UNIT 1 AGRICULTURE AND ECONOMIC

GROWTH
Structure
1.0 Objectives
1.1 Introduction
1.2 Conditions for Agricultural Development: Theoretical Background
1.2.1 Two-Sector Economy Model: The Lewis Argument
1.2.2 Three Phase Linkage to Industrialisation: Fei and Ranis
1.2.3 Necessary Conditions for the Sectoral Shift: Schultz-Jorgenson
1.2.4 Agriculture First Versus Balanced Growth Approach

1.3 Determinants of Agricultural Development

1.4 Agricultural Development Policies
1.4.1 Goals of Agricultural Development Policy
1.4.2 Classification of Agricultural Development Policies

1.5 Agricultural Development: A Prelude to Industrialisation

1.5.1 Contribution of Agriculture to Economic Growth
1.5.2 Agriculture’s Dependence on Industry

1.6 Let Us Sum Up

1.7 Key Words
1.8 Suggested Books for Reading
1.9 Answers/Hints to Check Your Progress Exercises

1.0 OBJECTIVES
After reading this unit, you will be able to:
 explain the relationship between agricultural growth and economic
development;
 describe some of the theoretical postulations linking agricultural growth with
overall economic growth;
 identify the determinants of agricultural development;
 explain the importance of economic policies to agricultural development; and
 relate the importance of agricultural development to industrial growth in
particular and overall economic growth in general.

1.1 INTRODUCTION
Agriculture has been the major source of livelihood in the Indian economy.
Notwithstanding the major structural changes in the sectoral distribution of the
economy (in terms of their employment and income shares in GDP) over the last 7
Agriculture and six decades, agriculture continues to be the main source of living for a large
Economic Development
section of the labour force in India. Agriculture, therefore, continues to be regarded
as an important sector to be focused upon in the overall policy thrust of the
country. It is estimated that for every additional rupee generated by agricultural
production, the various economic linkages in the rural areas add another three
rupees to the income. In addition, its multiplier effects influence many of the
secondary and tertiary sectors of the urban economy (e.g. industry, transportation,
banking, etc.). Although the relative importance of agricultural sector in the total
GDP of the Indian economy has registered a marked decline over the last six
decades, even at this juncture, for the much desired double-digit growth of the
economy to happen, it is estimated that a growth of Indian agriculture by close to
4 percent is essential. If this is so, then one would like to know the ‘conditions
necessary for agricultural development’. For an answer to this, we turn towards
some of the important theoretical postulations.

1.2 CONDITIONS FOR AGRICULTURAL

DEVELOPMENT: THEORETICAL
BACKGROUND
The role of agriculture in economic development has been recognised and discussed
since the time of the ‘physiocrats’ (i.e. the class of French economists prior to the
English classical economic theorists). According to the physiocrats, it was only
the agricultural sector which produced an economic surplus over and above the
cost of production. They considered manufacturing and commerce as non-
productive in the sense that, the value of raw materials handled by these sectors
was enhanced only enough to pay for the labour and capital used in the process
of production. In view of this, the physiocrats considered agriculture as most
strategic to economic development.
The classical economists, during the eighteenth and the first half of nineteenth
century, also recognised the importance of agriculture in economic development
but by duly linking its growth with that of the industry. For instance, Adam Smith’s
basic growth model considered the production of an agricultural surplus to support
non-farm production essential for overall economic development. An interesting
argument of the classical economists in general was the concept of ‘circularity’
characterising the interrelationship between ‘technology, investment and profit’.
This implied that the level of technology depends on the level of investment,
investment depends on profits, and profits depend partly on the level of technology.
The Classical economists, thus, did not focus on agricultural development per se.
But they considered economic growth to be implicitly dependent on development
of agriculture since in the initial phase of economic transition most of the economies
(particularly the agrarian developing economies) would be dependent on agriculture
to support the majority of their workforce. One can imagine that even in the
modern times, where food riots in many countries have been witnessed, importance
of agriculture to produce enough to meet the global requirement has to be ensured
wherever the production might actually take place. The classical theories of
development, however, did not make an exclusive distinction between growth and
development but assumed that development would follow growth in its natural
course. It was towards the end of World War II, i.e. around 1945, that development
by itself became an important field of study. We shall in this section study four
8
such theories viz. (i) the Lewis’s ‘two sector’ economic model (1954); (ii) the Agriculture and
Economic Growth
‘three phase linkage to industrialisation’ by Fei and Ranis (1961); (iii) the ‘necessary
conditions for the sectoral shift’ framework by Schultz-Jorgenson (1964); and (iv)
the ‘agriculture first as a development strategy’ or ‘a balanced growth approach’
advanced by a number of contributors who saw the mutually supporting character
of sectoral linkages as central to developmental planning.

