Archive for July, 2012

Role of Agriculture in Economic Growth

Previously, I have commented on India’s agriculture GDP and the workforce engaged in agriculture.  So I decided to dig deeper into the structural transformation of developing economies to understand where all this is heading.

In the process I came across a thin book titled “A World without Agriculture” by C. Peter Timmer. It is an academic work, not necessarily meant for popular reading, but it is worth getting through.

The book is based on data from 86 countries over 35 years, so it provides a very long-term fact based look at where things may be headed for countries like India going through economic development.

Below, I am paraphrasing/quoting some of the interesting points from the book.

 

The Structural Transformation: What, When and How

As expected, as economies develop, the share of agriculture in national GDP drops over time. However the agriculture GDP continues to grow in absolute terms (unless of course nature or politics go horribly wrong).  For example, India’s agri GDP is currently 18.5% of national GDP, down from 42% in 1970.

The share of agri employment in total labour force also declines over decades. At some point, the agri employment starts decreasing in absolute numbers, not just in percentage terms. For example, agri employment is currently 52% in India — that is, 52% of the workforce is involved in agriculture.  This number was 70% in 1970. In India, the number of people employed in agriculture is still growing — we added 20 million people (net of urban migration) working in agriculture over the last decade.

The gap between the share of agri in employment (52%) and share  of agri in GDP (18.5%) first widens and then starts narrowing at some level of threshold per capita GDP in the economy.  While this number varies from country to country and based on decade, some definitive things can be said about this turning point.

The turning point appears to be around $9-10K GDP per capita across the globe. Also, this number has been growing: i.e., the threshold at which the gap starts narrowing is becoming higher and higher.  “Such results are strongly suggestive of a failure of modern economic growth processes to integrate the agricultural sectors of poor countries into the rest of their economies, despite relatively successful aggregate growth records.”

“A widening sectoral income gap — as differences in labor productivity between urban and rural areas become larger – spells political trouble. Rural households that feel left out of the growth process can vote governments out of office… It is no wonder that policymakers feel compelled to address the problem, and the most visible way is to provide more income to agricultural producers.  The long-run way to do this is to raise their labor productivity and encourage agricultural labor to migrate to urban jobs, but the short-run approach — inevitable in most political environments — is to use trade policy to affect domestic agricultural prices. In low-income economies, agricultural protection is a child of growing income inequality between the sectors during the structural transformation.”

Looking back at the structural transformation of developed countries: “Virtually the entire growth experience of modern developed countries has been spent on the convergent path of sectoral labor productivity.  This is in sharp contrast to currently developing countries, which are mostly at income levels per capita where sectoral labor productivity is [still] diverging.”

 (East) Asia versus other countries

There appears to be something distinctively unique about the path Asian countries have taken so far (mostly East Asia, e.g. Indonesia).

“Asian economies tend to employ disproportionately more farm workers in the early stages of development.” Also, “Asian countries provided more price incentives to their agricultural sectors … as a way to prevent the movement of labor out of agriculture from being “too fast”. The net effect is that the turning point for the gap (between agri employment and agri GDP) is around $1600  of GDP per capita for Asian countries compared to $11,000 for non-Asian countries. “This difference underscores two distinctive features of Asian economies: their more rapid growth and the greater role of agri productivity in that growth.”

A side note: India’ GDP per capita is currently around $1500 at current exchange rates.

Paradoxical Role of Agriculture in the Structural Transformation

“The past decade has brought a quiet revolution in the understanding of determinants of poverty and the mechanisms for reducing it in a sustainable fashion.  Partly, it is a simple recognition that economic growth is the main vehicle for reducing poverty – provided the distribution of income does not widen too sharply.”

“In current strategies used by countries and donor agencies to cope with poverty, the role of agriculture has been limited, largely because of a failure to recognize the importance of direct links among agri development, food availability, caloric intake by the poor, and poverty reduction.”…

“The case [for linking agri to poverty reduction] builds on three empirical relationships: between agri growth and poverty alleviation; between increases in domestic food production and improvements in nutrient intake; and between agri productivity and productivity growth in the rest of the economy.”

“An agriculture-driven growth strategy, if it does not sacrifice aggregate growth, directs a greater share of income to the poor – that is, it is more pro-poor. Such a strategy is the first step in breaking the cyle of poverty.”

So the paradox is that in trying to make agri a vanishingly small sector of a growing economy, the economy must invest in increasing agricultural productivity.

Rural Employment

“Throughout Asia, most rural households earn half or more of their income from non-farm sources, and often this sector is the “ladder” from under-employment at farm tasks to regular wage employment in the local economy, and from there to jobs in the formal sector.” So investing in creation of this ladder is equally important.

Conclusions

  1. “Structural transformation has been the main pathway out of poverty for all societies, and it is depends on raising productivity in both the agri and non-agri sectors (and the two are connected).”
  2. “The process of structural transformation puts enormous pressure on rural societies to adjust and modernize, and these pressures are translated into visible and significant policy responses that alter agri prices.”
  3. “Despite the decline in relative importance of agricultural sector leading to the “world without agriculture” in rich societies, the process of economic growth and structural transformation requires major investments in the agri sector itself.  This seeming paradox has complicated (and obfuscated) planning in developing countries, as well as for donor agencies seeking to speed economic growth and connect the poor to it.”
  • Richa Govil

(Richa shares her thoughts on rural businesses at ‘Stirring the Pyramid’)

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July 31, 2012 at 7:03 am Leave a comment

Why the shrinking share of agriculture in India’s GDP is a good thing

After the release of the latest economic statistics in March 2012, many in development sector circles raised concerns about the rapidly declining share of agriculture in the country’s GDP and rural to urban migration.

