INEQUITABLE SECTORAL GDP GROWTH-RESULTING IN LOWER INCOMES FOR AGRI WORK FORCE: - K. Ramasubba Reddy
HIGHLIGHTS :
i. Continuous decline in GDP of Agri Sector and increase in GDP of Services is taking place resulting in Inequitable exclusive high growth of small workforce at the cost of the Agri workforce who account for 60% of the total workforce-thus defeating the XI Plan objective of Inclusive Growth.
As a consequence, the disparities in the incomes of workforce engaged in agri sector and non-agri sectors widened from 1:1.8 in 1951 to 1:5.2 in 2004 and it is estimated that the gap will further widen by 2012 despite the slogan of Inclusive Growth. Government employment accounts for about 3% (nearly 45 lakh employees) of India’s labour force that got a hike of 25% in their incomes in one go in FY09, where as 2700 lakh agri workforce, constituting nearly 60% of the total workforce, have got a measly 1.6% increase in GDP.
ii. The share in GDP of Agri and Industry sectors, constituting real economy, is declining year after year from 46% in 2005-06 to 43% in 2008-09, where as the share of Support service sector has increased from 54% to 57% during the same period. Agri GDP growth rate is subject to wide fluctuations, from -7.2 in 2002-03 to 4.9% in 2007-08 and registered only 1.6% for 2008-09. Industry GDP ruled high around 10% for 4 years up to 2007-08, but started decelerating thereafter and recorded lowest rate of 3.9% during 2008-09.
iii. Incremental GDP growth rates reveal that both Agri and Industry sectors are losing out to service sector year after year. Services sector, employing only 25% of work force, is gaining at the cost of real economy continuously and garnered 80% of the incremental GDP share in FY 09. In particular, Community, Social and Personal Services segment is gaining disproportionately and this segment alonegarnered a quarter of incremental GDP growth in FY09, where as both Agri and Industry sectors, employing 75% of the work force, shared between them only one fifth of the incremental GDP growth.
This is not a healthy sign and indicative of fundamentally faulty pricing system of outputs of real economy. The Standing Committee on Agriculture rightly observed that agricultural development has been ignored since 1990s and that the focus of our development is more towards raising industrial production and recently on the service sector
iv. Nearly 2% of 6.7% GDP growth in FY09 is nominal growth masquerading as real. When this is factored in, ‘REAL GROWTH OF GDP’ works out to about 4.5%, only half of GDP growth in FY 08.
v. Underpricing agri output is the main cause for inequity besides dwindling public investment in agri sector. Fair pricing of agri output by applying the formula of C2 cost plus 50% as recommended by the National Commission on Farmers, 2006 and doubling public investment for developing agriculture are urgently needed to make incomes of agri workforce fair and equitable”
vi. CONCLUSION: CONSTITUTE FARM INCOME COMMISSION- for ensuring a minimum take home income to farmers
DETAILS >
1. Foundation for XI Plan
The tenth five-year plan (2002-03 to 2006-07) achieved the highest ever growth rate of 7.8% per year reached in any five-year plan period. The domestic saving rate had shown rapid increases from 23.5% in 2001-02 to 35.7 in 2006-07, the terminal year of the tenth five-year plan. Likewise, the gross investment rate had jumped from 22.8% to 36.9% during the same period. In fact, in the last four years of the tenth plan, the average growth rate had reached as high as 8.9%. It was against the backdrop of such high growth that an ambitious target of 9% annual growth with the avowed objective of INCLUSIVE GROWTH.
After achieving an average growth of near 9 per cent in the last four years of the tenth plan (2003-04 to 2006-07), real GDP grew by yet another 9% in 2007-08. The growth in that year was much more widespread. GDP originating in agriculture grew by as much as 4.9%, industry by 8.1 and services by 10.9%.
The underlying factors that contributed to the above high growth have continued their momentum even in the first year of the eleventh plan (2007-08). There have been quantum leaps in the saving and capital formation rates, with both of them touching historically high levels of 37.7% from 35.7% in the previous year as saving and 39.1% from 36.9% investment. In the fiscal areas too there was considerable improvement. Growth of tax revenues accelerated in 2007-08 and there have been considerable reductions in revenue and fiscal deficits, with of course the spirit of the FRBM Act continued. Finally, the export growth in dollar terms continued at a high level of 23.0%, similar to the growth in the previous two years. Imports were also higher by 27.0% over the previous year.