1.2.1 Two-Sector Economy Model: The Lewis Argument

W. Arthur Lewis (1954) based his model on the premise that in many developing
countries a large reservoir of labour subsisting on low productive subsistence
(agricultural) sector existed. Their marginal productivity was very low (close to
zero) and hence the surplus labour available at subsistence-wage level could be
transferred to the more productive modern (industrial) sector. The transfer can be
effected at a wage rate slightly higher than the subsistence wage of the agricultural
sector to overcome the friction of moving from the agricultural sector to the
‘capitalist sector’. The capitalist sector would, however, need ‘skilled workers’
but this constraint was viewed by Lewis as a temporary bottleneck which can be
overcome by providing training to the ‘unskilled workers’ to enhance their skill
level.
Owing to higher investment and technology, the marginal productivity of labour in
the capitalist sector (i.e. industrial sector or the non-agricultural sector) would be
higher than the ruling wage rate in the agricultural sector. This, therefore, leaves
behind a capital surplus which could be further invested to result in higher levels
of capital formation. This, in turn, would make it possible for the employment of
more people from the subsistence sector. The increased investment would further
push up the marginal productivity of labour within the capitalist sector. This induces
the capitalist employers to stop recruiting the surplus labour from agriculture at a
level in which the supply of labour would become wage-inelastic. Some critics
have pointed out that Lewis’ optimism concerning development by absorption of
disguised unemployment from agriculture is unrealistic as it is not possible to
transfer a large number of workers without a drop in the agricultural output. The
Lewis model, however, is based on the assumptions of rationality and perfect
competition. In view of these assumptions (which rarely prevail in reality as the
governance/institutional challenges precisely centre around their establishment to
minimise the consequences of their violation), Lewis’s argument holds good for
large agrarian economies. The successive advancements made by others refine
Lewis’s two-sector theory making it more conform to the practicalities of the
capitalist market based economies.
Lewis, in fact, had visualised that the process of labour transfer cannot continue
indefinitely and must come to an end at some time point. He, therefore, argued
that when that happens, the process of capital formation can be kept going by
stimulating immigration from other labour surplus countries or by encouraging
export of capital to countries with abundant supplies of labour at the subsistence
wage rate. Lewis’ model thus provided a framework complete in itself to understand
the process of economic development in general. Nonetheless, certain valid criticisms
made against his thesis include: (i) the process of labour transfer would also push
the agricultural wages contributing to keeping the rate of profit and rate of capital
formation lower than expected; (ii) the capitalist employers may use the surplus for
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Agriculture and non-productive purposes instead of ploughing it back for development purposes;
Economic Development
(iii) to meet their rising expectations, rural poor also may consume more and save
less thereby dampening the pace of development; etc. An improvement on this
model was suggested by Ranis and Fei who propounded their theory by first
analysing the role of the ‘neglected’ agricultural sector in a static sense, and then
generalised the ‘static’ analysis by introducing the possibility of an increase in
agricultural productivity.