But none of these laments make sense, and worse, they are not based on facts.

According to Planning Commission data (from their website), in the last 10 years, the total GDP of the country has more than tripled. Even with the decline in Agricultural share of GDP from 21% to 18.5% (at current prices), agriculture GDP has increased by 2.8x.  This is a good thing and an expected development on the path to economic development.

Similarly, while the % of population engaged in agriculture may be going down as % of population, in absolute numbers, it is still increasing.

These macro-economic trends are part of the long-term structural transformation of the Indian economy.

In fact, the percent of population engaged in agriculture must go down much more dramatically to increase overall agricultural productivity even further and bring average farming incomes above the poverty line. (More on this in the next post)

The development sector should stop doing itself and its target populations disservice by promoting poorly-informed ideas and knee-jerk reactions, and think more deeply about the social and economic direction in which the country needs to go.

  • Richa Govil

(Richa shares her thoughts on rural businesses at ‘Stirring the Pyramid’)

July 18, 2012 at 8:42 am Leave a comment

Farm Sizes & Incomes in India

When looking up any research or facts about about farming in India, one often come across comments about the smallness of farms in India.  So I wanted to understand how small is small.  Here are some statistics from National Sample Survey Organization (NSSO):

Below table shows the data on the average farm sizes in India:

Total area No. of holdings Average farm                         holding size
(million hectares) (millions) (ha/ holding)
1960-61 134 51 2.63
1970-71 126 57 2.2
1981-82 119 71 1.67
1991-92 125 93 1.34
2002-03 107 101 1.06

 

In 2003, the average farm size (what NSSO calls operational landholding) was about 1 hectare, which equals the area of a 100m x 100m plot.  70% of farmers have plots sizes smaller than a hectare.

Next I looked into historical farm sizes and discovered that in the last 30 years, the average farm size has halved. That is, the average farm size in 2003 was 48% of the farm size in 1971.

So the same farm that supported a single family in 1971 now has to support two families.

I suspect the halving of farm sizes within 30 years has much to do with splitting of farms among male offspring of farmers.  With no substantial employment or income-generating opportunities besides farming in rural areas, it is no wonder that splitting of farms is common practice, ultimately making the farms too small to support a family.  [See back-of-the-envelope calculations in an earlier post]

This leads to another line of thought: What is the average income of a farming family in India?

Here also NSSO comes to the rescue and provides us with detailed data.  The average farming household’s income from all activities is apparently Rs. 2,115 per month. The breakup of this income is as follows:

  • From cultivation:                   969
  • From animals:                         91
  • From wage labour:                819
  • From non-farm activities:     236
  • Total household income:    2,115

The average family size in rural India (as per census data) is 5.4.  So the Rs.2,115 per month translates into Rs.13/day per capita, well below the poverty line.

This begs the question: Is small-scale farming a sustainable economic activity?

 

  • Richa Govil

(Richa shares her thoughts on rural businesses at ‘Stirring the Pyramid’)

July 10, 2012 at 6:24 am 4 comments

Is farming an economically viable opportunity?

This is a question that has been at the back of my mind for a couple of years. Luckily, I now have the opportunity to dig deeper into it.

Here is some data on gross returns, defined as (total value realized – cost of cultivation) divided by cost of cultivation.

Gross Returns%
Cereals
Wheat 4%
Paddy -7%
Maize -32%
Bajra -43%
Jowar -48%
Ragi -50%
Veg
Onion -irrigated 148%
Tomato 101%
Beans 81%
Brinjal 78%
Onion – dryland 63%
Okra 60%
Bhindi 52%
Fruit
Mango 360%
Chiku/ Sapota 194%
Lichi 115%
Guava 95%
Grape 53%

 

[Data from “Can Horticulture be a success story for India?” by Dr. Surabhi Mittal of ICRIER.]

As you can see, farmers barely break even on wheat/rice.  In contrast, fruits and vegetables give attractive returns.  Of course, here we are ignoring the fact that for fruits, you have to wait multiple years before trees are mature enough to fruit. And, we have ignored non-food crops in this comparison. But still these are very stark differences in returns.

This data makes you wonder why anyone would bother growing wheat or rice.

Yet, government data shows that roughly 70% of cultivation is for cereals.

It would be silly of us to assume that farmers are completely ignorant of the substantial difference in returns.  They may not have done the detailed studies and calculations done by Dr. Mittal, but they would know the ballpark difference in returns. So why not shift to more lucrative crops?

It turns out that there are many  reasons for lower cultivation of fruits and vegetables,  including higher production risk (pest attacks and sensitivity to adverse climate), high price volatility, as well as the  lack of proper storage and transport facilities required for perishable crops.  I also wonder how much of the relative risk perception is affected by the minimum support prices offered by the government for grains. We will explore these reasons in future blogs.

To get back to our original topic of economic viability of farming, the answer seems to be disappointing.

Given the low or negative returns from what is actually grown, (mostly cereals), is it any wonder that the state of farming and farmers in India is what it is today?

  • Richa Govil

(Richa shares her thoughts on rural businesses at ‘Stirring the Pyramid’)

July 2, 2012 at 3:56 am Leave a comment


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