STRUCTURAL TRANSFORMATION OF

THE INDIAN ECONOMY AND ITS

AGRICULTURE: 1961-2040

CABR annual meeting, Frascati, Italy

June 27-29, 2011

Hans P. Binswanger-Mkhize, Kirit Parikh, Alwind’Souza and Probal Ghosh

The past: 1961-2010

The future: 2011-2040

Comparison with other Asian countries

Outline

Hans Binswanger-Mkhize and Alex McCalla,

“The Changing Context and Prospects for

African Agricultural Development,” IFAD and

AFDB, Rome and Tunis, 2009

http://www.ifad.org/evaluation/jointevaluation/do

cs/annex1.pdf

Long version in Handbook of Agricultural Development

Apologies for false advertising

The stylized Structural

Transformation

At the outset of Structural Transformation (ST), labor and

economic output are both concentrated in Agriculture

The share of labor in agriculture exceeds the share in

nonagriculture

because labor productivity in agriculture is lower than in industry

During ST, the gaps in labor productivity and between the

agricultural shares of labor and output widen

A turning point is reached when the productivities and the

shares start converging

recently estimated by Peter Timmer at between 1600 and 9000

dollars per capita incomes ($ of 2000)

Convergence is driven by rapid absorption of labor in the

nonagricultural sector and by agricultural productivity growth

Agricultural share is declining

0

10

20

30

40

50

60

Sh

are

s (

%)

Year

Share of sectors in GDP (%)

Agriculture

Industry

Manufacturing

Services

Structural Transformation in

India

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

Ag. output per worker and Non. Ag. output per worker

Ag output per ag worker

Non Ag. Output per worker

0

10

20

30

40

50

60

70

80

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

Pe

rce

nta

ge(%

)

Year

Share of Ag. in labour force and GDP

Share of labor force

Share of Ag. In GDp

Structural Transformation in

China

0

1000

2000

3000

4000

5000

6000

7000

8000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

ou

tpu

t p

er

wo

rker

Year

Ag. output & Non. Ag. output per worker

Ag. Out. per worker

Non. Ag. Out. per worker

0

10

20

30

40

50

60

70

80

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

perc

en

tag

e (

%)

Year

Share of Ag. Labor Force and Ag. Value Added

Ag. value added

Sh. of Ag. Labr. force

Productivity Growth in Agriculture

Indicator

Average

1961/62

to

1963/64

Average

last

avail

three

years

Growth rates for decade

or three year avg. centered on last year shown

Average

growth

rate of

2006-

20091961-

1970

1971-

1980

1981-

1990

1991-

2000

2001-

2009Agric. output

per ha of

cropland (US$

of 2000)

315 1044 1.73 1.91 3.81 2.42 2.62 3.07

Animal

output/head

of cattle

equivalent

(US$ of 2000)

43 148 0.65 2.85 3.46 3.11 3.32 3.41

TFP growth* 0.8 2.1 1.5 1.9*

TFP growth

China*4.2 2.7*

* till 2007

Structural Transformation has been very

slow, a turning point may be far away

Agricultural labor force is still growing and its share

in the economy is declining slowly

Agricultural productivity growth has slowed down

Increasingly divergence in labor productivity

between agriculture and nonagriculture

Agricultural unemployment has increased in the

past decade

Agricultural wage growth has slowed down

But urban and rural poverty

have converged

Population below poverty line (%)

20

30

40

50

60

70

1950 1960 1970 1980 1990 2000 2010

Urban

Rural

Notes: Poverty rates based on a new and consistent time series of poverty lines which are based in the original Planning

Commission poverty lines but updated over time using different price indexes. Source: Datt and Ravallion (2009)

