NAME: K SMITHA

COURSE: B.A
COMBINATION: P.E.P
ECONOMICS
RESEARCH PAPER
TOPIC:
AGRICULTURE AND
INDUSTRY
 Introduction
Agricultural sector plays a vital part in a country’s economic growth cycle.
This has already made a major contribution to advanced countries’
economic growth, and its position in less-developed countries’ economic
development is vitally important.

3/4th of the population in India is based on agriculture, making it the

largest source of livelihood for the entire nation. The dependency on
agriculture has been the same since the time being. Even though the rapid
growth in modern-day developments has given birth to a significant
number of growth factors, agriculture remains a vital factor.

Industries get their raw materials from the agriculture sector, needless to
say, that without a flourishing agriculture sector, a large part of the
economy will freeze. The lessons drawn from many advanced countries’
economic history tell us that agricultural prosperity has made a significant
contribution to fostering economic progress.

The lessons drawn from many advanced countries’ economic history tell us
that agricultural prosperity has made a significant contribution to fostering
economic progress. It is right to note that today’s leading developed
countries were once primarily agricultural, while the developing economies
still dominate agriculture and contribute significantly to the national
income.
 Role of agriculture in
economic development
1. Stimulates industrial expansion: Expansion in the agriculture sector
also led to the expansion of the industrial sector. When agriculturalists
have savings, they can buy consumer goods, invest in industries too. This
results in an indirect expansion of the industrial sector.

2. Providing employment: When there is an increase in the agriculture

sector, its production, more employment opportunities will also be
generated. Direct employment in the crop raising, agriculture expansion
also provides work in the other sphere.

3. Resources for Capital Formation: This is all more important because

with the existing modern capitalist sector being small, there is little that
can come from this sector by way of surpluses or profits for investments.
On the other hand, agriculture, as is the case in India, is a big sized sector.
It can contribute more to the development of the industrial sector because
the primary industries run with the help of raw material which comes from
agriculture. For example, Sugar Industry, Juice Factory, Cotton industry,
etc.

4. Supply of Foreign Exchange: Agriculture can contribute a great deal in

earning foreign currency through the export of agricultural products. The
requirements for the expansion of exports can be easily met by adding a
crop or two within the existing crop pattern and that too with perhaps no
additional capital investments. Further, since such exports have to cater to
the existing and familiar international market, no additional costs are
involved to discover or nurture new markets.

5. The Shift of Manpower: Provides work to the majority of the workforce

in the country. In the least developed countries, the majority of the
workforce work in disguised unemployed agriculture labour. Agricultural
 progress allows manpower to shift from the agricultural to the non-
agricultural sector. In the initial stages, it is more necessary to shift labour
from the agricultural to the non-agricultural sector from the point of view
of economic growth as it relieves the burden of surplus labour-power over
the limited land. Consequently, the release of surplus manpower from the
agricultural sector is necessary to advance the agricultural sector and to
extend the non-agricultural sector.

6. Supply of Food and Raw Materials: Feeds the requirement of

industrialization. Agriculture plays a very role in development. Contributes
in many consumer goods like oil, clothing, etc. Further food grains are
very important for underdeveloped economies. In case of shortage of
food, it helps a lot in developing countries as the mass import is not
possible and economically feasible for them. So, agriculture should be
given due importance so that this essential supply of food and raw
material can be maintained.

7. Helpful to Reduce Inequality: There is greater income inequality

between the world’s rural and urban areas in a country which is largely
agricultural and overpopulated. To reduce this income inequality, greater
priority must be given to agriculture. Agricultural growth will increase the
income of the majority of the rural population and hence the income
inequality might be somewhat reduced.

8. Create Effective Demand: Agricultural sector growth will tend to

increase farmers’ purchasing power which will help the country’s non-
agricultural sector expand. It will provide a more productive market. It is
well recognized that the majority of people in underdeveloped countries
rely on agriculture and it is they who must be able to afford to consume
the goods produced. It will, therefore, be helpful in boosting non-
agricultural sector production. Similarly, an improvement in cash crop
productivity can pave the way for the promotion of the exchange economy
that can help the growth of the non-agricultural sector. Buying agricultural
goods such as chemicals, farm equipment, etc. also improves agricultural
dead-outs.

