Towards Double-Digit Inclusive Growth: Civil Services Mentor Magazine - February 2014


India’s economy is headed in a new direction – striving to touch double-digit annual growth rates, and a sustainable, equitable and inclusive growth, taking into account the needs of all sections of society. Despite the current slowdown, the rapid economic growth attained over 2004-09 has raised high hopes that the Indian economy can grow at a double-digit rate. Here we explore the role of agricultural development in inclusive double-digit growth. What role will agricultural development play if the Indian economy is to grow in an inclusive and sustainable way at a double digit rate for three decades as China’s economy has done? Continued population growth and double-digit economic growth that is inclusive will drive up food demand rapidly and change its composition. Supply will have to increase and it will have a different composition.

Agricultural output can increase only through expansion of irrigation, investment, intensiûcation of input use, and by way of technical progress. Since intensiûcation of input use will run into diminishing returns, and since water availability is limited, technical progress will be the ultimate source of agricultural growth. What rate of total factor productivity growth (TFPG) in agriculture will be needed to sustain agricultural and economic growth? In an open economy, rising food demand can be met by imports, but natural and political economy constraints limit the proportion of food that can be imported without putting the food security of the huge population of India at risk.

Indian agriculture is also considered to be vulnerable to the threat of climate change, which is expected to lead to global price increases and make reliance on imports less acceptable.

Will accelerating productivity growth and sustained expansion of irrigation supportthe higher agricultural growth needed? Will domestic agriculture be able to provide the required food in the long term, say over the next three decades? Or will limits to agriculture growth impose limits to economy-wide consumption and/or income growth? What will be the role of imports? These are the speciû c questions we address here.

The Approach

We explore these questions using a multisectoral, inter-temporal programming model that has the needed structure and features for addressing these issues. It has 28 sectors, of which 15 are agricultural (for details, see Parikh et al 2011). Crop production from irrigated and unirrigated land is distinguished so that there are 40 production activities. Land allocation to different crops is done within the constraint of 140 mha of net cultivated area and the available irrigation capacity. The model covers the whole economy and captures macro feedback and ensures macro balances.

It has 20 consumption classes, 10 rural and 10 urban. Of these, ûve classes in each sector are at much higher consumption levels than observed today and will be the ones into which the population will move as its income increases. Each class has its own expenditure system. Income distribution is determined for every period endogenously, depending on the level of aggregate consumption and prescribed parameters of the log normal income distributions for rural and urban consumption. Rural people migrate to urban areas depending on the relative gross domestic product (GDP) from agriculture and non-agriculture. A particularly important feature of the model is a demand system that can predict the consumption behaviour of classes at much higher income levels where income elasticities of demand for food will be much lower than today.

The possibilities of imports and exports provide some û exibility in sectoral composition. The scenario will be affected by whether consumption or GDP is maximised.The model in most scenarios maximises the present discounted value (PDV) of private consumption over 10 time points four years apart. If growth is to be inclusive, we should maximise private consumption. The base year is 2007 and the last year is 2039. We develop various scenarios that provide alternative possible futures for the economy and its agriculture. They are not predictions, but tools to explore the economic consequences of alternative assumptions.

The Results

The Reference Scenario In the reference scenario (RS), we take trend values of critical variables. An important concern is how fast technical progress increases productivity. Technical progress is widely recognised as an important driver of economic growth. Output can be increased by investing more capital, employing more labour, cultivating more land, or by using more inputs. TFPG measures the increase in the productivity of factors such as land, labour, and capital. It indicates that output will increase by TFPG with the same levels of factors. In the model, TFPG is incorporated as the rate at which capital/ output ratio goes down and the rate at which yield per hectare increases for the same levels of inputs.

A TFPG of 1.5% would in 20 years reduce the factorrequirement by nearly 20% to 81%, and a TFPG of 3% will reduce it to 55%. TFPG in the agriculture sector is set at 2%, a rate that was achieved in the 1980s (Fuglie forthcoming) and from 2003 to 2007, but that may be a bit on the optimistic side. In the non-agricultural sector, TFPG is set at 3.0%. It may be noted that over and above the prescribed TFPGs, we have a fuel use efû ciency growth of 1.5%, an electricity use efûciency growth of 1.0%, and a use of wheat, rice, and other agricultural commodities as intermediate inputs efûciency growth of 1.5%. Thus the overall productivity growth will be signiûcantly higher than the weighted average of the TFPG of 2% for agriculture and 3.0% for non-agriculture assumed in many of the scenarios. Together, these assumptions imply that the reference run is a slightly optimistic scenario. Another critical assumption is that the net irrigated area will increase to 90 mha by 2039 from 63 mha in 2007- 08. This is also a bit optimistic, considering the virtual stagnation, or even reduction, in the area of surface irrigation since 1990-91 and the overexploitation of groundwater in many parts of the country. The country added only 20 mha of irrigated area from 1980 to 2007.Finally, the permissible levels of imports critically affect the scenarios.