1.2.2 Three Phase Linkage to Industrialisation: Fei and

Ranis
Fei and Ranis (1961) spelt out three distinct phases of surplus labour transfer from
agriculture to industry. The first phase would last till the pool of ‘surplus labour’
exist. During this phase, the transfer of labour from agriculture to industry would
not result in any adverse effect on the agricultural output. In the second phase,
when the surplus labour is close to near exhaustion (called the Lewis’s turning
point), the marginal productivity of labour in agriculture would begin to rise. At
this stage, there is positive opportunity cost for the transfer of labour from agriculture
to industry i.e. labour cannot be transferred without a fall in output in agriculture.
However, even at this state, so far as the industrial wage rate is still higher than
the agricultural wage rate (i.e. as long as there is a gap, howsoever minor, in the
two sector-wage rates), labour from agriculture can continue to shift to industry
resulting in an aggregate increase in the economy’s output albeit with a marginal
fall in that of agricultural output. But at a point where the marginal product of
agricultural labour becomes equal to the industrial wage (i.e. the third phase),
further progress in economic growth becomes conditional to: (i) technological
progress; and (ii) the absorptive capacity of the economy (by way of improved
infrastructure). The central message flowing from Fei and Ranis’s analysis is that
while in the early stages of economic transformation, agriculture provides the
surplus labour without a dent on the aggregate economic growth, in the latter
stages, it is not unconditionally so. While to counter this situation, a balanced
growth strategy (i.e. growth of both agriculture and industry) was advanced by
many theorists, Schultz-Jorgenson provided a ‘necessary condition for the sectoral
shift’.

1.2.3 Necessary Condition for the Sectoral Shift: Schultz-

Jorgenson
Schultz (1964) argued that any withdrawal of workers from agriculture will result
in a reduction of agricultural output i.e. he maintained that the marginal productivity
of agriculture is never zero or negative. But he firmly believed that the aggregate
value of output in the economy can be raised by utilising the surplus labour in
agricultural sector if the two critical issues involved can be answered: (i) what are
the conditions under which the surplus labour from agriculture can be transferred
without reducing the output in agriculture?; and (ii) what are the requirements of
a potential labour force so that it can benefit both the sectors in a mutually
complementing manner? Applying the idea of ‘human capital’ to study the age-
earning profiles of population flows, Schultz put forward the theory that education
would transform raw or unskilled labour to a ‘skilled labour’ status which would
enable them to cope with external shocks. To illustrate this point, he gave the
example of farmers in developing economies who have to ‘deal with uncertain
10 economic conditions, which are not of their own making’. He argued that education
would make people better able to process information on the economic environment Agriculture and
Economic Growth
minimising the exploitation that they would otherwise suffer. Jorgenson (1961), a
contemporary of Schultz, looked at the issue from the standpoint of the inter-
sectoral flow of resources and stated that the growth of the non-agricultural sector
is contingent on a positive and growing ‘agricultural surplus’. Jorgenson’s major
contention was that if technological changes in agriculture are not rapid enough,
agriculture can never produce either a food surplus or release its ‘surplus labour’
productively to the industry. Implicit in the theory advanced by Schultz-Jorgenson
is, therefore, the message that simultaneous growth of agriculture and industry is
necessary both for the efficient transfer of ‘surplus labour’ as also for a ‘sustained
growth’ of both the sectors in a mutually complementing manner. Schultz-Jorgensen’s
argument are thus an important link in realising the potential of labour transfer
made by Lewis and advanced by Fei and Ranis. We now turn towards the
‘balanced growth approach’ model in which a strategy of development keeping
‘both agriculture and industry under focus’ is advanced.