9. Source of Foreign Exchange for the Country: Majority of the world’s

developing countries are exporters of primary products. Such goods
contribute 60 to 70 per cent of overall earnings from exports. Thus, the
ability to import capital goods and industrial development machinery is
crucially dependent on the agricultural sector’s export earnings. If
agricultural exports do not increase at a sufficiently high rate, these
countries will be forced to incur a heavy balance of payments deficit
resulting in a serious foreign-exchange problem. Primary goods, however,
face falling prices on the international market, and there is limited
prospect of increasing export earnings through them. Despite this, major
developing countries such as India (with industrial growth potential) are
attempting to diversify their manufacturing structure and encourage the
export of manufactured goods even though this involves the introduction
of protection measures in the initial planning period.

Place of agriculture in the

Indian economy
1. The major source of livelihood: One of the major sources of livelihood
is agriculture. More than 70% of the rural Indian people depend on
agricultural activities in one sense or the other for their livelihood. The
people depend on agricultural activities in one sense or the other for their
livelihood. The people dependent on agriculture in the foreign countries
which are developed nations such as America, Japan, and Germany have
less population dependent on agriculture in comparison to India.

2. Increase in foreign trade: Agriculture in India plays an important role

in the enhancement of international trade. The commodities which are
exported from India are oil cakes, tea, vegetables, and fruits, coffee,
cotton, spices, tobacco, sugar, flowers vegetable oils and raw wool.
Agriculture contributes a noticeable part in Indian exports. With the
invention of organic farming, exports have also increased in the last few
decades.

3. Creates employment opportunities: Indian agriculture gives

employment and work to a vast majority of the people to the rural crowd.
In rural and backward areas, almost 70% of the masses earn their
livelihood from cultivation and allied agro-industries. Agriculture is also
helpful in increasing the employment opportunities in the manner that it is
helpful in industrial growth and expansion which leads to an increase in
employment.
4. More capital investment: In today’s world modern agricultural
equipment is used for cultivation, irrigation, land preparation, banding,
harvesting, ploughs, etc. which requires a huge amount of investment.
Income leads to savings and savings leads to investments. As we know
that agriculture contributes almost 16% to the national income of the
economy, there will be savings from the agriculturalist and it will lead to
capital formation. The livestock viz. cattle, buffaloes, sheep, goats, horses,
ponies, etc. also have its food from agriculture.

DISADVANTAGES in carrying
out agricultural activities
 Poor inputs and techniques:
The techniques and methods of cultivation have been old and inefficient. It
results in a high cost of production and low productivity. These methods
have not undergone and changed for centuries. The investment in
agriculture in the form of manures and fertilizers, improved seeds,
irrigation, tools and implements and other types of assets has been
miserably low.

 Inadequate irrigation facilities:

One of the main reasons for the weakness of Indian agriculture has been
the lack of irrigation facilities in the country. The farmers have to depend
upon rainfall and very few of them can avail the facilities of irrigation
systems. Sometimes drought and floods also spoil the whole cultivation
and crops.

 Indebtedness of the farmers:

There is an old saying that the farmers in India are born in debt, live in
debt and bequeath debt. The reasons for their indebtedness are many
such as hereditary debt, litigation, want of supplementary incomes and
wasteful social expenditure.

 Low adoption of improved technology:

The adoption of high yielding varieties (HYV) is very rare in India. The
important reasons for the slow growth of HYV are the non-availability of
suitable seeds, the predominance of traditional seeds, short supply of
recommended seeds and defective distribution system.
 Absence of Innovation in Agriculture:
Absence of alternative for escaping pre-monsoon showers to avoid the
problem of pre-harvest sprouting of crops in flood periods is a major
problem. There is a lack of improved crop management practices for
shifting cultivation. The facilities of storage, processing and marketing are
particularly deficient for perishable commodities.

 Rural transport and communication network:

Most of the areas remain inaccessible during rainy seasons for non-
availability of all-weather roads. Roads are found to be highly damaged
and there are no proper transport facilities to the access of the villagers.