Why is there not more divergence

The decline in poverty in rural areas is now driven

as much by urban growth as by rural growth

Urban employment has been skills and capital

intensive

Too few employment opportunities for lower skilled

Rising inequality and depth of urban poverty

Relatively slow rural-urban migration

Rural poverty remains concentrated among rural

labor, of lower skills who have little access to

migration or rural non-farm jobs

The rural non-farm sector has become the

major source of rural income and

employment growth

YearRural

Poverty

Agricultural

wage

Non farm

employmentGDPN

Nonfarm

GDPAgriculture GDP

1983

-

2004

-2.3 3.2 3.3 5.8 7.1 2.6

1983

-

1993

-2.2 3.2 3.5 5.2 6.4 2.9

1993

-

2004

--- 1.7 4.8 6.0 7.2 1.8

Source: Himanshu et al.2010 and Eswaran et al. 2009

Notes: GDP at factor cost at 1993-94 prices. Agriculture GDP originating in agriculture,

forestry, and fishing. Nonfarm GDP defined as a residual.

Annualized rates of growth)

The rural non-farm sector is the single

most important source of jobs in India

6 out of 10 new jobs in rural areas are now in the non-

farm sector

They offer significantly higher wages than farm labor, but have

contributed only 22 percent of the wage rise in rural areas

These jobs go mostly to young men with some education, and

women have a hard time getting them

Most jobs are casual jobs, and a growing share of rural non-farm

self employment

Trade and transport, construction, and services growing

especially fast

But manufacturing still about 20 percent of non-farm jobs

Rural manufacturing concentrated in areas of relatively low

wages and agricultural productivity

Rural non-farm self employment

has become especially dynamic

Out of 5760 households, 19.6% have non-farm self

employment, up from only 7.3 percent

The share of households who combine farm and non-farm self

employment has gone from 58% to 73%

Their non-farm profits have increased by 70%

exceeding farm profits of each of the farming households

Nonfarm self employment income now 19.6 % of total village

income, plus 7.8% from non-farm wages

Results from National REDS survey 1999-2007 of NCAER

What does it mean for future

structural transformation?

While urban-agricultural productivity differential

will continue to rise, rural urban income

differences will grow less on account of the non-

farm sector

Nevertheless agricultural productivity will have to

rise much more rapidly

To gradually allow for convergence to emerge

To avoid even more political tension with farmers

Accelerating agricultural productivity will take time

The political issue of agricultural parity income

will remain very salient

Agriculture and Rapid Economic

Growth: 2007 - 2040

Issues

Double Digit economic growth along with population

growth will drive up food demand rapidly.

Given the limited land and water resources, political

economy constraints over limits to imports, change

in composition of demand basket, will domestic

agriculture provide the required food?

We need to expand irrigation, intensify use of inputs

and accelerate TFPG through technological

developments. What roles do these play?

What will be the impact on rural urban migration?

Modeling Approach

An activity analysis multi-sector multi-period programming model

Maximizes discounted sum of private consumption over 2003 to 2043, 10 time points 4 years apart

Constrained by commodity balance, capacity constraints, BOP, land and irrigation constraints, upper bound of trade, investment and savings rates and availability of different types of investment goods.

28 commodities of which 15 are agricultural commodities.

40 production activities/sectors

20 consumption classes, 10 rural and 10 urban.

Urban/rural consumption parity ratio drives migration: Assumed to decline from 2.35 in 2003 to 1.75 by 2039

Class boundaries

Class RURAL URBAN

1(poorest) < 4000 < 5000

2 < 6800 < 10800

3 < 14200 < 31000

4 < 19175 < 46000

5 < 24150 < 61000

6 < 36225 < 91500

7 < 48300 < 122000

8 < 62375 < 162500

9 < 82450 < 200000

10(richest) > = 82450 >= 200000

Consumption Expenditure Class in Rs per person per year at

2003-04 prices

Model Specifications (contd…):

Discount rate(3%), min growth of private consumption(3%),

government consumption growth (9%), upper bound on

marginal savings(0.35%), electrical efficiency growth(1%),

fuel efficiency(1.5%) and rice, wheat and other crops

efficiency in use as intermediate inputs growth at 1.5%.

Net sown area constant at 140Mh.

Net irrigated area increases at the rate of 0.5 percent per

year in the base run to 75 Mio ha.