1.2.4 Agriculture First Versus Balanced Growth

Approach
An important concern shared by many theorists was related to the stimulation of
demand in the economy. It is true that in the early stages of economic transformation,
the larger section of the population reside in the rural areas depending for their
survival mainly on agriculture. They are poor and less educated and, therefore,
increasing their incomes in activities of agriculture-centred occupations is important.
Unless this is done, the demand for the products of industrial sector also would
be less. To deal with this situation, Rosenstein Rodan (1943) advanced the theory
of ‘big push’ aimed at a coordinated expansion of ‘production, employment and
consumption’ in different sectors of the economy. The ‘big push’ signified a certain
minimum high quantum of investment required to deal with the economic obstacles
to development. Such a strategy was meant to facilitate a ‘balanced growth’ of a
large number of interrelated economic activities both in the ‘farm’ and the ‘non-
farm’ sectors in a mutually complementary manner. The approach would help deal
with the critical issue of ‘vicious circle of poverty’ (which is principally due to a
lack of effective demand in the rural poor) on the one hand while simultaneously
contributing to broadening the ‘socio-economic base of the economy’ on the
other. Such investments in both agricultural and industrial sectors would ensure the
realisation of multi-pronged benefits like: (i) augmenting the rural incomes thereby
strengthening the demand for industrial and non-agricultural goods; (ii) increasing
the supply of goods suitable to the tastes and income levels of large rural population;
and (iii) improving the ability of agriculture to provide for industrial capital through
foreign trade; etc. The policy challenge is, therefore, to resolve the conflict between
the role of agriculture as a net provider of surplus and also its role in providing
effective demand. In effect, therefore, the arguments make a case for prioritising
agricultural development by fostering linkages between agriculture and the rest of
the economy.
Check Your Progress 1 (Answer in about 50 words)
1) What is the concept of circularity?
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Agriculture and ..................................................................................................................
Economic Development
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2) Who were ‘Physiocrats’? State in brief their ideas on economic growth.
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3) What would you identify as common in the theories advanced by Lewis,
Fanis and Rae and Schultz-Jorgenson? What holds the key according to
Schultz-Jorgenson to realise the potential of ‘surplus labour’ indicated by
Lewis?
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1.3 DETERMINANTS OF AGRICULTURAL

DEVELOPMENT
The factors affecting agricultural development are varied. They encompass: physical,
technological, economic, socio-cultural, institutional, organisational and political
factors. All these factors operate at different levels like: household, village, district,
state, nation and the world as a whole. Depending on how they are managed,
these factors can have both favourable and adverse effects on development. For
instance, if the human resources of a country are not properly developed by
proper nutrition, health care, education and training, they are not productively
utilised. Such resources become liabilities and obstacles to development. However,
if they are properly developed and utilised, they become great assets and major
factors contributing to development. Knowledge about the nature and magnitude
of the impact of various determinants on agricultural development is necessary for
agricultural development to proceed efficiently and effectively.
At a more specific level, good ‘rural infrastructure’ is recognised as critical in
enhancing agricultural output and productivity. Under this comes many specific
factors like: roads, irrigation, electric supply, banking, communications, etc. A
more specific variant of agricultural infrastructure is ‘social infrastructure’
encompassing factors like: education and health facilities, extension services and
information dissemination systems, participatory mechanisms, investments in
agricultural research and technology (R and T), etc. Among the major deficiencies
in rural infrastructure affecting the progress of agricultural development, in all
developing economies in general, is the inadequate financial institutions for mobilising
saving and disbursing credit. The role of public investment is yet another widely
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 Agriculture and
Economic Growth

Technology Capital

Quality of life of
rural people

Institutional and
Human resources
organisation Natural Resources

Fig. 1.1: Determinants of Agricultural Development

recognised factor which greatly impacts agricultural development. Public investment

in agriculture for establishing facilities like cold storage, marketing outlets, etc.
plays a crucial role in developing economies where large proportion of farming
community belong to the ‘small and marginal farmers’ class whose income and
living conditions border at poverty level. There is acknowledged evidence in the
Indian context that in the post-liberalisation period, the proportion of public
investment as a proportion of total gross capital formation has declined steeply. In
this context, for capital constrained countries, the PPP (public private partnership)
models of attracting investment is considered a viable option to improve the
infrastructural facilities that are so vitally required for agricultural development.