2. Sudden decline in growth rate
Suddenly the overall GDP growth slipped to 6.7% in 2008-09 and current expectations are that the year 2009-10 may see some improvement only in the second half. Overall the third year of the eleventh plan may see only about 5-6% real GDP growth. Therefore, the first three years of 11th plan may show an average growth of only about 6-7% per annum as against the plan target of 9%. In the FY 2009, while there was sharp decline of real GDP at factor cost to 6.7% during the whole year FY 09, compared to 9.0% growth during the previous year, the GDP in the second half declined to 5.8% indicating decelerating trend compared to a growth of 7.7% during the first half year.
The share in GDP of Agri and Industry sectors constituting real economy is declining year after year from 46% in 2005-06 to 43% in 2008-09, where as the share of support sector has increased from54% to 57% during the same period.
T 2-Real GDP and Sectoral Growth Trends-During the Tenth Plan and First Three Years of the Eleventh Plan: Gross Domestic Product at Factor Cost -FY2003 to 2009 (at constant 1999-2000 prices) (Percentages)
E: Estimate- Source: CSO
Agri GDP growth rate was subject to wide fluctuations, from -7.2 in 2002-03 to 4.9% in 2007-08 and registered only 1.6% for 2008-09. Industry GDP ruled high around 10% for 4 years up to 2007-08, but started decelerating thereafter and recorded lowest rate of 3.9% during 2008-09.
Incremental GDP growth rates reveal that both Agri and Industry sectors are losing out to service sector year after year. Services sector, employing only 25% of work force, is gaining at the cost of real economy continuously and garnered 80% of the incremental GDP share in FY 09. In particular, Community, Social and Personal Services segment is gaining disproportionately and this segment alone garnered a quarter of incremental GDP growth in FY09, where as both Agri and Industry sectors, employing 75% of the work force, shared between them only 20% of the incremental GDP growth. Pareto principle is working here.This is not a healthy sign and indicative of fundamentally faulty pricing system of outputs of real economy. The Standing Committee on Agriculture made very apt observations: that ‘Agricultural development has been ignored since 1990s. Fix remunerative prices for agri produce-“where hunger rules, peace can not prevail”. The prices of agricultural produce received by the farmers are lower than the prices of the same prevailing in a free market and are often less than the cost of cultivation.The focus of our development is more towards raising industrial production and recently on the service sector; this lop-sided growth of our economy is increasing the gap between the rich of the cities & poor farmers of the villages, Farmer centric policies which can only solve our food security and unemployment problem are not on the agenda of the successive governments.’
3.Sectoral GDP Growth Disparities
Sectorally, Agriculture share witnessed a sharp decline from 4.9% (FY 08) to 1.6% in FY 09; industry too witnessed sharp decline in GDP share from 8.1% to 3.95 in FY 09. Services sector showed only marginal decline from 10.9% to 9.7%.
As agri sector GDP fell year after year since 1950s from 48% to 16% now, per capita income of agri workforce also dwindled sharply. Studies by the planning commission and others show that while the income ratio between agri workers and non-agri workers during 1951 was 1:1.8, it got widened to 1:2.8 by 1984, it further widened to 1:5.2 by 2004 and it is estimated by the Centre for Development Economics that whereas agricultural sectoral GDP stood at nearly Rs.3 lakh crore in 2002-03, it will rise to no more than Rs.4 lakh crore (+33%) a decade later in 2011-12 at the agricultural growth rate forecast for the Eleventh Plan. Meanwhile, the combined manufacturing and services sectors would have soared from Rs. 9 lakh crore to around Rs. 20 lakh crore (+120%), further widening the gap between the relatively stagnant sectors of the economy and the boom sectors from Rs.6 lakh crore to Rs.16 lakh crore. The disparity between agri and non-agri sectoral GDP is going to increase from 1:3 in 2003 to 1:5 by 2012
The Eleventh Plan candidly confesses: “GDP per agricultural worker is currently around Rs.2,000 per month, which is only about 75% higher inreal terms than in 1950 compared to a four-fold (400%) increase in overall real per capita GDP.”
