The Importance of Agriculture in GDP

[Repost of a July 2003 article.]

A head’s up from Rajesh Jain on an article Asia Times Online titled Why India’s Economy Lags Behind China’s got me thinking once again about popular misconceptions about development matters. Journalists are particularly susceptible to some of these. An example appears in the article.

The real bad news lies elsewhere. India’s agricultural sector, which continues to employ about 60 percent of the country’s workforce, has seen a real decline in terms of its contribution to GDP growth and its share of GDP.

I don’t know where to begin to unravel the illogic of that statement. Perhaps I should start off with an analogy.

Consider my grandmother’s GDP. She spent the bulk of her time in the kitchen and in rearing children (and later in her life, her grandchildren such as yours truly.) Her time in the kitchen was food-related and so let’s just call that her agriculture sector. Rearing children could be considered her service sector; and producing children, three boys and three girls, her manufacturing sector. I’d assign her GDP shares as

Agriculture:     50%
Manufacturing :     20%
Services :     30%

Now move ahead about 70 years and consider my sister’s GDP. She has two boys, works full-time managing a medical transcription service company, and spends a little bit of time in the kitchen after she gets home. Her sectoral output:

Agriculture:     10%
Manufacturing :     10%
Services :     80%

In other words, my sister spends most of her time working outside the home and very little time in the kitchen. Also, she has to rear only two children, as opposed to my grandmama’s half a dozen. Clearly the share of the GDP accounted for by “agriculture” has fallen dramatically as the generations progressed. Concluding from that that perhaps my sister’s family is starving would not be very clever.

In other words, the structural change in the GDP is a good thing. Lamenting it is somewhat idiotic, not to put too fine a point on it.

Anyhow, enough of that analogy. Let’s move on to the figures that India’s Tenth Plan states for shares of the GDP and growth rates.

Sector . . . . . . Growth rate .   Share of GDP
 . . . . . . .  2002-07  1997-02    2002-07  1997-02

   Communications   15.0     17.14      2.3       1.7
   Manufacturing     9.82     3.68     16.7      15.3
   Agriculture       3.97     2.06     20.5      24.7

The growth rate of the agricultural sector accelerates in the next plan. So in absolute terms it gains and there is no decline. That is good news. In relative terms, the decline of agriculture in the share of GDP from 24.7 to 20.5 is also good news. That decline implies that services and manufacturing are gaining share and that implies that we are moving away from a subsistence economy to one in which we may have some hope of improving our lot.

Of course, as a developing economy, agriculture is the core of the economy. No one is advocating a destruction of the core of one’s economy. What I maintain is that agriculture’s share in the GDP had better decline (but not a decline in the absolute value of the agriculture sector) if India is to ever develop. It is only very severely underdeveloped economies have high ag sector share of GDP.

For instance, here are some numbers of the share of agriculture in overall GDP of some nations. No prizes for guessing which are developed and which not.

 Country    % share of AG in GDP 1999 data

    Albania     54 (was 37% in 1990)
    Australia    3
    Bangladesh  21
    Belgium      1
    China       17 (was 27% in 1990)
    Ethiopia    49 (was 49% in 1990)
    France       2
    Germany      1
    Ghana       36
    Mali        47
    Nepal       41 (was 52% in 1990)
    Pakistan    26 (was 26% in 1990)
    India       28 (was 31% in 1990)
    Sri Lanka   21 (was 26% in 1990)
    Thailand    13 (was 12% in 1990)
    US           2 (was  2% in 1990)

The level tells you roughly if the country is poor or not. Albania, Ethiopia, Mali, Nepal, Ghana — economies with agriculture accounting for a large share of the GDP. Australia, France, Germany, US — agriculture accounts for low single-digit shares of the GDP. The trend is even more telling.

The direction of the change between 1999 and 1990 tells you whether the country is developing or not. See China, for instance. Compare that to Pakistan. Note that the trend for India is good. Sri Lanka is doing good and it will do even better when the civil war finally ends. Albania is a disaster zone and note that from 37%, Ag is now 54%. The US has the world’s largest agriculture sector — it can feed the entire world with only a bit more effort. US’s ag share of GDP is almost negligible.

For India to develop, its share of the ag sector has to decline rapidly (with an increase in the absolute size of the sector).

Author: Atanu Dey

Economist. View all posts by Atanu Dey