Agriculture and Development

Rajesh Jain writes on Indian outsourcing:

Outsourcing is good for India – but it will only provide a few million jobs at best. What’s also needed is for Indians to come up with innovations to raise the incomes of the rest of India – the 700 million in rural India. Only then will India will start to make the transition from an agricultural economy.

I agree that outsourcing is of limited value to the vast majority of Indians who cannot participate in it for obvious reasons. I also agree with Rajesh about the need for the transition from an agricultural economy. One reader, Nitin, commented on Rajesh’s blog and said:

I do not think moving away from an agricultural economy is necessary for economic development. With the huge natural & human resources agriculture gives India a comparative advantage. …

Though Nitin’s entire comment is worth commenting on, I will restrict myself to only the above for now. What does “moving away from an agricultural economy” mean? If by ‘agricultural economy’ one means an economy that is mainly agricultural, then clearly India’s being an agricultural economy is problematic. The reason is that India is a very large country population wise, compared to a country such as New Zealand. NZ can be an agricultural country and yet be developed because its production and consequent exports are sufficient to earn it a decent national income. India cannot be a developed nation and continue to be agricultural because it can never earn enough from agricultural exports to make a decent living. To illustrate this point, let’s do some arithmetic.

Let us assume that for a country to be developed, its per capita income must be $10,000 per year. Currently, India’s per capita annual income is about 5% of that, or about a 20th of the income required to be a developed nation. Our agricultural production accounts for about a quarter of our GDP. So for agriculture alone to raise India’s GDP to that of a developed country level, Indian agricultural production will have to increase 80-fold at least. Now of this 80-fold increase, we can only consume perhaps twice as much food as we currently produce and consume. So the rest of the humongous output will have to be exported. If one tries to export even a 10th of that amount, the world prices will crash close enough to zero that it will not be worth even picking the produce from the fields.

This is not the case with NZ because a couple of million people have to export only so much to get a decent income. Their exports do not affect their terms of trade so adversely that they become impoverished. A 1,000 million people who wish to depend solely on their agricultural incomes to become developed cannot ever hope to do so because there is a limit to how much food humans can consume.

For India to develop, there is no way other than moving away from agriculture. By that I don’t mean that we give up agriculture or reduce our production. I only mean that instead of 66 percent of our labor force being in agriculture, we have to steadily reduce that to something like 10 or 20 percent at most in the medium term, and to single digit percentages in the long term. When labor does make that transition, then the released labor has to be absorbed in manufacturing and services sectors. This is a natural progression, come to think of it.

Natural because first we need food. Then we need non-food stuff such as clothes and shelter and vehicles and roads and books and computers and shoes and ships and sealing wax etc. All that stuff has to be manufactured. Once we have food and manufactured stuff, we need services such as education and dentistry and dancing and musicals and movies and psychiatry and what nots. This entire edifice is built upon the agricultural sector because without it producing food, no manufacturing nor services would occur. Of course, if we got super good in manufacturing, we could export that and buy food. Or if we got super good in services (BPO or what have you), we could export that and buy food and manufactures. The trouble is that India has a very huge population. And therefore if we ever specialize (that is, do only one thing), then we would be forced to produce in such great quantities to export the stuff that the world price of that (food, manufactures, services) will crash and we will not be able to survive.

The bottom line is this: A large economy has to be largely self-sufficient. It has to produce food, manufactures, and services domestically and it has to consume most of what it produces domestically as well. Only small economies can afford to specialize and survive through trade.

Coming to that bit of Nitin’s comment about India’s huge natural and human resources. Yes, India has huge natural resources. Unfortunately, India has huge population as well. So with around 2 percent of the world’s land area and 17 percent of the world’s population, the natural resource base does not seem all that rosy. Couple that with the fact that India does not have sufficient fossil fuel resources (we import a lot of that stuff) and one is not all that sanguine about India’s natural resources. How about human resources then? The story there is also not that pretty. We do have a thousand million people. But they are mostly illiterate. Literacy is a basic prerequisite for any sort of human capital. Illiterate people can at best be engaged in subsistence farming, not working on rocket science or cardiac surgery or even BPO.

