GDP – Page 4 – Undergraduate Economist

What are the Contents of India's Economic Growth’

The above question was discussed by Bhabatosh Datta in 1977 in his book The Contents of Economic Growth and Other Essays. This blog post briefly revisits Datta’s article to see whether the current growth of India is on the right track. A few details about Datta is in order. For most of his life, he taught at Presidency College, Calcutta. He is an economist who has written on diverse aspects of the Indian economy – industrialisation, planning, regional rural banks, economic growth, monetary reforms, commercial banks, financial system and on Indian economic thought. And for this reason, his work is of utmost relevance to us- who want to understand the Indian economy.

On 29th December 2009, the Deputy Governor of RBI spoke about the ‘Current Macroeconomic Developments in India’. I reproduce some of her observations below:

India had a strong recovery in the second quarter of 2009-10 at 7.9 per cent. “The sequential recovery over the first quarter of 2009-10 was driven by notable turnaround in industrial output (9.0 per cent), and services sector (9.0 per cent), while agriculture sector also came to record a positive growth (0.9 per cent), despite drought like conditions and floods in some parts of the country.”

Which India had a strong recovery, when more than 60% of Indian population work in the agricultural sector’ As Datta writes, for India, economic growth takes place when there is “growth in employment and growth in incomes of large numbers.”

“On the whole, agricultural production during 2009-10 hinges critically on the performance of the North East monsoon and rabi production.”

“The recovery in industrial growth has been broad-based with acceleration in growth of all the three sectors, viz., mining, electricity and manufacturing .”

The consumer durables sector shows an impressive growth with 22.2 per cent in the second quarter of 2009-10.

Consumer durable showing strong growth, a recovery of industrial growth alongside a critical agricultural sector seems to suggest that Indian policy makers and economists seem pre-occupied with non-problems. As Datta lucidly points out: “it is possible that over a particular year there has been only a very small increase in agricultural and essential industrial production, while there has been a substantial rise in the output of luxury goods, high-income varieties of consumer goods and outdated capital goods.”

It is easy to forget that 8% or 9% rate of growth does not have a unique meaning. For, it might express many alternative states of affairs. I often wonder, what our objective should be as an economist in India! As I had argued elsewhere, it is time that we looked at the structure or the contents of economic growth carefully.

On Indian Agriculture

There is a consensus about the crisis which the Agricultural sector is facing in India. The contribution to GDP has been falling and it is under 20% of the GDP now. The sector provides employment to about 60% of the population. Most of the farmers under this sector fall under the ‘informal sector’ where there is a dearth of reliable statistics. This can be one of the causes for the low share of agriculture in the GDP. From the figures of employment and ‘contribution to GDP’, we can conclude that there is the presence of a high degree of disguised unemployment.

Agriculture in the Budget

The proposals to revive the agricultural sector are:

Farm credit raised to Rs 1,75,000 crore, providing relief to additional 50 lakh farmers.
At 7 percent interest rate farmers receive short-term credit from NABARD, with Rs 3,00,000 upper limit on principal amount.
The outlay for Accelerated Irrigation Benefit Programme (AIBP) has been raised by 58.22 per cent to Rs 7,120 crore for 2006-07 from Rs 4,500 crore during 2005-06.
Banking sector to credit-link an additional 3,85,000 Self-Help Groups (SHGs) in 2006-07.
NABARD to open a separate line of credit for financing farm production and investment activities.
The corpus of Rural Infrastructure Development Fund (RIDF) in 12 tranches to be increased to Rs 10,000 crore.
The programme for repair, renovation and restoration of water bodies to be implemented through pilot projects in 23 districts in 13 states. The estimated cost of the programme stands at Rs 4,481 crore.