On further disaggregation of GDP it was found that GDP growth of Community, Social and Personal segment unusually against the trend doubled to13.1% from 6.8%. This is definitely abnormal. A close analysis reveals the following position:
5. Govt. spending driving growth -fiscal deficit widened to Rs 3 lakh crore. High fiscal Deficit
While the actual spending of the government in 2008-09 was Rs 1.5-lakh crore more than what was budgeted, or Rs 9,00,953 crore as against Rs 7,50,884 crore, the Plan expenditure component in this excess was about Rs 40,000 crore. Most of the increase was on account of oil and fertiliser subsidies, which play no role in stimulating demand. A fiscal stimulus driven by expenditure is considered to be a better option than one fuelled by tax cuts. Economist Joseph Stiglitz terms the latter “voodoo economics”. The experience of developed economies suggests that the multiplier effect of tax cuts is uncertain and the funds so freed tend to find their way into the financial sector rather than the real economy.
The PMEAC had said, "under-budgeted and off-budget liabilities could add up to 5 per cent of the GDP. A significant part of off-budget liabilities (during 2008-09) was on account of phenomenal increase in oil prices." Even excluding the off-budget items the fiscal deficit of the government during 2008-09 rose from the original estimate of 2.5 per cent to 6 per cent of the GDP.
When we add off-budget items, Fiscal Deficit is presently around 10 per cent of GDP and after three of the last six elections, the government had taken remedial action on fiscal deficit. The fiscal deficit has contributed to driving almost four per cent of the six per cent GDP growth, but the government will now have to unwind the fiscal deficit.
6. Unhealthy growth in Government Consumption
Government consumption, which grew by 22% in Q4, was the largest contributor to boosting growth. It also appears that the over Rs 3.30 lakh crore injected into the system through three stimulus packages helped in increasing GDP. High salaries to government employees and increased expenditure on the National Rural Employment Guarantee scheme increased the share of services sector. Most of the credit for growth goes to government spending, which almost tripled year-on-year to cross 20% in the last quarter. This component alone contributed to more than half the GDP growth. The government announced a series of measures aimed at boosting demand, including indirect tax cuts and additional plan expenditure of Rs 20,000 crore. In sharp contrast, growth in private consumption shrunk almost two-thirds to 2.9%. Private spending as a percentage of GDP fell marginally to 54.7% in 2008-09 from 55% in the previous year, while government consumption rose to 11.6% in 2008-09from 10.1%. This took place as the government boosted spending in the last two quarters of 2008-09 to protect growth hit by the global slowdown.
“What you're seeing is essentially the effects of government spending, which is showing up in social and community services and construction,” Crisil. As a result, the fiscal deficit widened to Rs 3,30,114 crore in 2008-09, or 6.6% of GDP. The government’s revenue stood at Rs 5,44,651 crore in 2008-09, 3.1% lower than the revised target of Rs 5,62,173 crore. Tax revenue at Rs 4,47,726 crore was 3.9% lower than the revised projection of Rs 4,65,970 crore.
Some estimate that the rise in expenditure on the election campaign may have boosted India’s March quarter performance by about0.5%. What have made the difference are trade, hotels, transport & communications at 9%.
More importantly, community, social & personal services at 13.1%; the latter a reflection of the Sixth Pay Commission largesse unconnected to productivity and quality of service. In fact the growth in incomes employees in government service is more than 25% thus garnering a disproportionate portion of the GDP growth by a miniscule of work force, disproportionate compared to the share in GDP growth of the rest of the work force. This itself accounts for about 1% of the GDP growth. Surely, this can not be considered as earned GDP growth in the real sense and the cost is met out of tax money which otherwise could have been used for development of much deserving power infrastructure sector which would have added to the real income of the nation. These are real growth figures and conceptually, the Pay Commission is a nominal increase that should have been netted out. However, for government services, it is rarely possible to make that distinction and at least 1% of 6.7% is nominal growth masquerading as real.