1.4 AGRICULTURAL DEVELOPMENT POLICIES

Broadly, ‘policy’ is defined as a definite course of action selected from among a
set of alternatives. In its more general sense, a ‘policy process’ refers to the
formulation, promulgation and application of a course of actions specifically defined.
Here, we shall concern ourselves with public agricultural development policies by
which is meant actions taken by the government in the pursuit of specific objectives
of agricultural promotion.
In this context, it is important to distinguish between: (a) policy; (b) programme;
and (c) project. Policy is a comprehensive term subsuming many programmes. A
‘programme’, in turn, subsumes many projects. A policy has to be translated into
a number of programmes before it can be implemented. A programme specifies
what is to be done, how, by whom and where. A project is even more specific
and detailed in terms of objectives, location, duration, funds, executing agency,
etc. A project thus comes out to be the ultimate ‘unit’ of a policy action. A
programme may consist of several projects. An agricultural development project
may, therefore, be defined as an investment activity where resources are expended
over a period of time to achieve certain pre-set goals.
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Agriculture and 1.4.1 Goals of Agricultural Development Policy
Economic Development
Agricultural development policies are designed to improve the conditions under
which the rural people work and live. The goals of policies are governed by what
people desire. A ‘policy measure’ signifies what people think the government can
and ought to do to bring about the desired change. This is the theory of public
policy. Changes are desired only when people do not like the way things are
going. Pressure for public action arises when people feel they cannot individually
bring about the desired changes. They have in mind some norm or some image
of an ideal situation which they aspire. These norms become the goals of policy
towards which the objectives of specific programmes are directed.
From the ‘directive principles of state policy’ enshrined in the Indian Constitution,
it is possible to discern two dominant goals of an economic policy: (i) increasing
the national income; and (ii) improving the distribution of national income among
the members of the society. These goals are, therefore, reflected in all economic
policies that are specified in the ‘five year plans’. A goal which seeks to achieve
‘inclusive growth’ needs to be seen in the context of the four important dimensions
of state policy viz.: (i) improvement of ‘quality of life’ of the citizens; (ii) generation
of ‘productive employment’ opportunities; (iii) establishment of ‘balanced regional
development’; and (iv) achievement of ‘self-reliance’.
Many agricultural development policies are combinations of various goals having
different sets of instruments for its implementation. Broken down into several
programmes or projects, a particular government agency is designated to pursue
its implementation. These agencies may assign specific projects to be implemented
by other voluntary and private agencies under its monitoring and control. In order
to curb leakages and inefficient usage of resources, they are limited by various
conditions. These conditions are thus the decisive factors which together determine
the efficient implementation of projects/programmes.

1.4.2 Classification of Agricultural Development Policies

Tinbergen distinguishes between a qualitative policy and a quantitative policy. A
qualitative policy seeks to change the economic structure through the creation of
new institutions, modification of existing institutions and promotion of private firms.
A quantitative policy seeks to change the magnitude of certain parameters e.g.
change in the tax rate. An example which represents both qualitative and quantitative
policy is the introduction of an education system free of charge. It is qualitative
because it seeks to bring about a change in the economic structure and is quantitative
because it represents a change in the fee charged for a service.
Heady classifies agricultural policies into: (i) development policies and (ii)
compensation policies. A development policy seeks to: (i) increase the supply of
commodities and resources, and (ii) improve the quality of products and inputs.
A compensation policy is aimed at compensating its target group in various manners
e.g. subsidies, price support, etc.
Check Your Progress 2 (Answer in about 50 words)
1) Mention the principal determinants of agricultural development.
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 .................................................................................................................. Agriculture and
Economic Growth
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2) Policy subsumes projects. Do you agree with this statement.
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3) Distinguish between development policy and compensation policy with an
example for each.
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1.5 AGRICULTURAL DEVELOPMENT: A

