The government may be putting its best efforts to incentivise and encourage manufacturing in India but it is actually agriculture that has emerged as the largest and the fastest-growing ‘Made in India’ component of the Indian economy.
The agriculture sector output is expected to grow by 7.3 per cent at current prices in FY21 while the manufacturing sector is expected to shrink by 8 percent during the period.
This trend is in contrast with most of the Asian countries including China, Bangladesh and Vietnam where the farm sector’s share in GDP has declined steadily in recent years.
Make in India yet to impact manufacturing
Launched in September 2014, the Make in India (MII) initiative has three objectives. First is to increase manufacturing sector growth rate to 12-14 percent; second, to create 100 million additional manufacturing jobs by 2022 and third, to increase manufacturing share in GDP to 25 percent by 2022 (later revised to 2025).
Three continuous years of on-time and well-distributed monsoons combined with reverse migration to villages following Coronavirus lockdown has given a leg up to agriculture. Not surprisingly, the area under Kharif acreage last season at 882.18 lakh hectare was 13.92 percent more than the previous year in the country.
Similarly, for Rabi, wheat sowing area has increased by 4 percent this season till (January 7, 2021) to 325.35 lakh hectares and pulses acreage is up 5 percent to 154.80 lakh hectares, as per the Ministry of Agriculture.
“The fact is that while agriculture has been growing at a steady rate, manufacturing went into a negative zone last year due to the pandemic. Even before that, manufacturing had been growing at an anaemic rate in the last few years. This skews the share of agriculture upwards,” says Madan Sabnavis, Chief Economist at Care Ratings.
Agriculture – a steady performer
Post the expected contraction in FY21, the five-year growth in the manufacturing sector will decline sharply to 3.5 percent – a fraction of the growth envisaged under MII programme.
In contrast, the agriculture, forestry and fishing sector is expected to grow at a compounded annual rate (CAGR) of 9.4 percent during FY16 to FY21 period.
Agriculture has been the only consistent performer especially after demonetization, in November 2016, hit the manufacturing sector hard. “From a sectoral perspective, only two sectors are above last year’s level – agriculture and electricity, gas and water supply,” Dharmakirti Joshi, Chief Economist, CRISIL, said earlier this month.
Devendra Kumar Pant, Chief Economist, India Ratings, says agriculture didn’t face lockdown. “Moreover, demand remains good because while people may not go for spending on consumer durables or other goods, they still need to eat,” he says.
So, while the lockdown severely impacted economic activities across the country, a CRISIL research on the extent of shock and resilience of states, based on their economic structure, reveals that agriculture-dominated states have been impacted to a lesser extent as agricultural activity was largely unhindered even during the lockdown phase.
The states with a larger share of services in their GDP are showing weaker recovery while manufacturing-led states that initially suffered are now benefitting from recovery, it says.
Yet, manufacturing remains one of the weakest spots in the Indian GDP story. Sabnavis says manufacturing growth has not picked up after demonetization. And the growth in GDP has also not given rise to employment, so consumption has lagged. “When that happens, there is a surplus capacity and companies curtail investments. If you look at consumer goods, every festive season in the last three years hasn’t seen the kind of spending we witnessed earlier,” he says.
Economists, however, agree that the rising contribution of agriculture to GDP will not push India into becoming an agrarian economy again.
“But it’s not to say that we are becoming an agrarian economy. The agriculture sector has been resilient mainly due to good monsoons,” he adds.
India – a global outlier
The growing dependence on agriculture however could jeopardise India’s long-term economic growth. This is due to low labour and capital productivity in the farm sector compared to manufacturing as well as the service sector. Also, there is a physical limit to how much an individual can spend on food.
Not surprisingly, fast-growing countries such as China, Bangladesh and Vietnam have seen a steady decline in the share of the farm sector in their GDP in the last decade, unlike India. (See the chart below).
For example, the agriculture sector accounted for 7.4 percent of China's GDP in 2019 down from 9.9 per cent in 2009 according to data from the Asian Development Bank (ADB). In Bangladesh, the farm sector now accounts for 13.3 percent of the country’s GDP, down from 18 percent a decade ago. Similarly, in Vietnam, the agriculture sector’s share in GDP declined to 15.5 percent in 2019 against 19.2 percent ten years ago.
The farm sector accounted for 23.4 percent of Pakistan's GDP in 2019 - one of the highest in Asia.
According to the International Monetary Fund, Bangladesh will beat India in terms of per capita gross domestic product (GDP) in 2020. This makes India the third poorest country in South Asia, with only Pakistan and Nepal reporting lower per capita GDP.
The IMF database suggests that the Indian economy will be the worst hit from the pandemic in South Asia after Sri Lanka, where per capita GDP is expected to shrink 4 percent in the current calendar year.
So it’s time India boosted its manufacturing and service sectors to not only create jobs but also raise the per capita income. Because though agriculture may be employing half the working population in India, those jobs are low-paying and often disguised unemployment.
(Rashmi Pratap is a Mumbai-based journalist specialising in financial, business and socio-economic reporting)