In base run, on account of food security considerations,

imports of wheat and rice are limited to 1 % of domestic

availability, coarse cereals and milk and milk products at 2%,

and grams, pulses, and oilseeds at 10%.

Demand System for 10 Rural and

Urban classes

Long term projections require a robust system.

Econometrically we simultaneously estimated non-linear demand equations of transcendental form, using NSS data

For modeling purpose locally linear approximation made for each class on a LES

Every year per capita consumption distribution was calculated as per log normal distribution.

Committed expenditures were adjusted to reconcile the consumption data from NSS with national accounts

The Base Run

GDP growth rate at 5.7% (7.4 times 2007 value in 2039),

Agricultural growth rate 2.8%.

Per capita consumption grows at 5.4% (4.2 times 2007

value in 2039). Rural by 5.4 % and Urban by 5.5 %.

Economic growth rate limited by land availability and import

constraints on agricultural commodities.

The food grain sector grows by 1.1 %, industry by 6.7%

and services by 5.5 %.

The rural population is 980 and urban 531 millions in 2039

with migration of 111 millions

Sector 2011 2031 2039

Paddy 0.11 0.06 0.06

Wheat 0.08 0.06 0.06

Coarse cereals 0.03 0.02 0.013

Pulses 0.04 0.03 0.03

Total Food grains 0.30 0.17 0.15

Total horticulture 0.18 0.20 0.21

Sugar 0.04 0.04 0.04

Vegetable oil & Oil seeds 0.11 0.13 0.13

Other crops 0.06 0.07 0.07

Milk and milk products 0.18 0.26 0.27

Egg, Poultry, Meat, Fish, Animal services 0.13 0.14 0.14

Total livestock sector 0.31 0.40 0.41

Total agriculture, forestry, fisheries

0.24 0.16 0.14in total consumptions

Shares in food consumption

The impact of the land constraint

Years Unirrigated

Land

Irrigated Land

2007

2011 *

2015

2019 *

2023 * *

2035 * *

2039 * *

2019 2023 2035 2039

Paddy * * *

Wheat * * *

Coarse cereals * * *

Grams * * *

Other pulses * * *

Sugarcane * * *

Oilseeds

Fibers * * *

Plantations * *

Fruits * *

Vegetables * *

Milk and milk products *Egg, Poultry, Meat, Fish, Animal services * *Forestry

Period when import constraint becomes binding

How can the small agricultural sector

constrain the whole economy

Non-agricultural sectors need agricultural inputs,

via input-output matrix

e.g cotton for industry

food for the services sector

They are also related to the agricultural sector via

the commodity demand system

This is sharpened via the linear structure of the

model

In a model with flexible prices, the linkages would

be operating via prices and the raising of tarriffs

Base (B): Irrigation (75 MH), TFPG (1.5) in both sectors

Food Imports (Rice 1%, wheat 1%, Coarse Cereals 2%, grams

10% Pulses 10%, Oilseeds 10%, Milk & Milk products 2%)

S5: S3 +

Irrigation (90 MHA)

S6: S3 +

Irrigation (107 MHA)

S7: S6 + Food Imports (Rice 10%, wheat 10%, Coarse Cereals 25%, grams 15% Pulses 15%, rest of all crops 15%, other agricultural commodities 30%)

S8: S7 +Agri TFP 3.0%, Non-Agri TFP

3.0%

S1: B +Agri TFP 1.5%,

Non-Agri TFP 2.5%

S2: B +Agri TFP 2.0%,

Non-Agri TFP 1.5%

S3: B +Agri TFP 2.0%,

Non-Agri TFP 2.5%

S4: B +Agri TFP 3.0%,

Non-Agri TFP 3.0%

Assumptions and

dependent

variables

Base Run

(B)

Faster non-

agricultural

productivity

growth (S1)

(2011)

Faster

agricultural

productivity

growth (S2),

(2011)

Faster

productivity

growth in

both sectors

(S3), (2011)