[Via Surfindia]

The current budget has addressed the farm credit, pulses, plantation sector, irrigation, rainfed area development, restoring water bodies, ground water recharge, training of farmers, fertilizer subsidies, agricultural insurance, social security etc. [Budget 2007-08]

Are these enough to significantly affect the agricultural sector’ Moreover since India claims to growing at over 8% in GDP, are these allocations sufficient’

An important constituent of the strategy to revive agricultural performance in the country must be to increase the level of public investment in agriculture research and development and rural infrastructure. Increase in public investment in agriculture in turn requires significant rationalisation and restructuring of government subsidies on food and agricultural inputs, including power, canal irrigation and fertilisers. Greater public investment in agriculture research and extension and rural infrastructure would stimulate private investment in agriculture and agro-processing. A policy of higher investments without commensurate reforms in the institutions endowed with the charge of managing the resources created is, however, unlikely to succeed. Participatory management and selective privatisation can contribute greatly to improving the delivery of major inputs to agriculture. [Sharma and Gulati 2005]

Reasons for the crisis

Only 2 reasons are being highlighted as all the other reasons are associated to there too or spring form these two. So broadly speaking, the crisis is due to

<!–[if !supportLists]–>1) <!–[endif]–>Pressure on land: Population has outstripped land supply. Faster growth of population goes with slower rise in per capita output. [Vaidyanathan 1988] The rate of growth of population is more in the rural areas than in the urban areas. Population growth can be said to be indirectly proportional to education. Where there are more family planning programmes and adequate education, which lays emphasis on both the male and female child, the tendency to have more children is less. Moreover, with the rapid expansion of SEZ‘s, the pressure on agricultural land is further aggravated.

<!–[if !supportLists]–>2) <!–[endif]–>Structural deficiencies: Indian agriculture is characterized by inefficient distribution, marketing and financial institutions. As more of the agriculture falls under the ambit of the informal sector, there is a dearth of efficient institutions. The loans are hard to come by as they lack the necessary assets to keep as collateral. Moreover, with the current rates of inflation, the prices of inputs will rise, further adding to the farmers’ distress. The distribution systems fail as the agricultural produce most often does not reach the targeted population.

US and Indian Agriculture

Rich nations preach free trade but practice protectionism against poor nations, especially in agriculture. For example, the United States severely limits sugar imports from Latin America to benefit American sugar beet growers, even inhibiting imports of Brazilian cane-based ethanol, which is far cheaper and more energy efficient than domestic ethanol. [Noll 2006]

The subsidies that the developed nations offer their farmers’ vis-‘-vis to what the developing countries can offer is very large. The developing nations find it difficult to withstand this competition in the world markets. If the subsidies are not reduced by the US and the EU, it will be the developing nations who will have to bear the brunt. [Thomas 2006]

Globalization and Indian Agriculture

Once again, there are some individual cases where globalization has led to deprivation and suicide. About 800 km away from Mumbai is the cotton-growing region of Vidarbha, perched on the Deccan Plateau. Hundreds of cotton farmers here have killed themselves in recent years. The reasons are complex and varied. Among the reasons is this one: farmers here cannot compete with cheap cotton imported from the United States, whose farmers are lavished with huge subsidies by a government that preaches the virtues of competitive markets to the rest of the world. Their deaths can be linked to imperfect globalization. More generally, though, reform and globalization have led to faster growth and sharp drops in poverty levels. [Knowledge Wharton 2007]

The article talks about individual cases which resulted from imperfect competition. I wonder if anything in this world can work in a perfect way! And in Vidarbha, it is not individuals who are dying but ‘groups of individuals‘. Yes, globalization has led to faster growth but ‘sharp drops’ in poverty levels is hard to agree, though the statistics does say so.

Conclusion

On the whole, the condition of Indian Agriculture is bleak. If the current allocations of the budget will help the agricultural sector will be seen in the next few years. The sector is pressurised by the domestic as well as the international economy. Agriculture finds it hard to compete in international markets with other products which are highly subsidised. More of funds need to be devoted to research in agriculture which should aim at improving agricultural production and productivity. The size of agricultural markets needs to be increased. This can be facilitated by the extension and improvement of transport. [Vaidyanathan 1988]

Agriculture is a sector which cannot be neglected as majority of the Indians depend on it for their livelihood. Targeted policies which bring about favourable outcomes are necessary. Of late, the rhetoric is about the booming GDP and bulling bourses; that significant issues like ‘agriculture’ are not getting adequate attention.

