Agriculture and Structural Transformation 1960-2040:

Implications for Double Digit Inclusive Growth

Kirit Parikh Hans P. Binswanger-Mkhize

Probal Ghosh

ISSUES ADDRESSED

What is the role of Agriculture in Sustained Inclusive Double Digit Growth over the next three decades?

How important are Irrigation, Productivity Growth and Trade?

How is Structural Transformation progressing in India?

FALLING SHARE OF AGRICULTURE

STAGNANT SURFACE IRRIGATION

NET IMPORTS OF CEREALS

India has been net exporter for the last 15 years

TOTAL FACTOR PRODUCTIVITY GROWTH

Total Factor Productivity Growth (TFPG)

Inputs Year 1 Year 2 Year 2

Labour 1 2 1

Land 1 2 1

Machines 1 2 1

Yield 1 2 1.05

TFPG 0 5%

A TFPG of 1.5 percent would in 20 years reduce the factor requirement by nearly 20 percent to 81 percent,

and a TFPG of 3% will reduce it to 55 percent.

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 2.35 in 2003 as per

the SAM(2003-04) which is assumed to decreases to 1.75 by 2039

Class boundaries

Class RURAL URBAN

1(poorest) < 4000 < 50002 < 6800 < 108003 < 14200 < 310004 < 19175 < 460005 < 24150 < 610006 < 36225 < 915007 < 48300 < 1220008 < 62375 < 1625009 < 82450 < 200000

10(richest) > = 82450 >= 200000

Consumption Expenditure Class in Rs per person per year at 2003-04 prices

Demand System for 10 Rural and Urban classes

• Long term projections require a robust system.• Econometrically simultaneously estimated non-linear

demand equations of transcendental form• 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.

Estimation of the Demand Parameters

A 28 COMMODITY LES FOR 10 CLASSES

* beverages, pan, tobacco and intoxicants)** includes coal & lignite, petroleum products, crude petroleum , manufacturing products and non-metallic, water supply , electricity*** includes transport services, other services

LES DEMAND SYSTEM FOR EACH CLASS

• Transcendental demand functions simultaneously estimated for systems and subsystems from NSS data of 51st (94-95) to 64th (2007-08), price deflators from CSO

• Income elasticities for each rural and urban class are calculated from the regression coefficients as follows:

• ηim = ; ηNm=• Share of expenditure for each item (Si) are forecast for

each expenditure class from NSS data(2003-04)• For food they tend to decline as income increases • The income elasticities for each of the commodity (ηi) are

computed for each commodity and each class (eg: income elasticity for rice = ηr*ηs1*ηag)

1})log(21

{

Si

PCTCbibi

Sn

imSi }*1{

LES PARAMETERS

• Linear Expenditure Function:• Marginal budget share are calculated as bi=Si*ηi• Frisch parameter (FP, the expenditure elasticity of marginal utility

of expenditure)=

• For existing expenditure classes, the consumption levels Xi were obtained as Xi= si*PFCE (Private Final Consumption Expenditure) .

• si was similarly forecast for each new class, using the si for existing expenditure classes from the SAM.

• Committed expenditure coefficients were calculated from the base year consumption level as Ci = Xi +(bi*PFCE)/FP

• These procedures resulted in a local approximation of the demand system for each class

)*( iiiiiii CPEBCPXP

jjCPm

m

Shifting Population

•

SAM WITH DETAILED AGRICULTURAL COMMODITIES

• 75 sector Sam, 2003-04(M R Saluja), aggregated to 24 sectors.

• Sectoral splitting needed (using the SAM 2006-07, 130 sectors)

• Disaggregated Sectors:1) Pulses to grams and other pulses2) Other crops to fibres, plantations, fruits, vegetables

and other crops• Aggregated Sectors: Fishing, animal services, poultry,

eggs, meat and other livestock products.

SPLITTING AGRI. ACTIVITIES INTO IRRIGATED AND UN-IRRIGATED PRODUCTIONS

• Proportion of irrigated and un-irrigated area were obtained from DACNET.

• Yield differences were obtained from water and related statistics. The weights were computed:

= ; = YR=yield, AI= irrigated area, AU=un-irrigated area• Fertilizer inputs(source: agricultural sciences) were split

into Irrigated and Un-irrigated and per hectare irrigated. • Fertilizer Input in proportion to yield.• Other inputs same per Rs. of total output.