Note : Pay revision cost: Salary revision for 5 million Central Government employees costing to the exchequer Rs17, 800 Crore annually and additional Rs 29,400 crore by way of arrears from January 2006. Central govt employees are 45 lakh in number. Government employment accounts for about 3 per cent of India’s labour force that got a hike of 25% in their incomes in one go, where as 2700 lakh agri workforce, constituting nearly 60% of the total workforce, have got a measly 1.6% increase in GDP.
It was no different during the Fifth Pay Commission. By the same token, when Sixth Pay Commission recommendations percolate through to states (messing up their finances) and quasi-government bodies, there will be increments to GDP growth in 2009-10 and perhaps 2010-11 as well. It is significant that at constant prices (current price trends are similar), the government’s final consumption expenditure has increased from 9.8% in 2007-08 to 11.1% in 2008-09, with a corresponding reduction in private final consumption expenditure.
8. When all the above aspects are factored in, the GDP growth during 2008-09 works out to about 4.5%, 2% less than the announced figure of 6.7%. So the “REAL GDP GROWTH” for FY 09 is only half of the GDP growth for FY 08. High time to develop indices for services too, like IIP for commodities and output data for agriculture in order to gauge the real contribution of services to the GDP.
9. Unsustainable Growth
Posted by S.R.Ram on 2009-06-02
Growth in Per capita income in real terms is estimated at 4.9%. Sectorally it works out to percapita income of persons deriving income from in Agri sector to NIL, industry sector to 2% and services sector to 8%. Persons deriving income from COMMUNITY, SOCIAL AND PERSONAL SERVICES SEGMENT GAINED 11%. This segment registered uncommon growth rate, nearly double (13.1%) compared to previous year (6.8%), fed by Government spending leading to increased fiscal deficit. All other segments showed lesser growth compared to growth rate during the previous year. Such uncommon growth rate in support sector unaccompanied by simultaneous increase in growth rates in real sectors is not healthy and need to be pared else it will have adverse impact on the economic growth in future. Thus highly skewed growth trend was evident, contrary to XI Plan OBJECTIVE OF INCLUSIVE GROWTH. Agri sector, which employs 55% of work force, drew a blank thus widening income disparity of workforce in agri and non-agri sectors (read income divide between rural and urban dwellers).
10. While AGL GDP is continuously declining there is no proportionate decline in AGL work force
Agri GDP, which was nearly half of the total GDP in 1951 has been registering continuous fall as the above graph shows, and by FY 2008 fell by 2/3rd of its share in 1951.
But farm employment did not go down proportionately by 2/3rd during the same period. It went down only by 1/4th during the same period. Consequently per capita income of agri workforce sharply declined vis-à-vis services work force.
11. Sectoral Distribution of Employment
A sectoral disaggregation of the workforce shows that, there has been a decline in the share of agriculture in employment from 59.8 per cent to 58.4 per cent between the 55th and 61st NSS Round Surveys. As per NSS data the share of the manufacturing sector in employment has marginally declined from 12.1 per cent to 11.7 per cent. The services sector improved its share from 22.7 per cent to 23.4 per cent.
12.Why Agri sector per capita income is low?
Underpricing of Agri produce resulted in depriving farmers of their rightful income:” Concentrate on the income of farmers and productivity will take care of itself” Says Prof. M.S.Swaminathan. He touched at the heart of the solution by saying that the objective of policy-makers and others in the field of agriculture should be to make farming profitable and remunerative rather than focusing on production and productivity alone. The Eleventh Plan candidly confesses: “GDP per agricultural worker is currently around Rs.2, 000 per month, which is only about 75% higher in real terms than in 1950 compared to a four-fold (400%) increase in overall real per capita GDP.”
13.Fair output pricing and more investments essential for augmenting farm income
Findings of National Commission on Farmers (NCF)
During the nineties the profitability in agriculture declined by 14% mainly due to stagnancy in yield growth and increase in prices of inputs outpacing the increase in prices of output. The margin deteriorated particularly for cotton, almost all coarse cereals and oilseeds. Even if we look at the latest cost of cultivation for major food grain crops for 2005-06 [CACP data] and compare it with MSP prevailing in 2004-05, it would appear that the C2 costs were not covered even by MSP in many States e.g.; Paddy: A.P, Assam, Haryana, Karnataka, Kerala, M.P, Tamil Nadu & West Bengal, Jowar: A.P, Assam, Haryana, Karnataka, Kerala, M.P, Tamil Nadu & West Bengal. It would be extremely unlikely that in long run farmers would continue to cultivate those crops where the C2 costs are not recovered.
