Agriculture and Industry in Economic Growth

Let us make an in-depth study of the interdependence between agriculture and industry in economic growth.

We know how agriculture contributes to economic development and then how industry contributes towards development. However, the issue of choice of one sector over the other remains unresolved as far as economic policy is concerned.

Truly speaking, these two sectors are not to be viewed as competitive but are complementary to each other. In practice, the futures of agriculture and industry are closely linked with each other in the sense that expansion in agriculture depends on the supply of industrial inputs and the expansion in industry is tied up with the development of the agricultural activity. J. L. Nehru observed in 1963 that agriculture is more important than industry as industry depends on agriculture.

Industry which is, no doubt, important, will not progress unless agriculture is sound, stable, and progressive. Because of this interdependence these sectors are complementary, and not competitive. In the development of an underdeveloped economy, there is as such no conflict between agricultural and industrial development.

Interdependence between agriculture and industry becomes strengthened through various linkages generated in these two sectors. The three most important linkages are : production linkages, demand linkages, and saving-investment linkages.

Production linkages arise from the interdepen­dence between agriculture and industry through the use of productive inputs. Agriculture draws some raw materials, like chemical fertilisers, pesticides, electric power, agricultural machinery and imple­ments, etc., from the industry. Agriculture is also dependent on industry for the supply of materials for building up social and economic overheads in the agricultural sector.

Further, many raw materials and inputs used in industrial production, e.g., cotton, jute, sugarcane, tobacco, etc., is supplied by the agricultural sector. Such production linkages demonstrate that a 10 p.c increase in agricultural output results in an increase in indu5.trial output by as much as 5 p.c.

Demand linkages between the two sectors suggest that demand for one sector’s product pulls demand for another sector in an upward direction. Urbanisation and industrialisation are synonymous. Under the impact of Green Revolution, agricul­turists now experience rising rural incomes which has brought a change in the pattern of tastes and preferences of rural people. Increased rural income has resulted in an entry of industrial consumer goods, like TV, refrigerator, modem, car, footwear, refined sugar, edible oils, motorbikes, etc.

In the urban areas, we see some sort of demand saturation of some of these products of consumer goods industries. The impact of rising urban incomes and industrialisation has a favourable impact on the demand for food, vegetables, fruits, various raw materials produced in the agricultural sector. It has been an article of faith in India that the demand stimulus for industrial expansion would likely come mainly from agriculture with low social and economic costs.

Finally, there is a savings-investment linkage between these two sectors. A self-reliant agriculture capable of exporting surplus food-grains helps in saving scarce foreign exchange resources of the country. Now these resources can be better utilised for importing capital goods and crucial raw materials needed for industrialisation effort.

As agricultural production and productivity rises above the subsistence requirement, the volume of marketable surplus increases which provides sinews of industrialisation, particularly in the rural sector. Again, the rising volume of savings and capital formation consequent upon rising farm incomes give strong stimulus to demand for manufactured goods. Investment in one sector pulls investment of other sectors up thereby accelerating overall growth rate of the economy.

Similarly, the rise in non-farm incomes leads to an increase in the demand for various agricultural products. In the process, agricultural sector becomes diversified, modernised.

Most importantly, the relative terms of trade between the two sectors affect the flow of resources from one to another sector. Terms of trade will improve for agricultural sector if over a period of time the prices of agricultural commodities move at a higher rate than the prices of manufactured articles. Thus, the terms of trade favouring agriculture results in an increased real income and hence, increased private saving and investment. The relative terms of trade also influence government saving and investment in these two sectors.

It is thus evident that there is an interrelation­ship between the two sectors and each sector influences the development of the other. How does agriculture contribute towards higher development can be explained in terms of Fig. 2.2.

Here we consider two sectors—agriculture and industry. Agricultural production and consumption are measured on the vertical axis above the origin while industrial output is measured on the vertical axis below the origin. Horizontal axis—ON axis— measures the volume of agricultural labour. Agricultural output is indicated by the OQ curve. Its shape is governed by the law of variable proportions. OC curve measures the volume of consumption of agricultural output.

The difference between OQ and OC thus measures the volume of surplus generated in the agricultural sector. At ON, level of employment made in the agricultural sector, C₁Q₁ becomes the surplus agricultural output. Investment of this surplus generates N₁M₁output in the industrial sector. As employment in agriculture increases to ON₂, industrial output rises to N₂M₂ consequent upon a C₂Q₂ surplus produced in agriculture. If technological change is made in the primary sector there will be more surplus and, hence, more output in the industrial sector.

In the end, we must say a few words about the problem of inter-sectoral resource allocation. To begin with, it is almost impossible to make an optimum balance between these two sectors. In many of the developing countries, agriculture no longer enjoys a pride of place, for some obvious reasons. Neo-liberal era has seen the over-emphasis on the urban, industrial sector.

That is why agricul­tural land is now being forcibly taken away for industrial development, infrastructural develop­ments, and so on. Against this backdrop, farmers of these economies have been shifting their attention from the agricultural sector towards non- agricultural activities. How far these two sectors will complement each other, and to what degree, is an important issue. Indeed, the failure on the agriculture front is of tern attributed to faulty agricultural policy in many developing countries, including India.