India’s Agriculture Crisis is Set to Become Worse


The gross domestic product(GDP) data for 2015-2016 was declared sometime back. As per this data, agriculture (actually agriculture, forestry and fishing), made up for around 14.1% of the GDP, during the course of the financial year. The trouble is that close to 50% of the population continues to depend on agriculture for a living.

This basically means that agriculture formed around one seventh of the Indian economy during the last financial year. At the same time around half of the population is dependent on it. The point being that it employs many people than it actually should. Hence, there is a huge disguised unemployment in the rural areas.

Disguised unemployment essentially means that there are way too many people trying to make a living out of agriculture. On the face of it they seem employed. Nevertheless, their employment is not wholly productive, given that agricultural production does not suffer, even if some of these employed people stop working

There are many more people than the sector requires and this leads to lower incomes for those who work in agriculture. The broader point is that if the average incomes need to go up, people need to be moved away from agriculture. But a new analysis suggests that this will not happen at the pace it was earlier expected to be.

Akhilesh Tilotia of Kotak Institutional Equities makes this point in a recent research note titled Forecasts of fewer jobs dull demographic sheen. Tilotia is also the author of The Making of India. He reviewed a “set of 24 industry reports commissioned by the National Skills Development Council (NSDC) and compare them with similar reports that NSDC had put together around the end of the last decade.”

The earlier reports had put the size of the Indian workforce at 65.4 crore by 2022. The number is now a lot lower at 57.5 crore. As far as number of people employed in agriculture in 2022 is concerned, the earlier estimates put the number at 11.4 crore or 18% of the workforce. As per new estimates the number of people who are expected to be working in agriculture in 2022, stands at 21.6 crore or around 38% of the workforce.

This basically means that nearly 10.2 crore more Indians will be dependent on agriculture as a mode of living, than was expected earlier. Further, by 2022, agriculture is expected to form around one-ninth of the GDP or the overall economic size of the country.

The automobile sector which was earlier expected to employ 4.8 crore individuals is now expected to employ only around 1.5 crore individuals. The same goes for the food processing sector, which was earlier expected to employ around 1.8 crore individuals, but is now expected to employ only 40 lakh individuals. On the other hand, the numbers for organised retail have gone up dramatically from 1.8 crore individuals earlier, to 5.6 crore individuals, as per the latest estimates.

Long story short, enough jobs will not be created to move people out of agriculture into other sectors where they can make a living.

In fact, as the Economic Survey of 2014-2015 points out: The data on longer-term employment trends are difficult to interpret because of the bewildering multiplicity of data sources, methodology and coverage. One tentative conclusion is that there has probably been a decline in long run employment growth in the 2000s relative to the 1990s and probably also a decline in the employment elasticity of growth: that is, a given amount of growth leads to fewer jobs created than in the past. Given the fact that labour force growth (roughly 2.2-2.3 percent) exceeds employment growth (roughly about 1½ percent), the challenge of creating opportunities will remain significant.”

As the Survey further points out:Regardless of which data source is used, it seems clear that employment growth is lagging behind growth in the labour force. For example, according to the Census, between 2001 and 2011, labour force growth was 2.23 percent (male and female combined). This is lower than most estimates of employment growth in this decade of closer to 1.4 percent. Creating more rapid employment opportunities is clearly a major policy challenge.”

One reason why enough jobs are not being created is because of what economists call falling labour intensity. Economic growth now generates fewer jobs in the non-farm sector (industry including manufacturing, construction, mining and utilities plus services sector) than it used to earlier. For every 1% increase in the gross domestic product, the non-agricultural employment went up by 0.52%, between 1999-2000 and 2004-2005. This fell to 0.38% between 2004-2005 and 2011-2012. (Source: D.Joshi and V.Mahambare, HIRE & LOWER–Slowdown compounds India’s job-creation challenge, Crisil Research, January 2014)

Hence, economic growth does not translate into the same number of jobs as it used to in the past. This basically means that economic growth is less labour intensive. This has happened primarily because of two reasons. First, the economic growth now is driven by less labour intensive sectors like business and financial services as well as information technology and information technology enabled services. These sectors require only one or two people to produce Rs 10 lakh of real value added Gross Domestic Product or economic output. This basically means that faster growth in these sectors does not necessarily translate into jobs. (Source: D.Joshi and V.Mahambare, HIRE & LOWER–Slowdown compounds India’s job-creation challenge, Crisil Research, January 2014).

This is clearly a big problem which does not have easy answers. Further, people dependent on agriculture are low on skill-sets that are needed for jobs in other sectors. It also needs to be pointed out here that moving people from agriculture into other areas is not so easy.

In fact, other countries which have grown at a very fast pace in the past, have experienced the same phenomenon. TN Ninan makes the point in The Turn of the Tortoise. Take the case of Thailand. Agriculture still constitutes close to 40% of its workforce. Or China, which has become the factory of the world. Around 35 per cent of the workforce is still engaged in agriculture, even though it produces just 10 per cent of the Chinese economic output.

The column originally appeared in the Vivek Kaul Diary on June 9, 2016