Chapter-i introduction



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Chapter-iV

Inter linkages between sectors
Structural changes have been historically associated with the economic development in the national economies. It has been defined as a process combining economic growth with changing share of different sectors in the national product and labour force. Structural changes observed historically have followed a sequence of shift from agriculture to industry and then to services. An underdeveloped economy is characterised by a predominant share of agriculture; with development the share of industry increases and that of agriculture declines, and subsequently after reaching a reasonably high level of development, the services sector increases in importance, becoming a major component of the economy. This pattern holds across historically and with countries with different levels of development. Structural shifts and changing sectoral shares are found to hold both for the national product and the work-force. Structural changes do not only characterise economic development, they are also necessary for sustaining economic growth. The neoclassical view that sectoral composition is a relatively unimportant by-product of growth has been convincingly questioned by structural economists like Kuznets, who have empirically demonstrated that growth is brought about by changes in sectoral composition. This is so both for the reasons of demand and supply.

Emphasis laid on different factors by different economists has varied a lot, the broad line of reasoning advanced by pioneers like Fisher and Clark and followed with some elaborations and modifications by later analysts has been as follows:-



  • Income elasticity of demand for agricultural products is low.

  • Income elasticity for industrial, particularly manufacturing goods is high.

  • Income elasticity for services is still higher.

As a result, the demand for agricultural products relatively declines and that for industrial goods increases with rising levels of income, and after reaching a reasonably high level of income, demand for services increases sharply. Accordingly the shares of different sectors in the national product get determined by the changes in the pattern of demand. On the supply side, agriculture being mainly dependent on a fixed factor of production, namely land, faces a limit on its growth and is subject to early operation of the law of diminishing returns. Industry, especially manufacturing offers large scope for use of capital and technology, which could be multiplied almost without limit with human effort. Labour supply could constrain expansion of industry, but it is possible to overcome it by introducing labour-saving technological changes. It also applies to services, where application of technologies seems to offer much larger scope, as shown by the experience of past few decades. In the case of services, there are also additional reasons why their share in national product increases with industrial development. These arise both out of the technological developments and economic and institutional arrangements compelled by them (Kuznets, 1966).

Technological developments facilitate and economically necessitate geographical concentration and large scale based production. It leads to larger requirements of transport, storage and communication. In a rural economy, most of the food is produced close to the consumers but with increasingly larger population getting located in urban areas result in requirements of transport and trade increase even for making available food to the consumers. Increasing demand for housing in urban areas leads not only to the expansion of construction activity but also leads to demand for housing related services. These are generally not common in villages. Higher income levels not only give rise to higher demand for personal services such as education, health and recreation but also technology based modes of meeting them which leads to demand for other services. For example, when the conventional means of recreation such as folk songs and dances or fairs and festivals give way to radio and television, then a whole host of new services of repair, maintenance, production, broadcast, telecast and distributive arrangements for programmes develop. Larger scale and increasing complexity of economic organisations in different sectors of activity give rise to the need of regulation, requiring expansion in government machinery. There is a disagreement among economists regarding the primary force behind structural changes that accompany economic development. Classical economists like Fisher and Clark, basing their arguments on Engel’s Law thought that shift from agriculture to industry takes place as a result of low income elasticity of demand for agricultural products and high income elasticity of demand for manufactured goods. They seem to lay different emphasis on the demand and supply side factors in respect of shift from manufacturing to services. Fisher (1939, 1946) emphasised saturation of demand for manufactured goods and high income elasticity of demand for services. Basing his argument on the so-called “hierarchy of needs”, Clark agreed that final demand will increasingly shift to services, but shift of labour force takes place, according to him, due to high productivity of manufactured goods and low productivity of services. Kuznets (1971) saw income elasticity of demand as the primary reason for changes in economic structure, but recognised that other factors, technological and institutional, also play an important role in accelerating these changes.