Progress of Indian agriculture

1. Government Measures:

Through the five-year plans, the government of India has played an active
role in the development of agriculture. Proper objectives have been laid
down in the various plans. According to these objectives, corresponding
measures have been spelt out. All the activities are directed towards the
achievement of these objectives.

2. Expanding Government’s Role:

From the first five-year plan, the government realized that for the
development of agriculture, the government has to play an important role
which would be a crucial one. Agriculture is the backbone of the economy
and the poor farmers cannot uplift themselves. That is why the measures
needed for the upliftment of agriculture could be taken by the government.
In recent years, the government’s actions have expanded to include
programmes for rural development and special area programmes.

3. Laudable objectives:

The objectives of different plans are varied from time to time. Somewhere
the aim was to increase productivity and elsewhere to improve the quality
of food grains. Land reforms have been the other significant objective.
Another important objective was to uplift the weaker sections of the
society. For example, the small and marginal farmers, landless agricultural
labourers, and many of those engaged in activities allied to agriculture
such as animal husbandry and fisheries, etc.

4. Appropriate measures:

In order to achieve these objectives many measures have been taken by

the government of India. For example, to increase the production and
productivity the supply of inputs, infrastructural facilities, an extension of
irrigation, modern laboratory-based seeds, include banking, marketing,
credit, transportation, communication, finance, education, and information
dissemination, etc.

5. Considerable resources:

Large resources have been devoted to agricultural development. These

have been on the rise from plan to plan. The funding for the development
of agriculture has also been increased from time to time. For the control of
droughts and floods, many funds have been given by the government.
Special programmes for the benefit of rural people have been introduced
along with industrial development.

DEVELOPMENT OF
AGRICULTURE AND
INDUSTRY IN INDIA
India's already large population is expected to become the world's largest
in the next 20 years, while its economy will soon overtake Japan's to
become the world's third largest. The resulting increase in the demand for
food will need to be met through higher agricultural productivity or by
increasing food imports.

India has a particularly large agricultural sector. While the sector's share of
GDP has halved in the past 30 years to around 15 per cent, it still employs
around half of India's workforce and accounts for much of the volatility in
Indian GDP. India has the second largest area of arable land in the world
and is a major producer of a number of agricultural products (Table 1).

Around the turn of the century, India overtook the United States as the
world's largest producer of milk and is also a major producer of pulses,
such as chickpeas and lentils, which are major sources of protein in
vegetarian diets.

Table 1: India – Major Agricultural Products in 2008

Commodity World World Rank Production
Rank
Buffalo milk 1 60.9
Bananas 1 26.2
Paddy rice 2 148.7
Cow milk 2 44.1
wheat 2 78.6
Sugar cane 2 348.2
Fresh vegetables 2 31.4
Cotton lint 2 3.8
potatoes 2 34.7

Source: Food and Agriculture Organisation of the United Nations (FAO)

Growth in agricultural output over the past three decades has been strong
and, importantly, crop production has been able to broadly keep pace with
the demands from a growing population (Graph 1). The introduction of
high-yielding seeds (such as improved strains of wheat) from the mid-
1960s and the increased use of chemical fertilisers epitomised what
became known as the ‘green revolution’. Wheat production increased by
nearly 150 per cent between the mid-1960s and mid 1970s and the
country became self-sufficient in grain production by the end of the 1970s.
The increase in agricultural production boosted rural incomes while also
causing food prices to fall. This had the effect of reducing rural poverty
(World Bank 2004).

Graph 1
India – Crop Production and Population

Despite the productivity improvements in the Indian agricultural sector

over recent decades, yields remain low by international standards and
growth in yields has only been marginally higher than the world average
(Graph 2). In particular, yields for cereals and vegetables remain
substantially lower than the world average. Crop yields have increased
much more for rice and wheat than for other cereals, such as barley, or for
pulses. Wheat yields have tripled over the past 50 years and rice yields
have doubled, while yields for pulses improved little over this period.

