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Inter Sectoral Linkages in Indian Economy-RBI Study - Abridged by - K. Ramasubba Reddy
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ABSTRACT: |
RBI studied trends in interdependence of Agriculture, Industry and Services sectors of our economy and found that over the years, a rise in the income of agricultural households had made a positive impact on industrial and services sectors through the demand channel. Services reliance on industry is more than the reliance on Agriculture. |
While agricultural sector’s reliance on Industry has increased, demand linkages of industry with the agricultural sector have weakened in the last two decades or so.
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The growth trend of industrial andservices sectors have moved upwards, while that of agricultureand allied activities has followed a downward trend.
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The study observes that stronger growth of the services sector in India vis-a-vis other sectors does not appear to be desirable and calls for a corrections.
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The study suggests reforms in the agriculture sector which lagged behind that of the industrial and services sectors by appropriate policy measures.
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Summary:
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1950s@ |
1960s |
1970s |
1980s |
1990s* |
2000-01 to 07-08 |
08 - 09
QE |
09 -10
AE |
Agriculture, forestry &
fishing |
2.7 |
2.5 |
1.3 |
4.4 |
3.8 |
2.9 |
1.6 |
-0.2 |
| Industry |
5.7 |
6.5 |
3.6 |
6.1 |
6.2 |
7.9 |
3.9 |
8.2 |
| Mining & Quarrying |
4.6 |
6.2 |
3.1 |
8.9 |
4.9 |
5.2 |
1.6 |
8.7 |
| Manufacturing |
5.8 |
5.9 |
4.3 |
5.7 |
6.5 |
7.7 |
3.2 |
8.9 |
Electricity, Gas &
Water Supply |
10.7 |
11.4 |
6.9 |
8.3 |
7.0 |
4.6 |
3.9 |
8.2 |
| Construction |
5.8 |
7.2 |
2.0 |
5.5 |
6.0 |
10.6 |
5.9 |
6.5 |
| Services |
4.0 |
4.8 |
4.4 |
6.4 |
7.6 |
8.8 |
9.8 |
8.7 |
| Trade, Hotels, Transport and Communication |
5.0 |
5.4 |
4.8 |
5.9 |
8.0 |
10.7 |
7.6 |
8.3 |
| Financing, Insurance, Real Estate & Business Services |
3.1 |
3.2 |
4.3 |
8.4 |
7.7 |
8.8 |
10.1 |
9.9 |
| Community, Social & Personal Services |
3.5 |
5.2 |
4.1 |
5.8 |
6.9 |
5.6 |
13.9 |
8.2 |
| GDP at factor cost |
3.6 |
4.0 |
2.9 |
5.6 |
6.2 |
7.3 |
6.7 |
7.2 |
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*: Excluding the crisis year 1991-92.
@ : Average for the growth during the 1950s is the average of nine years, i.e., from 1951-52 to 1959-60. QE=Quick Estimates @ 2004-05 prices. &: Agri sector share in GDP, AE= Advance Estimates at 2004-05 prices
Source : Central Statistical Organisation, Government of India.
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Since the eighties, the growth trend of industrial and
services sectors have moved upwards, while that of agriculture
and allied activities has followed a downward trend.
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Performance of services sector in the Indian economy has been
exemplary. First, in contrast with agricultural and industrial sectors,
except for the interregnum of the 1970s, the growth in services sector has trended upwards, accelerating from 4.0 per cent in 1950s to 8.8 per cent in 2000s (2000-01 to 2007-08). On the contrary, while the
growth in primary sector remained volatile with no clear trend, growth
in industrial sector in the 1980s and 1990s (6.1 per cent and 6.2 per
cent, respectively) remained even lower than 6.5 per cent growth of
the 1960s (3.6 per cent in 1970s). |
In respect of comparison of sectoral shares in GDP since the
1950s, a skewed pattern emerges wherein the relative share of
agriculture is declining over time, with industry remaining nearly
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constant and services sector share rising in the GDP (Chart 1). Since
the early 1950s, share of services sector in GDP exceeded that of the
industrial sector, but the same remained smaller than that of the
agricultural sector till the 1970s.
