Financial Daily from THE HINDU group of publications
Wednesday, Jan 28, 2004
Tenth Anniversary Special
The progression to prosperity
Walking away from agriculture? Not just yet.
Culture suggests agriculture, but civilisation suggests the city. For in the city are gathered, rightly or wrongly, the wealth and brains produced in the countryside; in the city invention and industry multiply comforts, luxuries and leisure; in the city traders meet, and barter goods and ideas; in that cross-fertilisation of minds at the cross-roads of trade intelligence is sharpened and stimulated to creative power.
`The Story of Civilisation, Part 1, Our Oriental Heritage'
About 55 per cent of India's households earn `agriculture' incomes. But their incomes constitute less than 25 per cent of gross domestic product (GDP). Their per capita income grew at 2.10 per cent between 1994 and 2001, lower than that of households that earn `industry' incomes and `services' incomes.
About 18 per cent of households derive their incomes from industry. Their incomes constitute more than 27 per cent of GDP. Their per capita income grew at 2.51 per cent. About 26 per cent of households derive their incomes from services. Their incomes constitute more than 48 per cent of GDP.
Moreover, per capita income of households that earn incomes from services grew at 2.88 per cent, the highest.
Services are India's magic fountain of high incomes. Households that earn `services' incomes have two advantages.
First, their per capita income of Rs 21,463 in constant 1994 monetary units is the highest. The per capita incomes of `industry' and `agriculture' households are Rs 17,588 and Rs 5,129 respectively. Second, per capita `services' income is growing faster than per capita `industry' and `agriculture' incomes.
If services are the magic fountain of high incomes, agriculture is the deep pit of low incomes. `Agriculture' households have the least per capita income and the lowest growth rate.
If households can choose where they earn incomes from, they would discard agriculture. But 55 per cent of the workforce has been unable to discard agriculture.
It is not their misfortune alone that they are stuck in the lowest base level incomes and the lowest growth rate. It is the misfortune of India's industry and services sectors too.
India's industry and services sectors have to earn a large part of their incomes from the domestic market, of which more than half the workforce earns the lowest income with the lowest growth rate.
India's share of world trade in goods is merely 0.73 per cent. Its share in services is 1.43 per cent. Global trade offers little salvation and escape from the deep pit of low incomes.
What this means is that India's per capita income and growth in per capita income will continue to be small if a large part of the workforce continues to be employed in agriculture.
What this also means is that India's per capita income and growth in per capita income will rise if a part of the workforce could steadily and surely migrate from agriculture into industry and services. This has indeed happened, but rather unsteadily and not so reassuringly.
About 1.82 per cent of the `agriculture' workforce migrated out between 1994 and 2001. That is rather a trickle, a painful trickle. Is there some magic or miracle that would move more of the workforce away from agriculture? Is there some magic or miracle that would enable, say, 2 per cent of the workforce to migrate away from agriculture annually?
The `agriculture' workforce will not shift into industry and services if the demand for the output of industry and services will not rise fast enough to spur new employment.
This is the chicken-or-the-egg problem that India faces in its attempts to turbo charge national income and per capita income. New jobs, more jobs and more new jobs are prerequisites in industry and services for the migration of the `agriculture' workforce. But the new jobs will not be spurred if the demand from the `agriculture' workforce for the output of industry and services will not rise.
The chicken-or-the-egg problem is of recent origin. It was planned and triggered in 1952, and has had a staggering and, perhaps, brutal impact. It has resulted from the flawed and obviously obtuse policy of making larger outlays in industry heavy industry at that without beefing up agriculture and demand from the `agriculture' workforce. The flawed and obtuse policy has nothing to do with our culture and our civilisation.
Will Durant chose to trace the progression of numerous civilisations to prosperity. He was the foremost chronicler and sociologist of the last century. He was an economic historian who delved deep into the genius and labour of mankind.
Durant too was an earnest admirer of India, even before its Independence. He was particularly awed by India's contributions such as grammar and logic, chess and efficient iterations, and numerals and the decimal system. (These contributions are indeed the founding ingredients of the modern digital age and digital economy.)
Durant thought India would doubtless be among the powers of the earth. His optimism was not belied at the turn of the last century. India's accomplishments in agriculture, economic organisation and science overwhelmed Durant.
He found agriculture to be the most common and fundamental determinant of the prosperity of civilisations. He found historical evidence gathered by Anquetil-Duperron and Robert Clive to prove that wealth and brains moved from the countryside to the cities where consolidation and further sharpening took place.
Anquetil-Duperron, a historian journeying through the towns in the Mahratta districts in 1760, found himself "in the midst of the simplicity and happiness of the Golden Age. The people were cheerful, vigorous, and in high health."
Robert Clive, visiting Murshidabad in 1759, wrote that the ancient capital of Bengal was equal in extent, population and wealth to the London of his time, and men richer than any individual in London.
What's moving now?
Durant would be confounded if he were to examine India's economic and demographic data since Independence. There would be little evidence of the transfer of vast wealth from the countryside to the cities.
This does not mean that there has been no migration from the rural hinterland to the towns and cities.
There has been significant migration, but not of that quality and magnitude that made the Mahratta districts and Murshidabad in Bengal world famous.
The migration in the 1700s was the result of prosperity in the villages. The migration in the recent past has been the result of poverty in the villages.
People have moved away from unemployment in the countryside to unemployment or underemployment in the towns and cities. The townspeople have in the meanwhile used technologies that create goods and electronic services but not as many jobs to soak in the migrants.
The way forward
India's farm sector has to be made more prosperous and more secure. If the interests of the domestic farm economy are promoted, the interests of producers of consumer and industrial goods will be promoted. The interests of providers of consumer and commercial services will also be promoted.
If India's farm economy is hollowed out, there would be fewer customers for consumer and industrial goods and consumer and commercial services.
But the promotion of the interests of the domestic farm economy does not require more subsidies. It does not require subsidies at all.
The farm sector needs more freedom, more opportunities to reach out to the national market, and more trade and financial instruments to manage risk.
The farm sector needs mutuality and free markets that enable it to demonstrate its enormous appetite for productivity improvement.
Farmers are India's foremost capitalists, and they can be counted upon to make a vital difference to the total economy. But it is important to eliminate obstacles to their economic growth.
It is more important to reinforce policies that promote their economic confidence and growth.
The first step
Agriculture should be managed so well that `agriculture' incomes rise. Rising farm incomes will then boost the demand for output of industry. Incomes, profits and investments in industry rise as a result.
People will then migrate to high-income industry careers from low-income jobs in the countryside.
The second step
Industry is managed so well that `industry' incomes rise. Rising `industry' incomes will then boost the demand for services and farm goods. Incomes, profits and investments in services rise as a result.
People will then migrate to higher-income service careers from high-income manufacturing careers.
The third step
Services are managed so well that incomes from services rise. Rising incomes from services will then boost the demand for services and goods as a result. Incomes, profits and investments in the economy rise.
People continue to migrate to higher-income service careers from high-income manufacturing careers. This is the only magic to make things happen.
(The author is a financial analyst. Feedback may be sent to email@example.com)
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