I )*(

*

AUAIYR

AIYR

U )*( AUAIYR

AU

ESTIMATION OF QUALITY PREMIA

• Unit value for same commodity varies in NSS across classes, indicating that higher expenditure classes are consuming higher qualities.

• We regressed the unit value of each commodity against total expenditure of class.

• These were then used to calculate quality premia for each commodity and each existing expenditure class, and then predict them for the new classes, as above.

• For the model runs we converted total expenditure on particular food items to quantities by using the weighted average quality ratio across expenditure classes in the final solutions.

Rural-Urban Migration

• Total Population is assumed to be exogenous• However rural and urban population is

endogenously determined to allow for migration.

• Rural and urban population ratio is specified as a function of agriculture to non agriculture GDP.

Model Specifications (contd…):

• Discount rate(3%), min growth of private consumption(3%), government consumption growth (9%),

• Net sown area constant at 140Mh.

For Reference Run• Net irrigated area to net sown area increases from 63 Mha in 2003

to 90 Mha in 2039. • Imports of wheat and rice are limited to 11 % of domestic

production, imports of other agricultural commodities limited at 18 %, and coarse cereals at 33 %.

• TFPG in agriculture 2.0 % per year, Non Agr 3 %• Import bounds: 3% Wheat & Rice; 10 % Coarse grains; 6% milk; Others 15 % to 30 %

Ref Run: Key Variables @ 2003-04 prices

NAME 2007 2011 2031 2039Growth rates

GDP (Rs. Billion) 28321 41185 236106 374063 8.4Agriculture GDP 4472 4698 12740 16923 4.25Per Capita consumption (Rs)

16517 23315 116866 177481 7.7

Rural (Rs) 12433 17250 90432 139806 7.86 Urban (Rs) 28174 37852 168991 244998 6.99

Per Capita Food Consumption

Per Capita ConsumptionRs / year (2003-04 price)

• While shares go down actual consumption increases

Year Sugar

Oil Seeds

Plantations

Fruits

Vegetables

Other crops

Milk and milk products

Animal services, Poultry

Forestry    

2007 191 476 14 282 458 232 726 537 2072011 236 564 23 372 601 307 1046 689 2182031 544 1076 171 1111 1677 930 3915 1850 3552039 609 1186 320 1391 1966 1182 4952 2148 481

Reference Run Observations

• GDP growth rate restricted by agricultural goods availability

• Land, irrigation & import constraints are binding

• Investment much below what would have been possible with marginal savings rate bound of 35%

• This is because we maximize consumption

Maximizing Consumption (RC) and Maximizing Growth (GF)

  Reference Run (RC)

Growth First (GF)

Growth rates of 2007-39    

GDP 8.4 15.25 GDP Agri. 4.25 4.42

Per capita Consumption 7.7 3

Persons Poor in 2039 (Millions)    

Rural 4 79 Urban 0 32

Other Scenarios

• Irrigation– Net irrigated area increases to 109 Mill Ha (IH)

• TFPG– TFPG grows by 3 % (TH)

• IMPORTS– Higher import bounds (MH), 10% for Wheat &

Rice Much higher for others

• All Together (AT)

Macro Economic Aggregates of Different Scenarios

Rate of growth 2007-2039Referenc

e RunHigh

TFPGHigh

Irrigation (108 Mha)

High Food

Import

All Together

(RC) (TH) (IH) (MH) (AT)GDP 8.4 10.43 9.42 8.99 11.71GDP agriculture 4.25 5.64 4.92 4.43 6.28

Consumption per capita

7.7 10.19 8.97 8.47 11.55

What do these show?

• Higher TFPG gives double digit growth• Higher irrigation almost reaches it• High food imports does not quite make it• Much higher growth possible with all three

together

• DD growth requires agriculture growth > 4.9 %

Imports in RC and HM

• Can India accept these levels of food grain import? • 35 MT in 2015; 55 MT in 2019 and nearly 70 in 2039?