PRELUDE TO INDUSTRIALISATION
The process of economic transformation theorised by Lewis generally holds for all
economies i.e. both developed and developing. The pace of its transformation,
however, varies directly with the pace in which the necessary institutional mechanisms
are established by a country. Associated with such a transformation, the proportion
of workforce dependent on agriculture would decline and those in the non-
agriculture sector (i.e. industry and services) would increase. Table 1.1 presents
a comparative profile of the relative shares of the three main sectors of economies
in employment and income (i.e. national income) for India and the developed
economies. While the proportion of workers in the agricultural sector in India is
even now around 52 percent, for the developed countries it is in the range of just
1 to 5 percent. The share of industrial employment (in the total employment) of
India which is about 14 percent now, is just about half of that in the developed
economies. Further, the level of industrial employment over the six decade period
of 1950-2010 in India has risen by just about 4 to 5 percentage points (it was
about 9-10 percent around 1950s) which speaks of a far lower achievement on
the extent of industrialisation achieved in India over the fairly long six decade
period. Notwithstanding this, the extent of decline in the share of agricultural
employment, over this six decade period is not small: it has declined from as high
as 72 percent at the time of independence to 52 percent in the post-2000 years.
While this decline indeed supports the hypothesis of labour transfer from agriculture
to non-agriculture (i.e. industry + services) as proposed by Lewis, there is still a
substantial way to go for India to attain the levels of the developed economies.

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Agriculture and Table 1.1: Structural Composition in Employment (Empt.) and Income
Economic Development
for India and Developed Economies
(percent)
Principal Developed Economies India (2009-10)
Economic post-2000
Sectors Income Empt. Income Empt.

Agriculture 1-4 1-5 14.6 52

Industry 22-30 21-33 28.6 14

Services 68-73 63-74 57.2 34

On the distribution of income by three broad economic sectors, however, both in

respect of industries and services India is close to the developed economies level.
The trend suggests the need to focus on a more rigorous policy of rural
industrialisation programme. You will read more about our rural industrialisation
programmes and their achievement in the unit 10 of this course. Meanwhile, it is
important for us to know in what way agriculture makes significant contribution to
the overall economic development. We now turn to take a look at this below.

1.5.1 Contribution of Agriculture to Economic Growth

Kuznets identified four possible types of contribution that the agricultural sector is
capable of making to overall economic development. These are:
 product contribution i.e. making available food and raw materials;
 market contribution i.e. providing the market for producer and consumer
goods of the non-agricultural sector;
 factor contribution i.e. making available labour and capital to the non-
agricultural sector; and
 contribution to trade and thereby foreign exchange earnings (i.e. capital
inflow).
The above contributions of the agricultural sector can be further elaborated as
follows.
i) Source of Supply of the Basic Wage-goods i.e. Food items
A scarcity of food creates imbalance in the economy which works as a constraint
for economic development. In the absence of adequate domestic supply there will
be no surplus for exports.
ii) Food Scarcity and General Price Level
One of the main reasons why aggregate demand for food products is rising in the
developing countries is population growth rate which is around 2.5 percent per
annum. At the same time, there is a higher rise in per capita income (about 3.4
percent per annum) and therefore there is a relative rise in the income elasticity
16 of demand for food. Let us denote the percentage change in income by Y . It has
ED
been estimated that the Y for food is approximately 0.5 to 0.6 for most developing Agriculture and
ED
Economic Growth
countries compared with 0.2 to 0.3 for the developed countries. Under these
conditions, the increase in food demand is given by the equation: D = P + (Y ) Y; ED