The NCF, therefore recommended that, Commission on Agricultural Costs and Prices (CACP) should be an autonomous statutory organization with its primary mandate being the recommendation of remunerative prices for the principal agricultural commodities of both dry farming and irrigated areas. The MSP should be at least 50% more than the weighted average cost of production. The “net take home income” of farmers should be comparable to those of civil servants.
An analysis was published in EPW OF 11TH April 2009, of the agricultural situation. In all regions where the study was conducted, including a primarily food growing region like WB, it was found that the small farmers face a decline of their incomes to drastically low levels which can not satisfy even consumption levels of required subsistence norms. In the cash crop cultivating regions of Andhra Pradesh, income decline pervades the production by some large farmers as well. The decline is also of such intensity where even non-payment of debts barely allows attainment of the required consumption levels for a good number of households in these classes. In contrast, a few large farmers retain a sizeable surplus from cultivation but they are just about able to manage and cover their required consumption expenditures.
The analysis also shows that Low output prices do not allow the realisation of any net surplus to farmers. This means farm produce is underpriced and the amount is diverted to urban and metro areas by way of food subsidy at the cost of farmers. Simultaneous scaling down of government investment toward inputs and infrastructure required by agriculture, has hindered the process of capital accumulation that is so essential for furthering agrarian transition in the country.
14. CONCLUSION: CONSTITUTE FARM INCOME COMMISSION- for ensuring a minimum take home income to farmers
i. The finance minister rightly quoted Amartya Sen while clubbing ‘down turn with security’ which is meant for providing safety nets that could arise because of market related risks. More importantly, such protective security should also address the poor returns to farmers. Prof.M.S.Swaminathan rightly pointed out that ‘recommendations of the 6th Central Pay Commission, which provide benefit to 4.5 million central government employees and 3.8 million pensioners, were not only accepted but were improved upon by government. I suggest that major political parties should commit themselves to establishing a Farm Income Commission which can go into the totality of the income of farmers from crop and animal husbandry, fisheries, agro-forestry and agro-processing, and suggest ways of ensuring a minimum take home income to farmers.’ He hoped that ‘the recommendations of the National Commission of Farmers on the steps needed for increasing the income of small producers, as well as the need for ensuring minimum support price not only for wheat and rice but for a wide range of millets, pulses, oil seeds and tuber crops will be implemented. Further, provision needs to be made for establishing a national grid of warehouses for grains and cold storage structures for perishable commodities. The prevailing mismatch between production and post-harvest technologies should be ended. The National Policy for Farmers presented in Parliament in November 2007 makes a commitment that government will try to ensure income and work security to farm families.
ii. “Farmers livelihood always under threat and continues to be the riskiest profession”: Creation of two crore jobs in the non-farm sector in the rural areas over the next twenty years is necessary to achieve a nutrition secure India, said Dr M.S. Swaminathan. With 60 per cent of people engaged in agriculture, progress in agriculture held the key to prosperity. It remains the single largest private enterprise, in which livelihood is always under threat and continues to be the riskiest profession. Working towards a green revolution, production levels have been raised but hunger has not been banished. Malnutrition glares across all States in the country. Food security is the fundamental responsibility of the Government and many schemes are in place but they have not yielded the desired results.
iii. The ensuing budget should try to address the issue of converting this commitment into well defined programmes and resource allocation. Much has been done during the last five years to revitalise our agriculture and to reduce agrarian distress. Much, however, remains to be done to do justice to the genuine needs of the majority of our population who constitute the farming community.’ Pride of place would have to be given to agriculture and skill development — the first for raising productivity and the second for transferring workforce out of farms and traditional services into industry. These are the basics; India will pay a heavy price if it continues to neglect them.
Annexure :
Note: 1. Figures for 2004–05 are provided by NSSO based on their 61st Round survey.
2. Employment in 1993–94 and 1999–00 is as per Report of the Task Force on Employment Opportunities
(Planning Commission)