Imports of Foodgrains (Adjusted for Quality)

0

10

20

30

40

50

60

70

80

2007 2011 2015 2019 2023 2027 2031 2035 2039

Mil

lio

n T

on

nes

RC

MH

Persons Poor in 2039 (Millions)

Year RC TH IH MH AT GF

2007 359 375 365 359 385 336

2011 247 231 238 240 227 316

2023 43 23 32 36 17 242

2031 12 3 6 7 2 174

2039 4 0 1 2 0 111

Poverty can be wiped out by 2030 with high TFPG in agriculture and high irrigation development

STRUCTURAL TRANSFORMATION

• Share of Agricultural GDP goes down

• Share of Agricultural Labour Force goes down faster

• Persons employed in agriculture get absorbed in better paying jobs outside agriculture

Rural and Urban Population and Migration(in millions)

Past Trends

• Labour absorption in non-agr slow• Output per worker in 2010 in non-ag 6 times

in agriculture• 1980s agr growth largely due to green

revolution• Agr growth since 1990 sluggish and < 3%• Inadequate growth in urban manufacturing

employment

Feminization of Agriculture• Rising rural labour force with little opportunities for low skilled

employment in urban areas means male & especially female workers stuck in rural areas

• Farm sizes decline• Trend of feminization is clear• Yet, rural poverty has declined• Rural non-farm sector has become more dynamic and has grown

faster at 7.1 % over 1983-2004 compared to 7 % of national non-farm sector and 2.6% of agriculture

• In 1980s 4 out of 10 rural jobs were in non-farm, now it is 6 out of 10

• Mostly educated youth move out of agriculture• Rural non-farm wage is 47 % higher than farm wage• Premium on education is growing and in 2004-05 was

– Rs 86 for literate over illiterate, Rs197 for middle school attended and Rs 696 for graduates

Trend Toward Part Time Farming

• Still, non-farm wages contributed only 22 % to rural wage growth

• Agriculture is important• Diversification to more higher value products and

more remunerative self employment in non-farm sector are seen

• Marked tendency for agriculture to move to a productive and modern model of part time farming.

• For structural transformation we need rapid expansion of semi-skilled job in urban manufacturing

Conclusions• 8% and more growth rate in aggregate GDP would require a

minimum of 4% growth in agriculture GDP• At least 2% growth rate of TFPG in agriculture and

development of irrigation potential to minimum of 90 million ha (net) is needed for 4% growth rate of agriculture GDP growth given land and water constraints and import constraints for food security

• Raising it to 3 percent, similar to Chinese levels, raises agricultural growth to 5.6 percent and allows for a GDP growth rate to 10.4 percent

Conclusions• The import ceilings imposed in the base run lead to import of 18

million tonnes of food grains import in 2039. • Level of permissible imports affects growth . If food import limits

are significantly relaxed, this would involve 69 million tons of food grains import by 2039. Would the country accept such level of import dependence?

• Increasing irrigation growth that would lead to net irrigated area of 108 Mha by 2039 raises agricultural growth to 4.9 and would allow for a GDP growth rate of 9.4 percent.

• Import and irrigation constraints will emerge as extremely important policy variables.

Conclusions• The per capita food consumption increases very moderately from

139 kg/person in 2003 to 141.2? kg/person in 2039• The per capita consumption of rice (52kg/person in 2003 to 38

kg/person in 2039) and coarse cereals (31 kg/person in 2003 to 20 kg/person) decrease

• per capita consumption of wheat (45 kg/person in 2003 to 62 kg/person in 2039), grams (3 kg/person to 7 kg/person) and pulses (7 kg per person to 15 kg/person) increases

• The share of food grains consumption in total consumption of agricultural commodities decline while the share of fruits and vegetables, Vegetable oils & oilseeds, plantations, milk and milk products, egg, meat & Fish and other crops increase.

• The most significant increase is seen in horticulture and milk & milk products.

Conclusions

• The urban population ranges from 529 million to 635 million in 2039 across different scenarios.

• Migration increases with growth rate. It varies from 121 million in the reference scenario to 160 in scenarios with higher TFP or higher imports and to 209 million in the high growth scenario AT when all positive measures are taken together.

• Despite such high migration the share of rural population is still around 60%.

Impact of TFPG

Growth rate 2007-2039 Reference Run (RC)

High TFPG (TH)

GDP 8.4 10.43GDP agriculture 4.25 5.64Consumption per capita 7.7 10.19Food grain expenditures per capita

1.21 1.41

Rural food grain expenditures per capita

1.38 1.57

Urban food grain expenditures per capita

0.99 1.28

2039 per capita consumption as 11 22

a multiple of 2007 level