“Chinese”

productivity

growth

(S4) , (2019)

TFPG in

agriculture

1.5 1.5 2.0* 2.0* 3.0**

TFPG in non-

agriculture

1.5 2.5* 1.5 2.5* 3.0**

GDP 5.70 5.81 6.56 6.40 8.35

GDP agriculture 2.81 2.81 3.39 3.40 4.65

Consumption per

capita

4.41 4.43 5.55 5.46 7.98

The compelling need for productivity growth

Impact of growth of irrigation

When total NIA is increased to 1 % per year and reaches 90 Mha by 2039, over Scenario S3, then

GDP growth rate rises to 7.3 % point, from 6.4 %

per capita consumption to 6.7 %, while

Ag GDP growth rises to 4.1 percentage points

When total NIA is increased to 1.5 %, its recent historic rate, and reaches 107 Mha by 2039, the growth rates of GDP, GDP agriculture and

consumption become 8.3%, 4.6% and 7.8%

Expanding irrigation through water use efficiency through water shed development and ground water recharge is very important.

Large Impacts of Higher Trade

Bounds

S7: S6 + Food Imports: Rice 10%, wheat 10%, Coarse Cereals 25%, grams 15% Pulses 15%, rest of all crops 15%, other agricultural commodities 30%

Agr. GDP rises from 6.4 % to 8.5 %, a full 2 %

Level of food grain imports at 70 million tonnes in

2039, and huge imports of other agricultural

commodities.

Double Digit Growth

High imports, Chinese TFP growth, and high

irrigation

GDP growth rises to 10.2 %, Ag growth to 5.9 %

and consumption to 10.0 %

Double Digit Growth requires all of these

agricultural growth drivers

Rural to urban migration due to

economic growth

Rural to Urban Migration (millions – cumulative from 2003)

Base Chinese TFPG

Chinese TFP, high

irrigation,

imports

2011 37 40 39

2031 77 66 162

2039 111 115 209

Summary and Conclusions

The combined constraints on imports, agricultural technical

change, low irrigation growth imposed in the base run lead

to growth of less than 6 % per year

At least 2% growth rate of TFPG in agriculture is

needed, combined with high imports and irrigation growth,

is needed for 8% aggregate GDP growth and 3% TFPG

for a 10% aggregate growth

Import and irrigation constraints will emerge as

extremely important policy variables.

How about other Asian

Economies

Country Exp. Pop

growth ⁴

Exp GDP

growth ¹

Growth of index

of agricultural

output₂

Growth of

agricultural

TFP₂

2010-2050 2010-2050 1990s 2000-

2007

1990s 2000-

2007

India 38.2 6.7 2.8 2.6 1.5 1.9

Bangladesh 30.7 6.3 2.6 3.8 1.5 2.7

Pakistan 58.3 3.8 3.7 2.8 1.8 0.7

PRC -3.4 4.5 5.2 3.1 4.2 2.7

Indonesia 22.3 5.8 2.5 4.1 1.6 2.4

Vietnam 18.3 6.0 5.6 4.5 3.0 2.6

¹Source: Centennial report; simple average over 4 decades. ₂ Fuglie, 2009 updated. f⁴ Centennial Report, table A1

Summary and Conclusions

Horticulture and livestock share in agricultural

production is growing, while other agricultural

commodities have been declining.

In the high growth scenarios (more than 8 %), per capita

expenditure on food becomes 4 times as large in 2039

Share of Horticulture and livestock product (including fish)

in agricultural production will be 49% in 2011 while, 65%

in 2039.

Livestock products will be reaching 44 percent of the total

consumption expenditures on food, with milk and milk

products alone reaching 31 percent in 2039.

Summary and Conclusions

Per capita consumption of coarse cereals and rice

has already started to decline.

Per capita consumption of wheat continues to rise

slowly. These trends are also projected to continue to

2039.

All sectors of agriculture, except for oilseeds

and forestry. Most of these import limits will be

reached by 2023.

This also underlines need for yield improvement.