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As per the components of services sector, it is found that
‘community, social and personal services’ (CSPS) and ‘trade, hotel,
transport & communication’ (THTC) had almost the same share in
GDP during the period from 1950-51 to 1954-55 (Chart 2). In 1955-
56, THTC overtook the CSPS sector. The sector ‘financing, insurance,
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real estate and business services’ (FIRB) has seen its share expanding
sharply since the early 1980s and in 2006-07, its share in GDP has
become almost equal to that of the CSPS. Nationalisation of banks
and introduction of post office deposits along with the gradual
liberalisation in the insurance sector may have contributed to financial
deepening leading to a rise in the share of FIRB in the overall GDP
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B. Sectoral Linkages in the Indian Economy |
Considering inter-dependence among the three sectors of an economy viz. agriculture & allied activities (primary), industry (secondary) and services (tertiary), it may be presumed that demand for one sector in a closed economy is a function of outputs generated in the other two sectors. In an open economy, however, the relationship can be captured by incorporating some other variables, which integrate the external economy.
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To begin with, agriculture sector enjoys both production and demand linkages with industrial and services sectors. Agriculture sector has demand linkage with the industrial sector as it depends on the latter for agricultural implements and other inputs such as fertilizers and pesticides. Thus, a good harvest (in turn giving a boost to agricultural income) results in increased demand for industrial products. Similarly, a good agricultural year is also likely to raise demand for services like trade, transport, banking and insurance services.
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On the supply side, agricultural inputs are used in the production of various chemical and pharmaceutical products; consumer items, especially non-durable food products, etc. Thus, a fall in aggregate supply in agriculture sector is likely to cause a serious constraint in production of the industrial sector.
Similarly, there is a positive and significant association between manufacturing and services sectors, which becomes stronger at advanced stages of industrialisation. With the expansion of the economy, particularly in the manufacturing sector, demand for services like trade, transport, hotel, banking and social services such as education, hospitals and other infrastructure increases. In turn, the service sector growth depends on the development of manufactured inputs. Given the high-income elasticity of demand for services, as the economy develops with rising per capita income, the growth linkages between manufacturing and services sectors become stronger through increased demand for each other’s output. |
In recent years, there has been a phenomenal growth in respect of
distributive, communication and financial services. Abetted liberalisation communication sector has been one of the fastest growing sectors, which has enhanced the productivity in the commodity producing sectors through sharing of recent and update knowledge about the current market and demand conditions.
Financial services have consistently recorded double-digit growth in the last four years benefiting from substantial expansion in the
economic activity. Transportation sector also witnessed substantial expansion and benefited from the burgeoning activity in commodity producing sectors as well as growing external orientation of the Indian economy.
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| Production Linkages |
Production linkages among various sectors of the Indian economy basically arise from inter-dependence of sectors for meeting their productive inputs needs. The production linkages between the sectors can be best illustrated through the available I-O tables for 1968-69, 1979-80, 1989-90, 1993-94, 1998-99 and 2003-04. |
The sectoral share matrix (production linkage) based on the I-O table is presented inTable 1-Annexure. The I-O table reveals that during 1968-69, to produce one unit of services output, it required 0.017 units of agricultural input, 0.132 unit of industrial input and 0.096 unit of services sector input itself. In 2003-04, one unit of services sector output required 0.029 unit of agricultural input, 0.213 unit of industrial input and 0.129 unit of services input. It is observed that input dependence of services sector is more aligned with the industrial sector than with agriculture sector.
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In respect of industry in 1968-69, input requirements for producing one unit of industrial sector output were 0.127 units from agriculture, 0.333 units from industry itself and 0.135 units from the services sector. Input dependence of industrial sector remains the maximum with itself and this is found to be increasing from 0.333 during 1968-69 to 0.455 during 2003-04.