Primarily emphasising on the supply side, Kaldor (1966, 1967) considered manufacturing as the engine of growth. Agriculture being subject to diminishing returns is not able to sustain an increasing level of production and income therefore manufacturing without such limitations on expansion of production is the key to sustained economic growth. The key role of manufacturing in growth is explained by Kaldor through his three famous laws, emphasising strong causal relation between growth of manufacturing and growth of GDP, between growth of manufacturing output and growth of productivity in manufacturing and between rate of growth of manufacturing and growth of productivity in other sectors. Growth of services, according to him, was induced both by requirements of expanding industrial sector and rising levels of income.

The ‘demand side’ explanation based on differences in income elasticity of demand is questioned by economists like Bamoul (1967, 2001) particularly in regard with the shift of labour force to services. According to this line of argument, employment shift does not result from changing final demand, but from differential productivity growth. Victor Fuchs (1968) in his classical study of the emergence of domination of services sector in the United States corroborates the view propounded by Bamoul and concludes that shift to services is largely a result of productivity differentials; demand shifts play only a minor role in this process. He finds that income elasticity of demand for services is only slightly higher (1.07) than for goods (0.93) and that for non-food goods is similar to that of services.

Differences in emphasis placed on the ‘demand side’ and ‘supply side’ explanations of structural shifts, by different economists notwithstanding, the truth may lie somewhere in between. This view is best presented by Kuznets (1971), who sees the driving force for changes in sectoral composition of output in differences in income elasticity of demand for products of different sectors, but caused by differential growth of productivity in different sectors. Changing structure of demand with increasing per capita income levels induces changes in production structure, but at the same time, changes in technological conditions of production, increasing scale and concentration of production and institutional arrangements necessitated by changes in location of production and population, also have significant influence on the pattern of these changes. Further, the response of changing consumption demand pattern on production structure in the national economies will vary depending on the close or open character and trading possibilities of a country. In a closed economy the domestic production structure will need to respond to the changing demand pattern as much as its production capacity permits. In an open economy demand for certain commodities can be met by imports while the national production structure will primarily be determined by comparative advantage. Structural changes in the national output inevitably accompany and bring about economic growth irrespective of the primary and secondary factors causing them. Structural changes in output are also expected to be accompanied by similar changes in employment.

Thus, with the decline in the share of agriculture in national product, a decline in the share of agriculture in employment can be expected resulting in a transfer of labour from agriculture to industry. In fact, such a transfer is seen by economists like Arthur Lewis (Lewis, 1955) as a source of capital accumulation and a relatively costless process of economic growth. Agriculture carried out mainly as a subsistence activity in an underdeveloped economy has a large surplus of labour with insignificant contribution to production but claiming its full share in consumption. Use of this labour in growing industrial sector leads to net addition to the national output without significantly increasing the cost of labour consisting of subsistence wage to the economy. Several assumptions involved in this approach have doubtful validity, a subject, which has been widely debated in development literature and need not be repeated here. It emphatically makes the point that economic development of an underdeveloped country not only involves but requires shift of labour from agriculture to industry. Magnitude of such shift will depend on the rate at which industrial development takes place and the technology and the labour absorbing capacity of the developing industry. There is a general agreement among economists that the employment share of services will rise in the next phase, after the first phase of shift to industry. It is not clear as to when and at what level of economic development and per capita income it will take place. The reasons why this shift will take place are also seen differently by different economists. Earlier economists like Fisher and Clark seem to take it for granted that it happens due to changing demand pattern. Fisher argued that services are “luxuries” with an income elasticity of demand greater than unity and therefore at higher income levels an increasing share of expenditure is absorbed by them and it leads to high share of services in output and labour force. Clarke argued that demand for manufactured goods saturates, settling at around 20 to 25 per cent and with continuing decline in the demand for agricultural products the demand for services rises. While Fisher assumed that increase in the share of services in final demand directly and proportionately translates into its share in employment.

