Agriculture-Industry Inter-linkages


The inter-relationship between agriculture and industry has been a long debated issue in the development literature. In the Indian context the issue has acquired interest since industrial stagnation in the mid 1960s. Over the years the Indian economy has undergone a structural change in its sectoral composition: from a primary agro-based economy during the 1970s, the economy has emerged as predominant in the service sector since the 1990s. This structural changes and the uneven pattern of growth of agriculture, industry and service sector economy in the post reforms period is likely to appear substantial changes in the production and demand linkages among various sectors and in turn, could have significant implication for the growth process of the economy. At the same time the growing integration with the rest of the world in the post-reform period (post 1991 period) and the recent spurt of service sector led growth are also likely to have significant impact on the linkages between the agriculture and industry. This has triggered an interest in readdressing the analytical and methodological aspects of the interlinkages between the two sectors.

Theoretically, sectoral linkage describes a sector‟s relationship with the rest of the economy through its direct and indirect intermediate purchases and sales (Miller and Lahr, 2001; cited in Gemmell, 2000). The concept of linkages has evolved from Hirschman's theory of ‘unbalanced growth’.  The sectors with the highest linkages should be possible to stimulate a more rapid growth of production, income and employment than with alternative allocations of resources (Hirschman, 1958 and Polenske and Sivitanides, 1990). The linkage concept has been recognized as playing a crucial role and providing substantial contributions towards guiding the appropriate strategies for future economic development.

That agriculture and industry being integral component of development process due to their mutual interdependence and symbiotic relationship, the contribution of agriculture to the economy in general and to industry in particular is well known in almost all the developing countries. However, the degree of interdependence may vary and also change over time. In the theory and empirical literature, the inter-relationship between agriculture and industry has been discussed from different channels. First, agriculture supplies food grains to industry to facilitate absorption of labour in the industry sector. Secondly, agriculture supplies the inputs like raw cotton, jute, tea, coffee etc. needed by the agro-based industries. Thirdly, industry supplies industrial inputs, such as fertilizer, pesticides, machinery etc. to the agriculture sector. Fourthly, agriculture influences the output of industrial consumer goods through demand. Fifthly, agriculture generates surpluses of savings, which can be mobilized for investment in industry, and other sectors of the economy . Sixthly, fluctuations in agricultural production may affect private corporate investment decisions through the impact of the terms of trade on profitability (Ahluwalia, 1986 and Rangarajan, 1982).

 Whereas some of these channels emphasize the ‘agriculture-industry’ linkage on the supply side or production side, others stress the linkages through the demand side. The production linkages basically arise from the interdependence of the sectors for meeting the needs of their productive inputs, whereas the demand linkage arises from the interdependence of the sectors for meeting final consumption. Further, the linkages between the two sectors can also be categorized into two groups based on the direction of interdependence. One is the backward linkage, which identifies how a sector depends on others for their input supplies and the other is the forward linkage, which identifies how the sector distributes its outputs to the remaining economy. More importantly, these two linkages can indicate a sector‟s economic pull and push, because the direction and level of such linkages present the potential capacity of each sector to stimulate other sectors and then reflect the role of this sector accordingly.

The demand for industrial products from agriculture sector is influenced either by agricultural output changes or the terms of trade (here after TOT) between agriculture and industrial output. Therefore, a distinction between the output effect and the TOT effect of the demand for industrial products from agriculture is worth emphasizing at this point. The effect of an increase in food prices on the demand for non-food items by different expenditure groups in rural areas can be broken into two parts. First, there is the negative cross elasticity of demand, and second, there is the positive income effect, which depends on the increase in total expenditure from a rise in prices and on the expenditure elasticity of demand for non-food items of that expenditure group (Rangarajan, 1982). Further, given the conflicting forces between that low food price being good for industrial supply and high food prices being good for industrial demand,  it is the TOT between agricultural and industrial products that provides the equilibrating mechanism ensuring that supply and demand grow at the same rate in each other. If the prices of agricultural products are „too‟ high in relation to the industrial products then industrial growth is either demand constrained or supply constrained (Ahluwalia, 1985 and Rangarajan, 1982).

India being a predominantly agrarian economy and an agro-based industrial structure, the interrelationship between agriculture and industry has been one of the major issues for the researchers and policy makers since the beginning of the planning period. In the pre and early post-independence period, the industry sector had a close relationship with agriculture due to the agro-based industrial structure (Satyasai and Baidyanathan, 1997). Satyasai and Viswanathan (1999) found that the output elasticity of industry with respect to agriculture was 0.13 during 1950-51 to 1965-66. Rangarajan (1982) has found that a 1.0 percent growth in agricultural production increases industrial production by 0.5 percent, and thus, GDP by 0.7 percent during 1961-1972. However, the industrial sector witnessed a slow growth, followed by stagnation since the mid 1960s, which was largely attributed to the stunned agricultural growth and favourable agricultural TOT, among other factors (Patnaik, 1972; Nayyar, 1978 and Bhatla, 2003).

In fact the interdependence between the two sectors has found to be weakened during the 1980s and 1990s (Bhattacharya and Mitra, 1989; Satyasai and Viswanathan, 1997). For instance, Bhattacharya and Rao (1986) have found that the partial output elasticity of industry with respect to agriculture has declined from 0.15 during 1951/52 – 1965/66 to 0.03 during 1966/67-1983/84. Contradictorily, Satyasai and Viswanathan (1999) found that the output elasticity of industry with respect to agriculture has increased from 0.13 during 1950/51-1965/66 to 0.18 during 1966/67–1983/84, and then remained at the same level 0.18 during 1984/85- 1996/97. The deteriorating linkages between agriculture and industry have been primarily credited to the deficiency in demand for agricultural products, decline in share of agro-based industries coupled with slow employment growth (Rangarajan, 1982; Bhattacharya and Rao, 1986; and Chowdhury and Chowdhury, 1995). Sastry et al. (2003), for the period 1981-82 to 1999-2000, found that the forward production linkage between agriculture and industry has declined, whereas backward production linkage has increased. They also found significant impact of agricultural output on industrial output, and that agriculture‟s demand linkage to industry has declined, while that of from industry to agriculture has increased.

That most of the studies in India (and in many developing countries) have followed the traditional “two-sector” framework in a closed economy, it raises question about the methodological reliability and the comprehensiveness of the findings. It is reasonable to argue that neither the “two-sector” model nor the close economy framework are appropriate to analyze the sectoral linkages in India, because India has been becoming more and more open since the reforms of 1990s, and since then (or even before), the growth of the economy has been led by the services sector. That the services led growth is the most prominent feature in the post-reform era (Rakshit, 2007), any sectoral linkages analysis which circumvents the services sector does not provide comprehensive empirical findings. The present paper is aimed to readdressing some of the theoretical and methodological issues underlying the „agriculture-industry‟ interlinkages in the Indian context.

Tuesday, 08th Mar 2016, 12:20:45 PM

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