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10 A Study of Linkages

between Agriculture and


Industry: the Indian
Experience *
Isher Judge Ahluwalia
CENTRE FOR POLICY RESEARCH, NEW DELHI

and

C. Rangarajan
RESERVE BANK OF INDIA, BOMBAY

There has been extensive literature exploring the interrelationships


between agriculture and industry in the Indian economy, including
some attempts at quantification of some of the linkages .' While the
full complexities of these interrelationships cannot be modelIed
within the confines of a model , this study attempts to analyse certain
crucial interlinkages between the two sectors within the framework of
a macroeconomic model.
The two central issues addressed by the model are (i) the role of
the variations in the terms of trade between agriculture (or parts of it)
and non-agriculture (or parts of it) in inftuencing the demand for
industrial consumption goods, and (ii) the possibility of a differential
impact of the movements in the terms of trade on investment by
different sectors. It is worth noting that while the demand side impact
of an increase in investment on the output of the heavy industries is
explicitly incorporated, the model does not trace the impact of
increases in investment, particularly public investment, on creating
infrastructural capacities and releasing supply bottlenecks in both
agricultural and industry .
A similar model was earlier specified and estimated for the period
1961 to 1972 by Rangarajan (1982). The model presented in this
study retains the principal specifications in the Rangarajan model but
makes agricultural outputs endogenous along the lines specified in
the macroeconomic model by Ahluwalia (1979). The model for the
219
J. G. Williamson et al. (eds.), The Balance between
Industry and Agriculture in Economic Development
© International Economic Association 1989
220 Country Studies

present study is estimated over a twenty-year period from 196O--{)1 to


1979-80. Another feature worth noting is that the model uses data on
value added at constant prices for the use-based sectors of industry
rather than the indust rial production indices . The latter are known to
suffer from serious limitations.?
Section 1 presents an overview of the trends in the growth of
agriculture and industry covering the period form 196O--{)1 to date.
Section 2 sets out the principal linkages between the two sectors .
Section 3 presents the model - its specifications as weIl as the OLS
estimates derived from using time series data for the period from
196O--{)1 to 1979-80. Section 4 analyses three simulations of the
model with a view to tracing the effect of specified changes in the
agricultural sector on the endogenous variables of the model. More
specificaIly, the model is used alternatively to trace the effect of ' no
drought' in 1974-75 and an increase in the trend growth rate of the
output of foodgrains and non-foodgrains. The impact of an increase
in the terms of trade is also analysed.

1. OVERVIEW OF TRENDS

An analysis of the trends in the growth of agriculture and industry in


the Indian economy since the mid-1950s clearly reveals a continuing
dominant role played by agriculture in the economy. The share of
agriculture in the Net Domestic Product at 197~71 prices was as high
as 58 per cent in 1956-57 and it declined to 49 per cent in 1970-71 and
39 per cent in 198~1 (Table 10.1). However, even in 1980-81
agriculture was by far the largest contributor to the Net Domestic
Product.
A bird's eye-view of the relative rates of growth in the major
sectors of the economy from 1956-57 to 1983-84 is provided in Table
10.2. Whether we take the period from the beginning of the Second
Five Year Plan to 1983-84 or the twenty-year period ending in
198~1, the growth of value added in agriculture was around 2 per
cent per annum and that in industry was between 4.5 and 5 per cent
per annum. The long-term growth of industry exceeded that of
agriculture by 2.7-2.8 per cent per annum . The long term rate of
growth of the Net Domestic Product at 1970-71 prices was of the
order of 3.5 per cent per annum. As Table 10.2 shows, the first three
years of the 1980s recorded a higher growth rate than the long-term
average both for agriculture and for industry and this was reftected in