Graph 2
While able to meet most of its food requirements from domestic
production, India still needs to import some food. Trade in agricultural
products accounts for a modest share of total merchandise trade, currently
about 8 per cent of exports and 2 per cent of imports. Agricultural trade
has, however, grown rapidly over the past decade, with the value of
exports and imports both recording average annual growth rates of about
15 per cent. Rice, animal feed and seafood are India's principal food
exports, while fruit and vegetables are its largest food imports (Table 2).
The diversification of agricultural production over the past couple of
decades is also reflected in the changing composition of India's food
exports, with the share of traditional exports like tea and coffee declining
and the share of meat exports increasing. Food grain imports are relatively
low, consistent with India being broadly self-sufficient in grain production.
Much of India's trade is with economies within a relatively short shipping
distance, although imports of wheat and sugar come from more distant
sources such as Russia and Brazil.

Table 2: India's Agricultural Trade

Annual average over 2005–2009
 Average Average Largest Share of
Trade Value volume export/ trade with
import largest
US$ million kt partner partner

Per cent

Exports
Rice 2,137 4,287 Saudi Arabia 24.6
Animal feed 1,636 6,188 Vietnam 23.4
Crustaceans 1,093 237 United 21.6
, molluscs States
Fruit and 943 686 United 22.9
nuts States
Bovine meat 826 464 Vietnam 15.3
Imports
Vegetables 1,257 2,650 Myanmar 39.3
Fruit and 935 1,066 United 19.0
nuts States
Wheat 374 1,440 Russia 40.3
Sugar, 258 713 Brazil 74.0
molasses
and honey
Spices 150 106 Sri Lanka 25.1

Source: UN Comtrade

Overall, India has become more open to agricultural trade in recent years,
although government policies have often been driven by developments in
domestic food production and global food prices.

Since 2006, import duties on wheat, rice and pulses have gradually been
abolished to boost the domestic availability of these commodities and to
reduce domestic price pressures from rising global food prices. The
Government has also, on occasion, used trade policy to ensure domestic
supplies.

For example, in December 2010, the Government decided to ban all onion
exports and abolished import duties on onions after a fall in onion
production caused prices to more than double. Two months later, when
retail onion prices fell from around INR 70 per kilogram to less than INR 20
per kilogram, the Government lifted its ban on onion exports.
 In general, agricultural export earnings are mostly exempt from income
and other taxes, although the exports of wheat, (non-basmati) rice and
pulses (other than chickpeas) are currently prohibited. Overall, average
tariff rates on food peaked at just over 30 per cent in 2005/06, but fell
significantly in 2008/09, due mainly to a reduction in tariffs on edible
vegetable oils from an average of almost 75 per cent to 7.5 per cent
(Graph 3).

Graph 3

India – Average Tariff Rates on Imports

Rural Land Distribution and Access to Finance
A major institutional factor that has limited agricultural productivity in India
is regulation of land holdings. In order to address the highly concentrated
ownership structure of land in India prior to independence, the
Government instituted land reforms that placed ceilings on land holdings.

As a result, agriculture in India is dominated by a large number of small-

scale, owner-occupied farms. The most recent estimates suggest that
around 100 million households were engaged in agricultural production in
2002, roughly 70 per cent of all rural households and only marginally lower
than the share of rural households engaged in agriculture in the early
1960s.

Over the past 50 years, the share of farming households tending plots of
land of less than one hectare has increased from 60 per cent to just under
80 per cent and the average farm size has fallen to around 1 hectare, with
only ½ per cent of households farming more than 10 hectares of land
(Table 3). By the early 1990s, most Indian states had enacted tenancy laws
conferring ownership of land on tenants who were able to buy the land
they farmed at a fair price, which reinforced the trend of increased
fragmentation of land holdings during that decade.

Additionally, the increase in population has also contributed to smaller

land holdings, while the subdivision of original family land holdings over
generations has left many families with land holdings too small to provide
an adequate stream of income.