Later economists like Bamoul and Fuchs see a rise in the share of services in employment primarily in productivity differentials between industry and services sectors demand shifts playing a minor role. Bamoul, assuming that share of goods and services in real output is constant over time and across countries and basing his conclusion on a study of six developed countries (Canada, Germany, France, Japan, UK and US), over the period 1948-1995 finds that a higher and rising share of service sector in employment in high income countries is explained by low productivity of this sector. Victor Fuchs in his study of 48 US States over the period (1929-1965) also sees the lagging productivity growth of the services sector as the reason for its rising employment share. Increase in the share of services in employment and also to some extent in the national product is also explained in what is seen as change in the “inter-industry division of labour”. Industry has increased the use of services as intermediate inputs and many of the processes and activities of a ‘service’ nature which were carried out by manufacturing firms as part of their activity and accounted for as part of manufacturing and industry are increasingly outsourced to enterprises included in the ‘service’ category. The differences in income elasticity of demand still appear to be the driving force behind changes in product structure of an economy in an ‘agriculture-industry-services’ sequence. The supply side factors such as technology, scale and territorial concentration of production and changes in inter-industry division of labour leading to relocation of activities from one sector to another now provide increasingly significant explanation of structural shifts in output in recent years. Increasing share of labour force in services has been attributed by most economists to the low productivity in services as compared to manufacturing.

A common pattern of today’s developed countries has no doubt followed historical pattern of economic development. Share of agriculture has seen a steady decline in total output. Industry registered an increase for a considerably long period, and then has shown a decline. Share of services has steadily increased all through, but the rate of increase seems to have accelerated in the latter half of the twentieth century. The period characterised by the emerging dominance of services in the economies of developed countries is also seen as signalling the dawn of a ‘post-industrial society’ (Clark, 1984). The timing of the different phases of structural changes and speed of such changes has of course been different among different countries. In the ‘pre-modern’ era, which according to Kuznet’s assessment ended at different points of time during the nineteenth century in different countries (e.g. before1800 in Great Britain, 1835 in France, 1861 in Italy, 1870 in USA, 1878 in Japan, etc.), agriculture accounted for a half to two-thirds of the total output. It seems to have taken about 75 to 100 years for this share to decline to about one-fourth in the case of most European countries, though similar shift was achieved more swiftly in North America and Japan, the relative latecomers in modern economic development. In spite of differences in time of entering the era of modern development and in the speed of transformation, the share of agriculture had declined to less than 15 per cent in most of these countries by middle of the twentieth century and has seen a further continuous decline since then, reducing it to less than 5 per cent in all of them, by the end of the twentieth century.

At the beginning of the ‘modern’ development industry held a share of around 25% in most of the developed countries of today. It grew steadily and reached the peak of about one-half by 1950’s in all these countries irrespective of the period when they entered the industrialisation phase. All the developed countries have seen a decline in the share of industry in their output since the 1950’s. The changes in the share of industry have been observed to be hump-shaped (Kuznets, 1966, World Bank, 1988 and Echevarria, 1997). It is interesting to note that in most of the countries industry has the same share in output in the beginning of the twenty-first century as it had in the beginning of their journey to ‘modern’ economic growth. Thus in 2002, the share of industry in national output in the United Kingdom was 26 per cent, comparable to 23 per cent in 1801, in France 25 per cent same as in 1841, in Germany 23 per cent compared to 24 per cent in 1841, in Italy 29 per cent comparable to 22 per cent in 1901 and in USA 23 per cent comparable to 20 per cent in 1841 (Kuznets, 1966 and World Bank, 1983 and 2004).

The services sector has experienced a secular increase in its share right through the period of modern economic growth in all countries except for an initial decline in a few countries namely Great Britain, France and Germany. The share crossed the 50 per cent mark by 1901 in Great Britain, saw a decline till about mid-1950 and crossed 50 per cent again by 1960. Most other countries, France, Germany, Italy and Japan had crossed this mark for the first time by 1960. The United States had hit a 50 per cent mark for services in its GDP earlier. There has been a continuous and a relatively fast increase in the share of services since the 1960’s and now it stands at 68 to 75 per cent in all the countries. The highest being 75 percent in the case of the United States, followed by the United Kingdom at 73 per cent, France at 72 per cent in 2002. It is somewhat lower at 68 per cent in Japan. The above description of changes in sectoral shares during the period of modern economic growth in today’s developed countries tends to suggest a common or a ‘normal’ pattern of development. This has been seriously questioned by a group of economists led by Chenery (Chenery and Syrquin, 1975), who have argued that for any meaningful discussion on the subject countries need to be divided into different groups by size–large, small with primary exports and small with industrial exports. Empirical work using categories of very large, large and small categories, however, shows no difference in average performance among the nations in the three groups, except that the share of industry begins to rise at a lower per capita income levels in the large than in the small countries (Perkins and Syrquin, 1989). It is interesting to observe that by the end of the twentieth century most developed countries showed a remarkably similar structure of their economies irrespective of the period when different phases of structural changes occurred. Thus agriculture contributes less than 5 per cent in GDP, industry 25 to 30 per cent and services around 70 per cent in all of them.



