The initiation of economic reforms in the 1990s saw India gradually breaking free of the low growth trap which was euphemistically called the “Hindu growth rate” of 3.5 per cent per annum. Real GDP growth averaged 5.7 per cent per annum in the 1990s, which accelerated further to 7.3 per cent per annum in 2000s.
A feature of the growth acceleration during the period was that while the growth rate of industry and services increased, that of agriculture fell. This was because there was no notable technological breakthrough after the “green revolution” of the mid-1960s which saw sharp increase in yields of cereal production particularly in northern part of India. By the 1990s, the momentum of “green revolution” had died down. Consequently, the yield increases in the 2000s were much lower than those experienced even in the 1990s.
GROWTH DYNAMICS
Notably, the decade of the 2000s encompassed the inflexion point in the growth trajectory with an annual average GDP growth of approximately 9 per cent for the 5-year period 2004-08. Growth in all the sub-sectors of the economy, including agriculture, accelerated during this period. However, this growth process was interrupted by the global financial crisis. Subsequently, the average growth slowed down to 7.8 per cent during 2009-11, with a noticeable slow down in both agriculture and industry.
The growth dynamics altered the structure of the Indian economy with a decline in the share of agriculture from 28.4 per cent in the 1990s to approximately 15 per cent in 2009-11. There was corresponding gain in the share of services, including construction, from 52 per cent to 65 per cent during the same period.
What is, however, of concern is that the share of industry has remained unchanged at around 20 per cent of GDP. This suggests that India's growth acceleration during the last two decades has been dominated by the services sector. The pace of average annual industrial growth had nevertheless picked up from 5.7 per cent during the 1990s to 9 per cent during 2004-08, before being interrupted by the global financial crisis. While the share of industry in GDP remained stagnant, there was noteworthy structural transformation in manufacturing during the period. As a process of restructuring, while the gross value added in organised manufacturing increased by 8 per cent per annum at current prices, employment fell by 1.5 per cent per annum during 1995-2003. Subsequently, during 2004-09, gross value-added growth accelerated to 20 per cent per annum at current prices; but significantly, employment also increased by 7.5 per cent per annum.
With work participation rate of 39.2 per cent, India had a workforce of 400 million in 2009-10. Of this, 53 per cent was in agriculture and the rest 47 per cent in non-agricultural activity.
While the bulk of the employment is in agriculture despite its shrinking share, the noteworthy feature of the employment structure has been that, for the first time, the absolute workforce in agriculture declined in the latter half of the 2000s (Table 2). The overall unemployment rate in the economy also declined from 8.3 per cent in 2004-05 to 6.6 per cent in 2009-10.
POLICY CHALLENGES
India will have to raise agricultural productivity and diversify agriculture to feed its own population. The food entitlement has increased with the public employment guarantee programme (MGNREGA) which guarantees for 100 days of employment to one member of each family in the rural areas. This has also given better bargaining power to labour and, consequently, the overall wage rates have gone up, raising the demand for food.
While the country currently has sufficient foodgrains stocks, it is not yet self-sufficient in pulses and oilseeds. Further, demand for protein based products like meat, egg, milk and fish, as well as fruits and vegetables, has increased substantially with rise in income.
The demand-supply mismatches in the case of these items have resulted in rise in their prices. There is, therefore, a need for another technological breakthrough to give fresh impetus to agriculture.
At the same time, greater emphasis will have to be placed in the management of supply chain with investment in rural infrastructure. The annual growth in agriculture has to be raised to at least 4 per cent from the current growth rate of around 3 per cent.
The fact that 53 per cent of overall work force is still engaged in the agricultural sector — whose share of GDP has shrunk considerably — is worrisome. A substantial part of this labour force will have to be ejected from agriculture, not only to improve the productivity in agriculture, but also in the overall economy.
It is unconceivable that they can all be absorbed gainfully in the services sector. Hence, industrial employment will have to expand so also the relative contribution of industry. This needs a focused attention, as we have seen that the share of industry in the overall GDP has stagnated during the last two decades.
In this direction, the Government has taken up a major policy initiative to create National Manufacturing and Investment Zones (NMIZ) to increase the sectoral share of manufacturing in GDP to 25 per cent by 2022, and double the current employment level in the sector.
Good physical infrastructure, a progressive exit policy, structures to support clean and green technologies, appropriate investment incentives, and business friendly approval mechanisms will be the cornerstones of this new initiative.
(The author is Executive Director, RBI. The views expressed are personal.)
Excerpts from a recent speech at Harvard Business School