where D is the rate of growth of food demand, P is the rate of population growth
and Y is the rate of growth of per capita income. Substituting these figures in the
above equation, we get: D = 2.5 + 0.5 (3.4) or 4.2 percent, as an approximation
of the situation in a ‘typical’ developing country. If domestic food production is not
growing at around this rate, scarcity of food would arise pushing prices of food
items upwards. Food items being the basic wage-goods, an increase in food
prices is a sufficient justification for a demand for higher wages in the industrial
sector. Higher wages in the industry lead to cost escalations, particularly in those
industries in which the wage bill is a substantial component of the total cost of
production. This results in major macro economic disturbances which is a matter
of serious concern for the economic health of any country.
iii) Food Scarcity and BOP
While it is possible to supplement any domestic shortfall of food grains by imports,
this could lead to a balance of payment (BOP) problem. This in turn may make
it necessary for the country to forego the more essential imports of capital goods
like machinery, technical know-how, etc. In such a situation, the growth potential
of the economy would be stifled.
iv) Food Scarcity and Human Capital Formation
Until quite recently, economists tended to regard food strictly as consumption
good. It is now accepted that a part of food utilisation should be considered as
investment as it is vitally needed to maintain the quality of the labour force. In its
absence, the consequences of malnutrition would affect the potential human capital
resulting also in worker absenteeism and productivity decline. As it is, food
consumption in developing countries is deficient not only in calories but also in
proteins. This is one of the reasons why labour force is relatively less productive
in developing countries.
v) Inputs for Industry
The raw materials required for agro-based industries are entirely to be obtained
from the agricultural sector. In spite of all technological and scientific advancements,
it has not been possible for industries to adequately obtain the supply of agricultural
raw materials like cotton, jute, sugarcane, etc. Also, as we know well by now
the increasing demand for labour (consequent to increase in industrialisation) needs
to be met, in the transitional years, by drawing upon the surplus labour in the
agricultural sector. As more and more workers are released from agriculture, the
remaining workers in agriculture must increase their productivity to maintain food
supplies. There is thus a spiralling effect of increased inputs to both industry and
agriculture. There would be increased need of R and D efforts to increase
agricultural output.
vi) Source of Foreign Exchange
In its infant stage, industry earns little foreign exchange but creates strong demand
for it in terms of its need for machinery, technology and other inputs not available
locally. If agriculture does not provide foreign exchange from exports, the country
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Agriculture and would again be confronted with the BOP constraint impeding the industrial progress
Economic Development
of the country.
vii) Source of Capital Formation
A well-developed agriculture can make a net contribution to capital formation in
non-agricultural sector. There are three arguments in support of this view: (i)
capital-output ratio in agriculture is relatively low compared to industry so that
there is greater scope for raising productivity in agriculture requiring only moderate
outlays of capital; (ii) there is a relatively stronger tendency for sectoral terms of
trade to move in favour of agriculture leading to an increase in farm incomes at
a relatively higher rate than the non-farm incomes; and (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 which accrue
with agricultural development.
viii) Market for Industrial Products
The influence of agricultural development on the consumption of industrial goods
through the demand route works in both the directions: (i) increased agricultural
production and growing income stimulate demand for industrial goods; and (ii) the
terms of trade between the agricultural and the industrial sectors would tilt in
favour of agriculture making the industrial goods costlier. The terms of trade
effects in rural areas are different for the lower and higher income group persons.
While for those in lower income groups, the demand would be inelastic both for
the wage goods and the industrial goods, from higher income group persons, there
would be differing impact on demand owing to higher income accruing from rising
agricultural prices. Thus, agricultural performance can affect the demand for industrial
goods both through output effect and the terms of trade effect. To sum up,
therefore, increasing agricultural productivity makes an important contribution to
the programmes of industrialisation and general economic development. This is, in
fact, one of the necessary conditions which must be fulfilled before an economy
gets itself ready for a process of self-sustained growth.