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| Coming to agriculture, it is observed that input usage from the industrial sector (such as agricultural implements) is increasing, though in 2003-04 it shows a slight decline from the 1998-99 level. Increased dependence of agriculture on Industry for inputs is suggestive of the growing mechanisation of Indian agriculture. In fact, input usage from the industrial sector has been showing an increasing trend for all the three sectors, indicating the growing importance of industrial inputs for the other sectors, as the economy progresses. |
| III.1.2.Demand Linkages |
| In the preceding section, we examined production linkages using input-output coefficient matrix, say A, for each specific years. The matrix [I — A]-1 can be used to examine the demand inter-linkages among the sectors. Such matrices for the years 1968-69, 1979-80, 1989-90, 1993-94, 1998-99 and 2003-04 are presented inTable 2-Annexure. I-O table (based on the matrix [I-A]-1) for different years indicates major shifts in demand linkages. It is well established that an increase in agricultural income enhances the demand for industrial goods. Further, a good harvest year is also likely to raise the demand for various services such as the transport, etc. It is found that during 1968-69, a rise in demand in agriculture by one unit was likely to raise demand for industrial goods by 0.087 units and demand for services by 0.035 units. It is found that over the years, a rise in the income of agricultural households had made a positive impact on industrial and services sectors through the demand channel. |
| The demand linkage of agricultural sector was found to be stronger with industrial sector than with services sector. Over the years, demand for industrial goods arising from agricultural sector has increased more than five-folds (from 0.087 in 1968-69 to 0.466 in 2003-04). Similarly, over the years a rise in agricultural income has increased the demand for services sector by more than three-folds (from 0.035 in 1968-69 to 0.123 in 2003-04). |
| During the same period, demand linkage of the industrial sector with the agriculture sector declined from 0.247 in 1968-69 to a mere 0.077 in 2003-04. On the contrary, demand linkage of industry with the services sector has remained intact, it increased initially from 0.237 in 1968-69 to 0.404 in 1989-90, and thereafter declined to 0.213 in 1993-94 before increasing to 0.247 in 2003-04. Demand linkage of services sector with industrial sector improved significantly from 0.230 in 1968-69 to 0.501 in 2003-04, indicating rising importance of industry for services sector, though it remained almost static in case of agriculture. |
On the whole, I-O analysis reveals well-built production and demand linkages of services sector with industrial sector and of agriculture sector with industrial sector, respectively.
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Concluding Observations :
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| The present study has endeavored to examine and analyse inter-sectoral linkages in the Indian economy following both the I-O approach and the econometric exercises using co-integration and state-space models. The analysis of I-O tables from the production side reveals that input demand of the services sector is industry intensive rather than being farm (denoting agriculture) intensive. Further, that the farm sector is significantly reliant on industry for inputs. |
| The demand linkage examination amply demonstrates that the agricultural sector exhibits strong association with the industrial sector, while the converse connection in terms of demand linkages of industry with the agricultural sector have weakened in the last two decades or so. Demand linkages of the services sector were observed to have strengthened vis-à-vis the industrial sector overtime. |
| As per the policy implications of the study, it is found that relatively stronger growth of the services sector in India vis-a-vis other sectors does not appear to be desirable and calls for a correction in terms of enhancing the growth synergies among sectors. This is likely to give a stimulus to the dormant growth potential. Towards this end, reforms in the agriculture sector which lagged behind that of the industrial and services sectors deserve policy consideration to be able to harness the export potential of agro-products. Creation of specialised infrastructure services for promoting agri-exports would strengthen the agriculture-services relationship. Finally, the public policy needs to be geared towards encasing the unorganised sector in the ambit of banking and insurance so that the latent growth potential of the sector could be fully realised. |
Source: RBI: An Empirical Investigation of the
Inter-Sectoral Linkages in India-RBI Occational Papers, Summer 2009 |
Abridged by: K. Ramasubba Reddy
KRSR/040310
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