So then, do we have comparative advantage in agriculture? Perhaps we do or perhaps we don’t. The problem with comparative advantage (as opposed to absolute advantage) is that it is not always entirely clear whether one has comparative advantage because one is good at something or whether it is due to the fact that one is not good at it but one is worse in everything else one does. For instance, I may have a comparative advantage in ballet dancing and yet really suck at it. My comparative advantage in ballet dancing could arise from the fact that I did everything else even worse than I performed ballets.

Now Rajesh wrote that one has to come up with some sort of innovation to raise the incomes of the 700 million rural people. I don’t really think that we need any ‘innovation’. The only way to increase incomes is the old-fashioned way as my grandfather used to say: by producing stuff. Income, just to remind ourselves, is just another word for production. We produce a lot of stuff, so we get to have lots of stuff and that is what it means to have a high income. Therefore for rural incomes to rise, rural production has to rise. Agricultural productivity has to increase (and perhaps some increase in agricultural production as well) of course and then the labor released from agriculture has to produce manufactured stuff and then move on to producing services.

There is very little by way of innovation that is required for rural incomes to increase, looked upon that way. But there may be innovations required for getting the productivity to increase. For instance, for raising human capital (a precondition for raising productivity), we may need innovative solutions to India’s literacy and education problems. For educating India’s umpteen millions of youth, we may need to use modern technology innovatively. Perhaps we can use the information and communications technologies to impart quality education efficiently.

Well, that is all for now from Saratoga California. Be well, do good work, and keep in touch.

{Continue reading Part 2 of Agriculture and Development.}

7 thoughts on “Agriculture and Development

  1. Nitin Sunday February 1, 2004 / 10:31 am

    For the huge bulk of rural India to make the transition from agriculture to manufacturing and eventually to services while desirable, is not going to happen fast or easily.

    I’m not thinking so far into the future.

    What I’m saying is for rural India to have a profound growth in income it is not necessary to engineer a radical movement away from agriculture. If Indian farmers are provided with an opportunity to participate in new markets (domestic and export) they can generate higher income.

    My next point is for the food processing industry to be actively developed to move the ‘agricultural’ economy further up the value chain. This industry need not necessarily have to be located where the agro-inputs are grown.

    The crucial enabler for all this is infrastructure. Taking grains to factories, canned food to the ports, frozen food to the airports on refrigerated trucks, fresh fruits to global supermarket shelves, cold storage etc needs good roads, power, and telecommunications.

    I’d even say that once you get this infrastructure in place, the rest will happen on its own.


  2. Nitin Monday March 1, 2004 / 3:28 pm


    Here’s a story from today’s news that’s relevant to this discussion

    [“In 1993 the population of this village was about 3,500. Now it is 25,000,” said Jagannath, sitting in his two-storeyed building which he built after selling off his farm to make way for an Intel facility that will be spread over 44 acres (17.6 hectares).

    “Farmers do not want to sell the land but we are forced to. Property values have soared and government has started acquiring property to meet the demand from IT firms. Job opportunities in agriculture are vanishing now,” he said.

    “Property developers are making money while farmers are leaving their farms to go and settle more than 25 kilometres (15 miles) away. It is a sad situation,” Jagannath said.Space Daily]


  3. s..yogeshwari Thursday April 14, 2005 / 4:29 pm

    Dear sir,

    I am an M.A (Economics) student . This article of yours is really interesting and it made me to think in a different perspective.
    I want a small help from you ,please do this favour if possible ,I want to do Ph.d after my P.G and I am interested in the topic “Green Revolution “can you give me some suggestions that which area under this topic need quick attention for the growth of our economy,as I am lagging for the required information.
    yours faithfully,


  4. viraj Wednesday February 1, 2006 / 1:48 pm

    Dear sir,
    Iam an B.E(ETRX).Iam interested to start a business venture in agiculture as we own landscape in goa & bombay aswell,secondly I want to make some use of my degree in Electronics to create job appotunities.Kindly give me the hand of help as on how to start


  5. dinesh Monday December 11, 2006 / 1:52 pm



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