One of the things taken virtually for granted is that the share of agriculture in the economy will keep on falling. As a country develops, Industry and Services sectors become larger and Agriculture as a sector shrinks. This is as close to a universal truth about development as it gets. And indeed, this is what has been happening in India since Independence. In every single decade, the Agriculture & Allied activities sector has grown slower than the other two sectors – Industry and Services. Consequently, the share of agriculture in the GDP has fallen from over 50% just after Independence to less than 20% at the end of the last decade (2010).
But the last decade has been different. Between 2010 to 2020, India’s GDP grew 11.9% Cagr in nominal terms while Agriculture and allied sector’s GDP (GVA to be precise in both cases) grew by 12.3% Cagr. Thus, the Agriculture sector has grown slightly faster. Even if we smoothen the data by taking a 3-year average instead of point-to-point growth rates the picture does not change substantially. In nominal terms, India’s GDP grew by 12.6% between 2010 to 2020 (taking a 3-year average, so 2008 to 2010 average compared with 2018 to 2020 average) while Agriculture GDP also grew by 12.6%. So, the Agriculture sector has grown at the same rate as Industry and Services put together in the last decade. Thus, its share in GDP has averaged 18% in the last 3 years (2018-2020), broadly the same as the share a decade back.
If we switch the data to Real terms from Nominal terms, the story changes. Agriculture has grown slower and its share in GDP has fallen in the past decade also. In the last 3 years (2018-2020), the share of Agriculture & allied activities in real GDP has averaged 15% which is 400bps lower than its share in 2010 (2008-2010 average). What this divergence between real and nominal data implies is that Agriculture has seen faster growth in inflation than the other sectors of the economy. In the last decade, inflation in Agriculture (as proxied by the GDP deflator) has risen by 8.5% Cagr as against 5.1% Cagr in Industry and Services. This gap between Agriculture and Non-Agriculture inflation is the highest of any decade since Independence.
Sustained high inflation in a sector of the economy suggests a structural mismatch between demand and supply. And in the case of Agriculture, this largely reflects low productivity or the lack of sufficient improvement in productivity to keep pace with demand. And the ambit of productivity covers a host of issues with the sector from cropping patterns to irrigation to fertilisers to the size of land etc. Over the next couple of weeks, we will explore some of the trends in Agriculture.