References

<!–[if !supportLists]–>1) <!–[endif]–>Pooja Sharma and Ashok Gulati, Can the Budget Boost Agricultural Performance’, EPW, May 21, 2005.

<!–[if !supportLists]–>2) <!–[endif]–>Alex M Thomas, Why fear subsidies’, Undergraduate Economist, August 16, 2006.

<!–[if !supportLists]–>3) <!–[endif]–>Roger G. Noll, The Foreign aid Paradox, SIEPR Policy Brief, October 2006.

<!–[if !supportLists]–>4) <!–[endif]–>A Vaidyanathan, India’s Agricultural Development in a Regional Perspective, 1988.

Further Readings

<!–[if !supportLists]–>1) <!–[endif]–>On Private Participation in Agriculture- M Rajivlochan (Via the commenter, Chetana)

India and it’s ‘Segregated Growth’

This article tries to show that high rates of GDP in India need not trickle down to the rest of the masses and also strives to explain why ‘segregated growth’ further fuels inequality. By ‘segregated growth’, I refer to growth which takes place in sectors which employ relatively a small percentage of the total labour force.

The IT revolution is happening but the GDP contribution of agriculture is decreasing.’ One inference from this change could be that, labour from agriculture is migrating to the services sector; but that is not the case in India. India is witnessing farmer suicides, increased debts, droughts and low productivity in the agricultural sector.

Sustained economic growth requires progress in several dimensions ‘ education, health, infrastructure, legal institutions, etc. [Noll 2006] For the whole of the population to enjoy sustainable growth, it is essential that growth takes place in all sectors of the economy. Otherwise, it will lead to growth, but only in a few sectors, like the IT boom which India faced. This growth is not sustainable in the long run. Another consequence of such ‘segregated growth’ is that, the GDP figures will show an increase. And as the GDP is the most commonly used (By the media) measure among the masses to portray economic growth, the picture presented will appear rosy.

Moreover, the per capita income will also show a rise due to the increase productivity coming from ‘such sectors’. This increased GDP will not trickle down as many economists and others state. This increased income accruing to the denizens of ‘such sectors’ will only be spent in conspicuous consumption. Thorstein Veblen coined the words ‘conspicuous consumption’ in his book ‘The Theory of the Leisure Class’. The basis on which good repute in any highly organised industrial community ultimately rests is pecuniary strength; and the means of showing pecuniary strength, and so of gaining or retaining a good name are leisure and a conspicuous consumption of goods. [Veblen 1899]

On Poverty

And though the country (India) has made significant strides ‘ poverty levels are roughly 35%, down from close to 60% in the 1970s, (by the World bank’s $ 1 a day definition of poverty, though precise numbers are the subject of never-ending debate) – the benefits of this rapid growth are yet to trickle down to the masses. [Bhusnurmath 2006]

Development agencies define poverty as an income of less than $2 per person per day (about $3,000 annually for a family of four). By this standard, nearly 3 billion people are poor. [Noll 2006]

I wonder why India still defines poverty as an income of less than a dollar per day for a person. I had argued for a restructuring of the current poverty line in another article of mine. Probably the present estimate makes it easier to state that poverty levels have come down from 60% to around 35%!

On Development

Amit Bhaduri, in his recent paper in the Economic and Political Weekly, wonders if it is Developmental Terrorism or Development which is taking place.

Destruction of livelihoods and displacement of the poor in the name of industrialisation, big dams for power generation and irrigation, corporatisation of agriculture despite farmers’ suicides, and modernisation and beautification of our cities by demolishing slums are showing everyday how development can turn perverse. [Bhaduri 2007]

Conclusion

Thus, the Indian populace is dichotomized in terms of economic growth; there are certain areas where growth levels are very high along with a majority of sectors which are witnessing a decline. Thus, this kind of ‘segregated growth’ fails to ‘trickle down’ to other sectors of the economy.