Table 3: India's Rural Land Distribution (Millions)

1960/61 1971/72 1981/82 1991/92 2002/03

Total rural 72.5 78.4 93.9 116.4 147.8

household
s
Engaged 52.9 56.9 69.4 93.4 101.8
in
agriculture
land
holdings
Less than 30.5 34.3 46.6 65.5 80.4
1 hectare
1–2 8.6 9.3 10.1 13.3 11.4
hectares
2–4 7.3 7.3 7.4 9.1 6.3
hectares
4–10 5.0 4.6 4.4 4.6 3.0
hectares
Over 10 1.6 1.3 1.0 1.0 0.5
hectares

Sources: NSSO (2006); RBA

With small land holdings, farmers have limited incentive to adopt capital-
intensive farming techniques, as productivity gains from capital through
mechanisation and exploiting economies of scale are minimal. Larger land
holdings would also allow farmers to engage in multiple cropping, which
would make them less susceptible to adverse weather conditions and help
diversify their income base.

Private investment in the agricultural sector has also been limited by

restricted access to credit and insurance, although access has generally
improved over the past decade with credit to the agricultural sector
growing, on average, by more than 20 per cent annually over the period.

Nevertheless, credit extension remains predominately focused on assisting

farmers through the annual cycle rather than helping them to finance the
building and purchase of assets, such as tractors and pump-sets.
Government programs have been used to improve access to credit for
farmers through a number of channels, including: interest rate subsidies;
debt relief; collateral-free loans; improving administration; and mandating
banks to increase the flow of credit to rural customers.

Much of this expansion has been through so-called micro-finance facilities

but while such lending has increased significantly over the past decade,
borrowers have often faced interest rates as high as 40 per cent.
Furthermore, many have had difficulties repaying debts after crops have
failed. In 2009/10, the Indian Government spent roughly 0.2 per cent of
GDP on debt waivers and debt relief for farmers.

The Government is also gradually improving access to insurance through

the National Insurance Scheme, although in 2009 only 18 million farmers
were insured under the scheme. The scheme covers farmers who produce
cereals, millets, pulses, oilseeds, sugarcane, cotton and potatoes.

In certain areas, farmers growing these crops and accessing Seasonal

Agricultural Operations loans from financial institutions are required to
purchase this insurance, while others can opt in voluntarily. Importantly,
the scheme covers drought and other weather events as well as loss of
production due to pests and disease.

Premium rates are typically between 1.5 per cent and 3.5 per cent of the
value insured, with those farming less than 2 hectares receiving a 50 per
cent subsidy. Recently, the Government trialled a modified insurance
scheme, expanding coverage to more areas and providing premium
subsidies of between 40 and 75 per cent.

By reducing credit risk faced by lending institutions, increased coverage of

insurance should give farmers better access to credit and encourage
further investment in the agricultural sector.

The increase in the flow of credit to the agricultural sector has seen
investment by the private sector double over the past decade, although
public sector investment still dominates (Graph 4). Since the early 1990s,
investment growth in the agriculture sector has averaged over 4 per cent,
although prior to the onset of the global financial crisis, investment growth
exceeded 10 per cent, suggesting that the improved flow of credit to the
sector, and higher food prices, had encouraged capital deepening in the
sector (Graph 5).

Graph 4

India – Investment in Agriculture

Graph 5
India – Agricultural Investment
Water Management
Water management is crucial to improving conditions in agriculture. India
currently has around 5,000 large dams that are able to store more than
220 teralitres, which ranks seventh in the world in terms of capacity.
While dams in other parts of the world are built for flood mitigation, power
generation and water supply, the primary purpose of India's dams is
irrigation. Around 40 per cent of crop areas are now irrigated, and these
areas produce 70 per cent of India's crop output. A significant proportion of
farms have limited or no access to irrigation, and therefore still rely on
rainfall as their sole source of water.

With just over 80 per cent of India's rainfall occurring during the summer
monsoon season, which occurs from June through to September, deficient
rainfalls have often had significant effects on the Indian economy.

In 2009, the summer monsoon rainfall was lower than normal, which
caused a fall in grain production of 7 per cent and pushed up grain and
other food prices.

In the past, agricultural production has been much more dependent on the
summer monsoon, with large fluctuations in rainfall accounting for most of
the volatility in agricultural production (Graph 6). Over time, however, the
effect of the summer monsoon rain season has been mitigated through
drought management (including drought monitoring), increased use of
irrigation, and diversification of agricultural production.

