A bumper crop may energize Indian industry

August 7, 2013

(Any opinions expressed here are those of the author and not of Thomson Reuters)

Industrial growth in India in 2012 was less than a percent and data from April and May this year doesn’t show a lot of promise. The reluctance of industry to grow has been the reason for GDP growth dropping to a disappointing 5 percent, raising doubts about whether the India story has come to an end. That may be an extreme view considering that even the best performers, such as China, are having problems.

But there is a glimmer of hope. Monsoon rains have been above average this year and a bumper crop is expected. Agriculture contributes to around 20 percent of India’s GDP and even an 8 percent increase in agricultural production will at best improve GDP growth by a percent. But agriculture does have an impact on industry and both together can make a perceptible difference.

Before the nineties, when agriculture was a relatively larger sector of the economy, a good monsoon counted for a lot. But after reforms that gave new impetus to industry, agriculture is losing its relevance as a stimulant to industry. Still, a bumper crop does promote industry and helps it grow faster.

Agriculture provides industry with input such as grains for processed foods, sugarcane for the sugar industry, oilseeds for edible oil industry, cotton for textile industry and so on. About 30 percent of the manufacturing sector is agriculture-based. So a bumper crop eases the supply of raw material for industry.

An increase in agricultural production also puts more money in the pockets of farmers who spend it on goods such as tractors and agricultural implements, apart from consumer goods.

If we take 4 percent growth as the benchmark, there were bumper harvests in seven of the last 14 years. And in these seven years, industrial growth was more than in other years. Which means a bumper crop does count as a stimulus.

When crops were bad in seven of the last 14 years, average agricultural growth was 0.6 percent. During that time, industries grew by an average of 6.8 percent. In years with a bumper crop, average agricultural growth was 5.9 percent while industries grew 9.2 percent on average. Broadly, each percent increase in agricultural growth above the benchmark engineers a 0.6 percent rise in industrial growth.

In the current year, agricultural growth is expected to be around 8 percent, and should therefore prompt industry to increase growth by 2.5 percent. That is the additional growth one can expect from the impact of a bumper harvest this year. There will be other factors too, such as an increase in public sector investment, which will contribute to industrial growth. And this likely turnaround in industrial activity will also boost GDP growth.

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