Table: 4.1 Output and Employment Shares in Selected Developed Countries (2002)

Countries

Shares in output (%)

Shares in employment (%)

Agriculture

Industry

Service

Agriculture

Industry

Service

U.K.

1

26

73

1

25

74

U.S.

2

23

75

2

24

74

France

2

22

76

3

25

72

Japan

1

31

68

5

31

64

Germany

1

30

69

3

33

64

Italy

3

29

69

5

32

63

Australia

4

26

69

5

21

74

Sources: Kuznets, 1966 and World Bank 1983 & 2004

It is also equally interesting to note in general that the structure of employment is found to be remarkably similar as that of the national product. Figures of shares of different sectors in GDP and employment in 2002, as given in Table: 4.1 1 reveal a striking symmetry between the two variables. In all the seven developed countries selected agriculture contributes less than 5 per cent of GDP as well as of employment. Industry share in GDP is in the range of 22 and 30 per cent and its share in employment varying between 21 and 33 per cent follows similar pattern as of GDP among the countries. Services account between 68 and 75 per cent of GDP and 63 and 74 per cent in employment in all the countries. What is equally, if not more striking is that structural shifts in output have generally been faithfully accompanied by similar shifts in employment. So that when output share of agriculture in the United Kingdom declined from 32 per cent 1801 to 22 per cent in 1841 and further to 6 per cent in 1901, its employment share also declined correspondingly to 35, 23 and 9 per cent. When output share of industry rose from 23 per cent in 1801 to 40 per cent in 1901 and 56 per cent in 1955 and declined to 42 per cent by 1980, the corresponding change in its employment share were from 29 per cent to 54 per cent, 57 per cent and 38 per cent. Product and employment shares of different sectors in other countries have not behaved as ‘perfectly’ as their counterparts in the United Kingdom but their long-term movements have also not shown a degree of asymmetry that could result in significant widening of inter-sectoral productivity and income differentials.

It can be summarised the main interesting features of the historical pattern of changes in the economic structure that accompanied economic development of today’s developed countries over the past two centuries are first, all countries irrespective of the time they embarked upon the ‘modern’ economic growth had a similar sequence of changes in their economic structure starting with a predominance of agriculture to industry and subsequently in favour of services. Second, while a decline in the share of agriculture and increase in the share of services took place continuously over a period of about two centuries but the share of industry changed in a hump-based fashion, initially increasing continuously for a period of about one and half or one century and then experiencing a decline over the last fifty years. Irrespective of the time when industrialisation started, ‘deindustrialisation’ in terms of a decline in the share of industry is observed to have started around the middle of the twentieth century in all countries. Third, the structure of the economies of most developed countries looks like a replica of each other, each of them having a miniscule share of agriculture, industry claiming about one-fourth and services around seventy per cent of the national product. Fourth, changes in the structure of labour force generally accompanied those in product structure, thus the share of each sector in employment moving in line with the output share of that sector. What is most interesting to note is the fact that today the employment structure of most developed countries is strikingly similar to their product structure reflecting a high degree of inter sectoral equality in productivity and income level.