References

1) Roger Noll, The Foreign Aid Paradox, SIEPR Policy Brief, October 2006.

2) Thorstein Veblen, The Theory of the Leisure Class, 1899. (Full book available here)

3) Mythili Bhusnurmath, Time for a reality check, www.forumblog.org, November 25, 2006.

4) Amit Bhaduri, Development or Developmental Terrorism’, EPW, February 17, 2007.

On Economic Growth

‘Economic Growth’ is a term which one often sees in the media. It is also looked at closely by the economists, the government and the people. Economic growth tends to show the rate of growth of an Economy

The chart graphs the growth rate of the Indian Economy.

What is this ‘Economic Growth”

Economic growth is the increase in value of the goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real gross domestic product, or GDP. [Wikipedia]

Economic growth has become the Holy Grail of the 20^th century. [Lewis 1974] The ‘saga’ continues. Governments like projecting a target rate of growth (The higher the better) for the economy and the economists like to fiddle around with the projected targets.

Why ‘growth’ happens’

One factor which caused growth is said to be the increments in capital. This ‘link’ was given to us by Roy Harrod in the 1940’s. This causality led to the policy of increased expenditure on capital mainly by the government, so as to ‘grow in GDP’.

In the 1950s, Robert Solow (1956) of MIT generalised the relationship between capital, labour, technology and output in the neat little ‘neoclassical production function’, which still lies at the heart of contemporary growth accounting exercises. Other theorists (as well as planners and policy-makers) also emphasised the importance of education (human capital) and technological development in spurring sustained growth. [Acharya 2006]

Economic growth was caused by capital accumulation, or a rise in the ratio of investment to income and/or increasing efficiency and productivity. [Roy 2006]

Thus, basically with growth in labour, capital (Physical and Human) and technology, there will be growth in the economy too.

According to Paul Romer, three broad factors contribute to growth in output per capita:

1) Increases in physical capital ‘ the buildings, machinery, and infrastructure that we use in daily life.

2) Increases in human capital ‘ the skills and experience of the workforce.

3) Increases in productivity ‘ a catchall category that includes the many large and small discoveries that lead to the introduction of new goods and services or to more efficient production of existing goods and services.

The significance of economic growth

History shows us that a small permanent increase in the trend rate of growth can profoundly alter our quality of life. [Romer 2001]

Keeping this in mind, economic growth acts as an important indicator. So Governments try to achieve high rates of growth so as to provide their respective nations with a high quality of life. But, quality of life is better measured using the HDI rather than GDP.

There is, indeed, a positive relationship between rapid economic growth and a victory over poverty. But this does not happened automatically. A good economics that concentrates on the even distribution of economic opportunities and benefits is essential. And further, good economics has to be also combined with sensible and responsible politics. [Alexander 2005]

Early works on Economic Growth

Robert M. Solow, the Nobel Prize winner in 1987 says in his Prize lecture ‘Growth theory did not begin with my articles of 1956 and 1957, and it certainly did not end there. Maybe it began with The Wealth of Nations; and probably even Adam Smith had predecessors.’

Some of the economists who worked on growth models prior to Solow were Roy Harrod, Evsey Domar and W. Arthur Lewis.

Conclusion

It is the GDP rate which appears to be more of a concern than the HDI, which does not enjoy the limelight as GDP does. Both these criteria are important and thus the need for understanding both of them.

References

1) Shankar Acharya, Economic Growth: Some Reflections, November 4 2006, EPW.

2) Tirthankar Roy, The Economic History of India 1857-1947, Second Edition, Oxford Textbooks.

3) Paul M. Romer, Growth Policy, 2001 SIEPR Policy Brief.

4) John M. Alexander, Economic growth and the Millennium Goals, 2005, The Hindu.

5) [Indian Growth trend picture]