These measures have made food production less vulnerable to poor

weather conditions. In part, this helps explain why deficient rainfalls since
the late 1990s have resulted in less significant contractions in agricultural
output. In fact, variations in agricultural output, which once accounted for
60 per cent of the variation in GDP, now account for only 20 per cent,
which in part reflects agriculture's lower share of GDP.

Graph 6

India – Rainfall and Agricultural Production

The Food Procurement and Distribution System
In addition to policies on land distribution, the Government has significant
influence on the agricultural sector through other policy instruments,
including subsidies for inputs, minimum price support arrangements and
government procurement of food.

One-third of input subsidies are paid in the form of fertiliser subsidies,

which are equivalent to 1 per cent of GDP. Under this subsidy scheme, the
Government quotes a maximum retail price for various types of fertilisers
and reimburses the seller the difference between the retail price and the
‘market’ price. The market price for domestically produced fertilisers takes
into account transportation, storage, labour and energy costs. The subsidy
for imported fertiliser is the difference between the import price and the
maximum retail price. Urea fertilisers are a major input into agricultural
production and its price has been fixed since 2003 despite large
fluctuations in the cost of inputs. While India is able to produce enough
urea fertiliser to meet domestic needs, it relies on imports to satisfy its
demand for compound fertilisers, so that the increase in global fertiliser
prices during 2007 and 2008 saw a large outlay in the subsidies paid for
compound fertilisers (Graph 7). There are also substantial subsidies for
electricity. Many farms use unmetered power and pay a subsidised lump-
sum based on the power ratings of pump-sets used for irrigation purposes.

Graph 7

India – Fertiliser Subsidies

To help alleviate poverty and to shield Indian consumers from global food
price fluctuations, the Government subsidises food purchases for many
consumers. The Government procures agricultural goods from producers,
who must sell a share of their output to the Government at minimum
support prices (MSPs), which are typically below market prices (Graph 8).
Procured food is sold through the Targeted Public Distribution System
(TPDS), which consists of about half a million ‘fair price shops’. In order to
purchase food through this system, households apply for ration cards,
which indicate whether they are assessed to be Above Poverty Line (APL)
or Below Poverty Line (BPL). In 2005, 81 per cent of rural households and
67 per cent of urban households held ration cards. The type of ration card
a household holds determines the prices they pay (the central issue price)
and the amount of food they can purchase through the TPDS. According to
the most recent estimates, about one-third of the production of rice and
wheat was released for consumption under the TPDS in the 2009/10 Indian
financial year.
Graph 8

India – Grain Prices

While the MSP program covers 26 crops, in practice, the program is used
to subsidise farmers when market prices fall to very low levels for most of
those crops. With market prices generally higher than MSPs for most
agricultural commodities, MSPs are typically only used by the Government
to procure rice and wheat. The Government also uses its stock of grains to
buy or sell produce to ensure retail market prices remain broadly stable.

Although government programs have sought to make food more affordable

to poorer households, India's lack of cold-storage facilities and cold-chain
transportation have resulted in large quantities of food being wasted. For
instance, almost all cold storage is used for potatoes for five months of
each year, resulting in only around 10 per cent of remaining fruit and
vegetable produce being stored in a refrigerated environment, which
means that a significant amount of produce deteriorates and is unfit to
consume. Some estimates suggest that between 25 and 40 per cent of
fruit and vegetable output is wasted during the storage and transportation
stages of distribution. Electricity supply is another major factor, with rolling
brown-and black-outs contributing to a loss of food in cold-storage
facilities.

Transport infrastructure is also limited, resulting in further food damage

and loss during transit. Most highways in India are narrow and congested,
and about 40 per cent of India's villages have no access to all-weather
roads. Most of the cold-chain transportation network is used to distribute
milk, with only around 20 per cent of the network available for the
distribution of other food produce. As a result, fruit and vegetables are
typically transported in open-top trucks.

Conclusion

India's agricultural sector is still very important to the Indian economy,

although its share of the economy has decreased over the past 50 years.
India has made significant advances in agricultural production in recent
decades, including the introduction of high-yield seed varieties, increased
use of fertilisers and improved water management systems. Reforms to
land distribution, water management and food distribution systems will
further enhance productivity and help India meet its growing demand for
food.