Indian economy revealed similar structural characteristics in 1950 as most developed countries of today showed at the time they embarked upon the road to industrialisation. With about 60 per cent of GDP accounted for by agriculture, industry contributing about 13 and services about 27 per cent the Indian economy in 1950 was structurally comparable to the economy of the Great Britain in late eighteenth century and of Germany at the beginning of the nineteenth century and of the United States and Italy of mid-nineteenth century and of Japan in 1900. Similar comparisons hold in respect of the share of labour force in different sectors. Agriculture accounted for about three-fourths, industry for about 11 and services 16 per cent of total employment in 1950 in India. Economic development in India over a period of half a century seems to have followed the same pattern of structural changes that the developed economies of today underwent over a period ranging between 100 to 150 years. The share of agriculture in GDP declined from around 60 per cent in 1950-51 to 14.64 per cent in 2009-10. Industry increased from 13 to 28.27 per cent and of services from 28 to 57.09 per cent. This pattern of shifts has been continuous throughout the period of over half a century, but the speed of the shift has been faster since 1990-91. The first forty years saw a decline in the share of agriculture from 59 per cent to 35 per cent, the next 20 years from 35 to 15 per cent. Share of services increased from 28 to 40 per cent in the first 40 years and from 40 to 57 per cent in the next 20 years. Share of industry has grown slowly but has stagnated since 1990-91. The most striking feature of the structural change in the Indian economy in recent decades has been the pre-eminence of services sector as the major contributor to growth raising its share rather sharply in the national output. Industry particularly manufacturing which has been observed historically to be the main contributor of growth has at least in the initial period of economic development played only a minor role in India’s economic growth. Questions have been raised whether India is already at a level of development to sustain such a change in the sources and pattern of economic growth. In other words while developed countries entered the phase of predominance of services in their economies after going through a phase of industrialisation, and industry having attained a share of 50 per cent in the economy. India is on the way to become a post-industrial ‘service economy’ without industrialising.

Generally two propositions have been advanced to explain such a swift and a historical transition of an economy directly from an agricultural to a service economy bypassing industrial development. It is argued that technological advancements over the past few decades have led to increasing demand for services even at a relatively low level of per capita income and also the distinction between products and services has become rather blurred. Development of communication technologies and movements of people across countries have produced demonstration effect creating similar pattern of demand in developing countries as in the developed countries leading to larger demand for and consequently production of services (Panchamukhi, Nambiar and Mehta, 1986). As a result, elasticity of demand for services has become greater than unity even in countries with relatively low per capita income levels (Sabolo, 1975) leading to a rise in the contribution of services in national product. Second, the classical model of structural changes with economic development was based on the experience of nations with more or less autarkic regimes with little international trade, a situation in which domestic product structure of each country has to reflect its demand pattern. With increasing openness of economies and trade playing significant role in them changes in demand pattern can be met through trade and countries can have a product pattern very different from the pattern of consumption demand largely based on comparative advantage.

These propositions imply a new path of development different from the one observed to have operated in the countries which went through development process earlier and if true should hold not only in India but also in other countries with similar levels and structures of economic development. A comparison with economies of developing countries, particularly in South, South East and East Asia will be in this regard. Countries chosen for this comparison here are China, Indonesia, Malaysia, Pakistan, India, Philippines, Thailand and Republic of Korea (Table 4.2). Share of the services sector has increased in all these countries since 1960.



In Indonesia, it increased from 25 per cent in 1960 to 38 per cent in 2002, in Malaysia it declined during 1960 to 1980 but raised from 36 per cent in 1980 to 44 per cent in 2002. Pakistan saw an increase from 38 to 54 per cent and the Philippines from 46 to 53 per cent between 1960 and 2002. In Thailand it increased from 41 per cent in 1960 to 48 per cent in 2002. For China estimates are available since 1980 when the share of services sector in GDP stood at 21 per cent and rose to 34 per cent in 2002. In Republic of Korea, which has a much higher level of per capita income, services expanded from 43 per cent of GDP in 1960 to 55 per cent of GDP in 2002. India registered by far the fastest increase in the share of services from 30 per cent in 1960 to 51 per cent in 2002.

