricultural progress is normally regarded as a prerequisite of economic development. It is true that economic development in modern times has come to be associated with industrialisation; nevertheless, it is generally accepted that industrialisation can follow only on the sound heels of agriculture.
Kuznets identifies four possible types of contribution that the agricultural sector is capable of making to overall economic development. These are:
(a) product contribution, i.e, making available food and raw. materials,
(b) market contribution, i.e., providing the market for producer goods and consumer goods produced in the non-agricultural sector,
(c) factor contribution, i.e., making available labour and capital to the non-agricultural sector, (d) foreign exchange contribution.
We elucidate these further.
(1) Source of Supply of the Basic Wage-goods, i.e., Food items :
A scarcity of food creates imbalances in the economy that work as checks on economic development.
(i) Food Scarcity and General Price: Level Aggregate demand for food products in the developing countries hàs been growing not only because of population growth (2.5 per cent annually) but also because of rising per capita incomes (an average annual increase of 3.4 per cent Since 1960) and a relatively high-income elasticity of demand (YED) for food (the percentage change in food demand divided by the percentage change in income).
(ii) Food Scarcity and BOP: It may be possible to supplement the domestic supply of foodgrains by imports in order to maintain their
internal demand-supply equilibrium, but this type of activity may lead to another imbalance – this time in the external sector of the economy which in turn may have an adverse effect on the domestic sector. Food imports may prove a heavy burden on the country’s BOP. This, in turn, may make it necessary for the country to forgo the more essential imports of capital goods like machinery, technical know-how, etc. If it happens, this will narrow the potential of growth.
(iii) Food Scarcity and Human Capital Formation: Until quite recently, economists tended to regard food strictly as a consumption good. But, now it is generally accepted that a part of food utilisation really should be considered an investment which improves the quality of the labour force. Malnutrition causes both mental retardation, and poor diets also affect general health. As a result, worker absenteeism is higher and on-the-job productivity lower than would be the case with a well-nourished labour force.
(2) Inputs for Industry: Two essential inputs required for industries may be procured only from the agricultural sector. These are (a) raw materials, and (b) labour In spite of all technological and scientific transformation it has not been possible for industries to dispense with the supply of agricultural raw materials like cotton, jute, sugarcane, hides, etc: Similarly, the agricultural sector comprises a vast majority of people in a developing economy. _The increasing demand for labour as the programmes of industrialisation proceed can be met only by drawing labour from the agricultural sector.
(3) Source of Foreign Exchange: In its infant stage industry earns little foreign exchange but creates strong demand for it. The industry needs foreign exchange for machinery, technology and other inpüts that are not produced locally. If agriculture does not provide foreign exchange from export sales of primary products, the country may again be confronted with the BOP bottleneck that will impede the industrialisation
(4) Source of Capital Formation: If agriculture is well-developed it can make a net contribution to capital formation in the non-agricultural sector. There are three arguments in support of this view :
(i) Capital-output ratio in agriculture is relatively low compared to the industry so that there is great scope for raising productivity in agriculture by means that require only moderate outlays on capital.
(ii) There is a strong tendency for sectoral terms of trade to move in favour of agriculture which leads to an increase in farm incomes at a relatively greater rate than non-farm incomes. (iii) The consumption levels to which the farm population is traditionally habituated are generally low and these. are not likely to increase commensurately with the rise in incomes that accrue with agricultural development.
two ways(i) Increased agricultural production and growing
income stimulate demand for industrial goods. (ii) The effect of agriculture on the industry also works through the terms of trade. The impact of a rise in the terms of trade in favour of agriculture will adversely affect the demand for non-food items in urban areas. In relation to rural areas, however, the terms of trade effects are not necessarily in one direction. In the case of lower-income groups, while the effect may be the same as in the urban areas, in the case of high-income groups, the negative effect on demand can be offset by the increase in income resulting from the improvement in agricultural prices. The overall effect of the rise in terms of trade will depend upon this combined effect for all classes of the population.(b) Agriculture’s Dependence on Industry
It should not be concluded from the above review that a programme of agricultural development can be pursued independently of the industrial development programme. As a matter of fact, agricultural development programmes will come to a halt, sooner or later, if these are not supported by adequate industrialisation. The industry contributes to and makes possible agricultural progress in a number of ways.
(i) Most of the modern inputs, including fertilisers, pesticides and even water, are made available by industry.
(ii) Industry supplies the machinery required on the farms.
(iii) Agricultural engineering is a significant branch of industry.
(iv) Most of the research that has gone into bringing about the green revolution in our country has been undertaken in what can be described as industrial culture.
(v) Industry helps raise the necessary infrastructure required for agricultural progress. This may consist of transportation and
communication, trade and commerce, banking and marketing channels, etc.
(vi) Industry is to meet the growing demand for consumer goods in the rural sector in the wake of the growing population and income in this sector.
In short, there is no need to overemphasise the interdependence between agriculture and industry during the process of economic development. The relative forces of inter-sectoral demand and supplies of resources, products and factors not only set the pace of development but are also a manifestation of the stage of growth.
