The Agriculture Dividend

PESSIMISM OVER INDIA’S GDP growth rate has steadily mounted after the economy grew at a subdued 6.6 percent in the quarter ending December 31, 2018.

- Minhaz Merchant

Talk of eight percent growth in 201920 has vanished. Most analysts expect growth in 2018-19 to be sub-seven percent. The consensus among global institutions like the International Monetary Fund (IMF) and the World Bank is that with crude oil prices trending towards $70 per barrel, Indian GDP growth in 2019-20 will at best be between seven percent and 7.5 percent.

This is bad news for the economy. India needs more robust growth to accelerate the reduction in people living below the poverty line. The key to the problem lies in agriculture. Historically agricultural growth has been around three percent a year. In contrast, services are growing at an average of nearly 10 percent and industry at an average of around five percent. Between them, services and industry contribute 86 percent to India’s overall economy.

Excluding agriculture, and taking the relative weights in GDP of services and industry as 60 percent and 26 percent respectively, Indian GDP growth would trend at around eight percent a year. Agriculture, growing at three percent, drags the overall GDP rate down to seven percent despite its low weightage of 14 percent in India’s GDP.

While the lack of land, labor and tax reforms has slowed industrial growth, it is agriculture that needs surgical reform. Indian agriculture has grown tortoiselike over decades. There is no reason, however, to believe that the agricultural sector should forever be consigned to low growth rates. Doubling the annual agricultural growth rate from three to six percent will, despite its low weightage in the overall GDP pie, add a crucial 0.5 percent to overall economic growth, taking India nearer to eight percent GDP growth levels. For this to happen, agriculture needs deep reforms to boost productivity per acre by reprioritizing crops sown, creating a new technological ecosystem, and revamping market distribution.