1.5.2 Agriculture’s Dependence on Industry

The above review underscores the importance of dovetailing the agricultural
development policies and programmes with that of the industrial development
programmes. To reinforce this point, we can list out the various ways in which
industry contributes to agricultural progress.
 Most of the modern inputs, including fertilisers, pesticides and even water,
are made available by industry.
 Industry supplies the machinery required on the farms.
 Agricultural engineering is a significant branch of industry.
 Most of the research that has gone into bringing about ‘green revolution’ in
India has been undertaken in what can be described as an industrial culture.
 Industry helps raise the necessary infrastructure required for agricultural
progress. This may be in the form of: transportation and communication,
trade and commerce, banking and marketing channels, etc.
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 Industry helps meet the growing demand for consumer goods in the rural Agriculture and
Economic Growth
sector in the wake of growing population and income in the agricultural
sector.
In short, therefore, there is ample justification to support the mutually complementary
nature of interdependence between agriculture and industry during the process of
economic development and structural transformation. The relative forces of inter-
sectoral demand and supply of resources, products and factors not only sets the
pace of development but are also a manifestation of the stage of growth. However,
the linkages between the sectors are such that for sustained development, a rise
in agricultural productivity would have to first precede, and in later stages keep
up with the development of the non-agricultural sectors.
Check Your Progress 3 (Answer in about 50 words)
1) In which respect India’s progress is closer to that of the developed economies?
Answer using the distribution of sectoral income shares.
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2) What are the four types of contribution identified by Kuznets from the
agricultural sector to the overall economic development of a country?
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3) How does food scarcity impacts on human capital formation?
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4) Increasing agricultural development would need additional R and D efforts to
sustain the growth of both agriculture and industry: why?
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Agriculture and
Economic Development 1.6 LET US SUM UP
The unit began with a review of major theories which have advanced arguments
on how agricultural development is a necessary condition for overall economic
development. We noted that paying adequate attention to human development
efforts [by way of social sector investment (i.e. on education, health, infrastructure,
etc.)] is vital for an all round development of the economy. The importance of
policies, programmes and projects in realising the targets and goals set for the
sectoral development in general, and agricultural development in particular, was
also noted. We saw that: (i) India is at an intermediate stage of development
wherein the process of sectoral labour transfer postulated by Lewis and others is
working; and (ii) growth of agricultural production to yield an annual 4 percent
increase is necessary for sustaining the harmonious economic advancement of the
country. Towards the end of the unit, we saw how imperative it is for ensuring the
successful implementation of both the agricultural and industrial sectors in a mutually
complementing manner.

1.7 KEY WORDS

Balanced growth approach : An approach in which both the agricultural
and the industrial sectors are equally focused
upon for development.
Two sector economic model : A model in which the total economy is
considered to be dichotomous with: (i) a low
productive agricultural sector shouldering a
reservoir of labour force the marginal
productivity of whom are very low; and (ii) a
more productive non-agricultural sector (i.e.
industry + services) whose growth and
sustenance depends on a successful agricultural
sector. The models built on this premise
provide a clarity of the policy focus needed
for realising the optimum developmental goals.

1.8 SUGGESTED BOOKS FOR READING

1) Ashok Gulati and Tim Kelley, Trade Liberalisation and Indian Agriculture,
Oxford, New Delhi, 2003.
2) G.S. Bhalla, Indian Agriculture Since Independence, NBT, New Delhi,
2007.
3) Kartar Singh, Rural Development: Principles, Policies and Management,
Sage, 3rd Edition, 2009.
4) Ranis, Gustav (2004), Arthur Lewis’s Contribution to Development
Thinking and Policy, The Manchester School, Volume 72, No. 6, December,
pp 712-723.

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 Agriculture and
1.9 ANSWERS/HINTS TO CHECK YOUR Economic Growth
PROGRESS EXERCISES
Check Your Progress 1
1) Refers to the interrelationship between ‘technology, investment and profit’.
See section 1.2.
2) See Section 1.2 and answer.
3) See Sections 1.2.1 to 1.2.3 and answer.
Check Your Progress 2
1) (i) physical/technical/economic/….etc.; (ii) rural/social infrastructure; (iii) credit;
and (iv) public investment.
2) See Section 1.4 and answer.
3) See Section 1.4.2 and answer.
Check Your Progress 3
1) See Section 1.5 and Table 1.1 and answer.
2) See Section 1.5.1 and answer.
3) See Section 1.5.1 (iv) and answer.
4) See Section 1.5.1 (v) and answer.

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