Table: 4.2 Changes in Sectoral Shares (%) in GDP in Some Asian Countries (1960-2002)

Country


Agriculture

Industry

Services

1960

2002

1960

2002

1960

2002

China

30 (1980)

15

49

51

21

34

Indonesia

50

18

25

45

25

38

Thailand

40

9

19

43

41

48

Philippines

26

14

28

33

46

53

Malaysia

36

9

18

47

46

44

Republic of Korea

37

4

20

41

43

55

Pakistan

46

23

16

23

38

54

India

55

24

16

25

29

51

Source: Reproduced from T.S. Papola (2005)

Note: For China estimates are available since 1980.

In its share in GDP agriculture, expectedly, registered a decline in all these countries during 1960-2002, the largest decline being in the case of Thailand from 40 to 9 per cent and of course Korea from 37 per cent to 4 per cent. The share of industry experienced significant and continuous increase in most of these countries. Thus in Indonesia it increased from 25 per cent in 1960 to 42 per cent in 1980 and 45 per cent in 2002. Corresponding figures for Thailand are 19, 29 and 43 and for Malaysia 18, 41 and 47 per cent.

In India, the increase in the share of industry was much smaller. In 2002 share of industry in GDP in India was 25 per cent, while it was much higher at 51 per cent in China, 45 per cent in Indonesia, 43 per cent in Thailand and 47 per cent in Malaysia. Pakistan is the only country in the group with a lower share of industry than India and the only one along with the Philippines to have experienced a decline in it during 1980-2002. Thus the proposition that the growth in the technologically advanced and globalised world of late twentieth century had to be primarily service-led in which industry plays a second fiddle does not seem to hold universally. In most developing countries similarly placed with India and growing at a reasonably high rate industry has played an important role as services in their growth. Even with a significant rise in the share of services countries like China, Indonesia and Malaysia have a higher share of industry than of services and all of them along with Thailand and Korea have over 40 per cent share of industry in their GDP as compared to about 25 per cent in India. Another significant difference between the growth pattern of these countries and India is seen in the shift of labour force with changing sectoral structure of the economy, particularly in the employment share of services. What is common in most of these countries and India is a relatively slower shift of labour force from agriculture to non-agricultural sectors.



Thus while the GDP share of agriculture in China declined from 30 per cent in 1980 to 15 per cent in 2002 its employment share declined from 69 to 47. Corresponding shifts between 1960 and 2002 were: From 50 to 18 per cent in GDP and from 75 to 44 per cent in employment in Indonesia, and from 40 to 9 per cent in GDP and 84 to 46 per cent in employments in Thailand. Only in Malaysia the decline in labour force in agriculture has been commensurate with that in GDP which is from 63 to 18 per cent in the labour force compared to 36 to 9 per cent in GDP. In India, shifts during 1960-2002 have been from 55 per cent to 24 per cent in GDP and from 74 to 60 per cent in labour force. The shift in labour force in relation to decline in GDP share has been much slower in India than in other countries. Industry always had a much lower share in labour force than in GDP in all the countries and the two shares have moved similarly over the period. In Indonesia when GDP share of industry increased from 25 per cent in 1960 to 45 per cent in 2002 its employment share also increased from 8 to 17, in Thailand corresponding movements were from 19 to 43 and 4 to 21 per cent and in Malaysia from 18 to 47 and 12 to 32 per cent. In China while GDP share of industry increased from 49 in 1980 to 51 per cent in 2002 but that of employment increased from 18 to 21 per cent. In India industry share in GDP increased from 16 to 25 per cent and employment share from 11 to 18 per cent during 1960-2002. Thus the share of labour force in industry has moved similar to that of GDP in all countries including India but a similar proportion of labour force produces much larger share of output in other countries than in India.

Table: 4.3 GDP and Employment Shares in Services (2002)

Country

Share (%)

In GDP

In Employment

China

34

31

Indonesia

38

39

Thailand

48

33

Philippines

53

47

Malaysia

44

50

Republic Of Korea

55

62

Pakistan

54

34

India

51

22

Source: Same as Table 4.2.