(c) Role of Agriculture in the Indian Economy
In present-day India, the vital role of agriculture arises out of the position the agrarian sector occupies in the overall economy of the
Country. Agriculture is a large sector of the economic activity and has a crucial role to play in the country’s economic development by providing food (more than fifty per cent of income is spent on food by eighty per cent of the population in urban areas and ninety-five per cent in rural areas) and raw materials, employment to a very large proportion of the population, capital for its own development and surpluses for national economic development.
(1) Contribution to National Income: Agricultural sector contributes a significantly large share to the national income of India, although it has come down from as high as 56 per cent during the 1950s to 26.0 per cent in 2003-2004, and is projected to go down further in immediate future.
Whatever it is, the situation as it obtains presently requires that more available resources should be devoted to the development programmes in the agricultural sector, as it is this sečtor that continues to have great potential for reducing poverty and hunger in the rural sector. For every additional rupee generated through agricultural production in India, the existing economical linkages can add other three rupees to the income of the rural economy. It is important to raise the productivity and level of output in this sector, which in turn means that agriculture must make an incremental contribution to the growth rate of the economy despite a diminishing land frontier.
(2) Major Source of Livelihood: Agriculture has been and is a major source of livelihood in India. Over the years 1921-2001, the size of the labour force dependent on agriculture had more than doubled and over the next decade is projected to go up by more than 25 per cent. All calculations indicate that 50 per cent of the increase in employment opportunities will have to come from agriculture. The sector, thus, presents challenging opportunities for the Plan framers in India, inasmuch as thèse workers represent an enormous pool of labour that can fuel labour-intensive industrialisation over the coming decades.
(3) Role in Foreign Trade: The agricultural sector is a net earner of foreign exchange which is needed for capital and maintenance imports required in the non-agricultural sector.
(4) Primary Source of Saving in the Economy: This sector is the primary source of savings, and hence capital formation for the economy. These are known as savings and investment linkages. Since independence, large investment, both public and private, has been made in agriculture. In areas where agricultural practices are traditional, investment has also been on traditional lines like land and its improvements, tools and implements, farm structures, livestock, carts, etc. But the pattern of investment in progressive areas, where modern technology has been adopted, has been predominantly in irrigation, land improvements, farm machinery, storage godowns and other infrastructures. Both variable and fixed capitals in the latter areas are, therefore, of a different order-in
variety as well as in quantum-since substantial amounts of capital are required for the various infrastructures and inputs to stimulate growth,
(d) Interdependence between Agriculture and Industry
During the process of development, the interdependence between agriculture and industry has become stronger through the production linkages, demand linkages, and savings and investment linkages. Production linkages arise from the interdependence of agriculture and industry for productive inputs, i.e, supply of agricultural materials such as cotton, jute, sugarcane, etc. to agro-based industries and supply of fertiliser, machinery and electricity by industry to agriculture.
Modelling of the linkages between agricultural and industrial growth has shown that a 10 per cent increase in agricultural output would increase industrial output by 5 per cent.
Over the last five decades, these linkages have got further strengthened with agriculture’s dependence on industry increasing at a faster rate than the dependence of industry of agriculture, reflecting the fast-moving modernisation of the agricultural sector. There are strong demand linkages between the two sectors. The impact of urban income and industrialisation on the demand for food and agricultural raw materials is generally recognised. Equally significant is the impact of rural income on industrial consumer goods, i.e, clothing, footwear, sugar, edible oils, TV sets, washing machines, refrigerators, motorbikes, etc. A recent study concludes. “Rural Bazar outbuys urban market. ” There is a widely held view that in a large country like India, the demand stimulus for industrialisation would come mainly from agriculture with less social and economic costs. More significant, are the savings and investment linkages that have developed between the two sectors. The relative terms of trade between the two sectors not only. influence the level of private saving and investment, these also manifest themselves into government saving and expenditure.
Relative Declining Dependence on Agriculture
The following reasons among others, account for it.
(i) The relative share of agriculture in the total national income has declined from 50 per cent in the 1950s to about 26 per cent presently. Thus, the degree of drag or push that the agricultural sector can exert on the overall growth of the economy has been reduced substantially.
(ii) The secular growth rate of- the agricultural sector during the five decades works out to some 2.3 per cent. The decline in the relative share of agriculture in the GNP, despite this sustained growth, indicates clearly that the secular growth in the secondary and tertiary sectors has been more rapid.
(iii) The wage goods constraint on the overall growth of the economy no longer remains valid for two reasons. One, the Indian economy overcame food shortages long ago. Two, there has been a decline in the employment elasticity of output of non-agricultural sectors, which
means that increased output in industry and services does not involve a commensurate increase in the demand for wage goods.
(iv) With the spread of modern farm technology in the wake of the green revolution, non-traditional inputs into agricultural production have assumed greater importance.
(v) The traditional agro-based industries have been stagnant; their share in overall industrial output has been falling. The boom sectors of the new millennium-chemicals, consumer durables1 and hi-tech services-have very little linkage to agriculture.
(vi) The overwhelming preponderance of agriculture-based items in India’s export mix- tea, cotton and jute textiles- has been reduced and today non-traditional exports have emerged as important components. Industrial growth is, thus, insulated from the domestic factors to the extent to which non-traditional exports influence domestic industrial production.
(vii) In an open economy there is no reason why agriculture should be a constraint on growth or food supply.