For example, in the reference run, the imports of wheat and rice are limited to 3.0% of domestic availability (or 3.1% of domestic production), close to self-sufûciency. From 1990 to 2010, India was a net importer of cereals only in two years and the maximum import was 2.6 million tonnes in 1993, constituting less than 2% of domestic production. This reûects the strong policy preferences of India’s policymakers for national food security that are consistent with the large size of the population. In the reference scenario, coarse cereals imports are limited to 10%, milk and milk products imports to 6%, animal products and forestry products to 30%, and all other agricultural commodities to 15% of availability (17.6% of production). The import constraints imposed on other sectors of the economy are also much wider than what is seen historically. The reference scenario (Table 1) shows a per capita private consumption growth rate of 7.70% an agricultural growth rate of 4.25%, and a growth rate of GDP of 8.40%. At these rates of growth, GDP rises more than 13- fold between 2007 and 2039 while per capita consumption rises nearly 11-fold.

The reference run implies that a per capita consumption growth rate of 7.7% and a GDP growth r ate of 8.4% require an agriculture growth rate exceeding 4%, slightly higher than the target rate for agricultural growth generally assumed in India’s ûve year plans. The higher rate of increase of rural per capita consumption compared to urban consumption is the outcome of an assumed fall in urban- rural consumption parity. Though per capita rural consumption increases at a higher rate, it is still much below urban consumption even in 2039.With these growth rates, the share of agriculture in GDP goes down to 5% by 2039, and the share of GDP from the foodgrains sector to 1%. Even then agriculture constrains the growth of GDP. The investment rate ûuctuates between 19% and 8%, well below what would have been possible given the upper bound of 35% on the marginal savings rate.

As it is possible to increase investment, higher growth rates of the economy would be possible. Why was the growth rate of GDP only 8.9% in the reference scenario? The rea son is we maximise consumption in it
and given the limited land, irrigation capacity and import restrictions, agricultural supply is limited and consumption cannot be increased any further. The import bounds and land constraints for both irrigated and unirrigated land become binding in the beginning of 2023. This means that our model projects the economy being constrained by the availability of agricultural commodities from 2023 onwards. This raises the question of whether the demand for food projected is too high. We next look at this.

Changing Structure of Food Consumption The rapid growth in consumption is accompanied by a change in consumption patterns in the reference scenario. Figure 1 shows the per capita consumptions of foodgrains. In calculating the physical quantities of foodgrains from monetary expenditure, we have accoun ted for quality differences in the consumption of different classes. Total foodgrains consumption increases only marginally from 139 kilograms/ year to 142 kg/year. In total foodgrains, rice and coarse cereals consumption decreases over time, while the consumption of wheat increases, and that of gram and pulses rises more signiûcantly.

This is similar to the trend seen internationally in many Asian economies. Our new consumer demand system therefore is able to reproduce these trends even over the enormous income changes that are asso ciated with nearly 35 years of rapid growth. The change in the consumption pattern, while not unexpected, is even more striking when we look at other fooditems. The expenditure share of foodgrains (cereals and pulses) goes down by more than half, from 29% to 12% and that of oils from 11% to 7%. The agricultural economy will be even less dominated by foodgrains than today. The share of sugar remains more or less constant. The shares of all high-value commodities rise – from 12% to 13% for meat, û sh, and eggs, from 18% to 21% for horticulture, and from 17% to 31% for milk and milk products. These high value products will therefore constitute almost two-thirds of the total food consumption expenditure.

The increase in the share of animal products is striking. By 2039, milk and milk products will account for most of this increase, as it alone constitutes 31% of the total food expenditure. The share of meat, eggs, û sh, and animal services rises by 1%. The high increase in consumer expenditure on animal products is consistent with the differences in consumption across expenditure classes in the NSS data of 2007-08, which shows that the richest decile in rural areas consume 16 times and in urban area nine times as much milk as the respective poorest decile. Thus it is not the demand system that leads to agricultural growth being critical for inclusive growth. To illustrate this point further, we develop a scenario in which GDP is maximised.

Maximising Growth in the growth û rst scenario (GF), the present discounted value of GDP is maximised and a minimum growth rate of per capita consumption of 3% is stipulated. A much higher economic growth rate is achieved with exactly the same assumptions as in the reference scenario on land, TFPG, irrigation, and import bounds. The broad characteristics of this scenario are summarised in Table 3.It is seen that with an emphasis on growth a much larger GDP growth rate of 15.25% is realised at t he cost of pr ivate consumption. The growth rate of private consumption is merely the minimum stipulated 3% in growth û rst, compared to the 7.70% in the reference scenario. Of course an economic growth rate of more than 15% over 30 years is highly unrealistic as other resource constraints may become binding, but the scenario illustrates the point that the consu mption growth rate has to be much higher for inclusive growth. This is seen from the number of persons in poverty in the two scenarios. Whereas in the reference scenario poverty is virtually eliminated by 2039, in growth û rst, 111 million people remain below the poverty line even in 2039. Since India’s policymakers aim at inclusive growth in all other scenarios, we maximise the present discounted value of private consumption.

Double-Digit Inclusive GrowthIn the reference scenario, with the maximisation of consumption, limits on the availability of agricultural com modities due to constraints on land irrigation andimports curtail the growth rate. The availability of agricultural commodities needs to be stepped up to attain doubledigit inclusive growth. This can be done by increasing the TFPG in agriculture and/or expanding irrigation and/or by permitting larger imports of agricultural commodities. We now examine these options.

Dr. A Q Shekh


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