If we look at the difference in the growth of employment vis a vis of GDP in services. In all other countries the share of employment in services has increased more or less in line with that of GDP but in India employment share has shown much smaller increase than the GDP share. For example in China the share of services in GDP grew from 21 in 1980 to 34 per cent in 2002, their share in employment also increased from 13 to 31 per cent. In Thailand, Indonesia, Malaysia, the Philippines and Korea, employment share increased much faster than the GDP share. In India while the share of services in GDP increased from 29 per cent in 1960 to 51 per cent in 2002, their share in employment increased from 15 per cent to 22 percent only. In other words growth of services in India has been much less employment-intensive than in other countries. As a result while in most other countries the share of services in 2002 is similar both in GDP and employment (China 34 and 31, Indonesia 38 and 39, Malaysia 44 and 50, and Korea 55 and 62 per cent). In India the two percentages are as apart from each other as 51 and 22 (Table 4.3).

There has been a structural change in its sectoral composition of Indian economy over the years. This structural change and the uneven pattern of sectoral growth and the recent spurt of service led growth is likely to cause substantial change in the production and demand linkages among various sectors which in turn could have significant implication for the overall growth of the economy. At the same time the changes in the policy environment as a result of the economic reforms process WTO agreement and growing integration with the world economy in the post reform (Post 1991) period is also likely to have significant impact on the linkages between different sectors of the economy. It is widely recognized that the burden of structural adjustment and fiscal stabilization has been registered in its most virulent form in the agriculture sector. The post-reform period has witnessed significant decline in capital formation in the agriculture sector especially in the public sector. The trade liberalization has led to shifts in cropping patterns towards cash crops such as cotton, oil seed, sugar cane etc. reducing not only food availability but also increasing the volatility of agricultural incomes (Jha, 2010). As a part of the structural change within the industry sector the importance of agro-based industries has come down in the post-reform period. The jobless growth of the organized manufacturing sector and the decline in employment elasticity of the service sector in the post-reform period has put intense pressure in the farms sector which ends up with vast numbers of workers moving out of the farm sector into self-employment for mere subsistence.

The relationship between agriculture and industry has been seen from different channels. First agriculture supplies food grains to industry to facilitate absorption of labour in the industry sector. Secondly agriculture supplies the inputs like raw cotton, jute, tea, coffee etc. needed by the agro-based industries. Thirdly industry supplies industrial inputs such as fertilizer, pesticides machinery etc. to the agriculture sector. Fourthly agriculture influences the output of industrial consumer goods through demand. Fifthly agriculture generates surplus of savings which can be mobilized for investment in industry and other sectors of the economy. Sixthly fluctuations in agricultural production may affect private corporate investment decisions through the impact of the terms of trade on profitability. Because of the mutual inter-dependence and symbiotic relationship between agriculture and industry the contribution of agriculture to industry is well known, especially in developing countries. Whereas some of these channels emphasize on the supply side or production side others stress the linkages through the demand side. The production linkages basically arise from the inter-dependence of the sectors for meeting the needs of their productive inputs whereas the demand linkage arises from the interdependence of the sectors for meeting final consumption. Further based on the direction of interdependence the linkages can also be categorized into two groups. One is the backward linkage which identifies how a sector depends on others for their input supplies and the other is the forward linkage which identifies how the sectors distribute their outputs to the remaining economy. The linkage between agriculture and service sectors is one-way unlike the two-way interdependence between agriculture and industry and it is mainly backward linkage. On the other hand industry has two-way linkages with the service sector and the level of linkage is much higher compared to agriculture sector. Further service sector has stronger backward linkages compared to forward linkages with both agriculture and industry (Singh N-2007 and Gordon and Gupta 2004). Service sector also provides substantial infrastructure support and inputs for the two sectors engaged in production namely primary and secondary sectors.

It would be useful to review the changes in the sectoral composition of the Gross Domestic Product (GDP) in terms of share of agriculture, industry and services sector in the Indian economy. Table 4.4 presents temporal behaviour of the share of economic activities under primary, secondary and tertiary sectors in the national income for the period 1951-52 to 2009-10. Over the year, there is a major shift away from the agriculture towards services sector and industrial sector.



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