SECTORS OF AN ECONOMY

Every economy tries to maximise the returns of economic activities in which it is involved. Whatever be the organising principles of an economy, the economic activities are broadly classified into three broad categories, which are known as the three sectors of the economy

1. Primary Sector

This sector includes all those economic activities where there is the direct use of natural resources as agriculture, forestry, fishing, fuels, metals, minerals, etc. In some of the economies, mining activities are considered as part of the secondary sector, though we see direct use of natural resources here. Broadly, such economies term their agricultural sector as the primary sector. This is the case in India.

2. Secondary Sector

This sector is rightly called the manufacturing sector, which uses the produce of the primary sector as its raw materials. Since manufacturing is done by the industries, this sector is also called the industrial sector—examples are production of bread and biscuits, cakes, automobiles, textiles, etc.

3. Tertiary Sector

This sector includes all economic activities where different ‘services’ are produced such as education, banking, insurance, transportation, tourism, etc. This sector is also known as the services sector.

WASHINGTON CONSENSUS

The term ‘Washington Consensus’ was coined by the US economist John Williamson (in 1989) under which he had suggested a set of policy reforms which most of the official in Washington (i.e., International Monetary Fund and World Bank) thought would be good for the crisis-driven Latin American countries of the time. The policy reforms included ten propositions:

(i) Fiscal discipline

(ii) A redirection of public expenditure priorities toward fields offering both

high economic returns and the potential to improve income distribution,

such as primary health care, primary education, and infrastructure.

(iii) Tax reform (to lower marginal rates and broaden the tax base)

(iv) Interest rate liberalisation

(v) A competitive exchange rate

(vi) Trade liberalisation

(vii) Liberalisation of FDI inflows

(viii) Privatisation

(ix) Deregulation (in the sense of abolishing barriers to entry and exit)

(x) Secure property rights

However, in coming times, the term became synonymous to neo-liberalism (in Latin America), market fundamentalism (as George Soros told in 1998) and even globalisation across the world. It has often been used to describe an extreme and dogmatic commitment to the belief that markets can handle everything.

But the reality has been different—the set of polices was already being recommended by the IMF (International Monetary Fund) and the WB (World Bank) together with the US Treasury, especially during the period of the eighties and early nineties. The prescription was originally intended to address the real problems occurring in Latin America at the time, and their use later to handle a wide array of other situations has been criticised even by original proponents of the policies. The name of the Washington Consensus has often been mentioned as being somewhat unfortunate, especially by its creator. John Williamson , says that audiences the world over seem to believe that this signifies a set of neo-liberal policies that have been imposed on hapless countries by the Washington-based international financial institutions and have led them to crisis and misery—there are people who cannot utter the term without foaming at the mouth. He further adds that many people feel that it gives the impression that the points outlined represent a set of rules imposed on developing nations by the United States. Instead, Williamson always felt that the prescription represented a consensus precisely because they were so universal. Many proponents of the plan do not feel that it represents the hard-line neo-liberal agenda that anti-free-trade activists say it does. They instead present it as a relatively conservative assessment of what policies can help bring a country to economic stability.

But the policy prescription led to processes which are known as Liberalisation, Privatisation, Globalisation, thus cutting down the role of the State in the economy—more so in the nations which got developmental funding from the WB or went to the IMF in times of the Balance of Payment crises (as in the case of India which commenced its reform process in 1991 under the ‘conditions’ of the IMF). It was as if the Adam Smith’s prescription of ‘free market’ (liberalism) has taken its rebirth (in neo-liberalism).

Many scholars believe today that the recent financial crises of the US and the European nations are somehow born out of the ideas rooted in the Consensus. In the aftermath of the Great Recession (after the ‘US sub-prime’ crisis) in the Western economies, it is believed that dependence on market to correct the growth and development may not sustain any longer—and the world might agree in favour of a development state, as in the case of the East Asian nations which never went for the Consensus for their robust growth. The Keynesian idea of ‘interventionist state’ seems the ultimate alternative in the present times, as is suggested by the US Nobel economist Paul Krugman and being followed by the Japanese Prime Minister, Shinzo Abe (the Three Arrows of Abenomics).

Mixed Economy

The belief in the self-correcting quality of the market and the ‘invisible hand’ of Adam Smith got a major setback in early 20th century during the Great Depression (1929). The impact of the depression spread from the USA to other economies of Western Europe escalating large scale unemployment, downfall in demand and economic activities and lockouts in industrial enterprises. The prevailing Smithonian macro ideas failed to check the crisis.

A new approach was needed which came in the famous work, The General Theory of Employment, Interest and Money (1936) by the English economist at Cambridge University, John Maynard Keynes (1883–1946).

Keynes questioned the very principles of ‘laissez-faire’ and the nature of the ‘invisible hand’. He even opined that the invisible hand brings equilibirium to the economy but by ‘strangulating the poor’. He suggested that prices and wages are not flexible enough to provide employment to all. It means there will be some people unemployed when the economy will be at its full potential. Ultimately, a fall in demand will be imminent resulting in recession and if unchecked, in depression which happened in 1929. Questioning the limitations of the market mechanism, Keynes suggested strong government intervention in the economy. To get the economy out of the depression, he suggested an increase in government expenditures, discretionary fiscal policy (fiscal deficit, lower interest rates, cheap money supply, etc.) to boost the demand of goods and services as this was the reason behind the depression. As Keynesian policies were followed, the concerned economies were successfully pulled out of the Great Depression.

While Keynes was inquiring into the causes and cures of the Great Depression he questioned the capitalist economic system being practised throughout Euro-America. He suggested the capitalistic order to assimilate the goals of the socialistic economy (economic ideals of the socialists, i.e., the ex-USSR). In the capitalist economies of the time, all the basic goods and services were part of the market mechanism, i.e., being produced and supplied by the private sector. It meant that almost everything the people required was supplied by the private enterprises via the market which was ultimately an undimensional movement of money and wealth (from the mass of people to the few who controlled the production and supply chain) and the masses were going through the process of pauperisation every day, thereby weakening their purchasing power. In the end, it affected overall demand and culminated in the Great Depression.

State Economy

Rooted in the ideas of historical change proposed by the German philosopher Karl Marx (1818–1883), more specifically, this kind of economic system first came up in the erstwhile USSR after the Bolshevik Revolution (1917) and got its ideal shape in the People’s Republic of China (1949). This form of economic system also spread to other countries in Eastern Europe. Here we see two versions of the state economy—in erstwhile USSR known as the socialist economy and in pre-1985 China as the communist economy. While a socialistic economy emphasised collective ownership of the means of production (property and assets), it also ascribed a large role to the state in running the economy, while communist economy, on the other hand, advocated state ownership of all properties including labour with absolute power to state in running the economy. Though for Marx, Socialism was a transitional stage to communism, it never did happen in reality.

Basically, this form of economy came in reaction to the prevalent popular economic system of capitalism and proposed just the opposite. The decisions related to production, supply and prices were all suggested to be taken solely by the state only. Such economies were also known as Centralised Economy, Centrally Planned Economy or Non-market Economy.

The socialist and communist economies used to criticise capitalistic economics of being based on exploitation. In response, the capitalist economies called them the practioners of ‘state capitalism’, where the state was the sole exploitator. The communist and anti-communist propagandas resulted in serious intellectual discussions almost upto the mid-1980s.

Capitalistic Economy

The capitalistic form of economy has its origin in the famous work of Adam Smith—Wealth of Nations (1776). Adam Smith (1723–1790), the Scottish philosopher-economist professor at the University of Glasgow, whose writings formed the basis of classical economics, had stressed certain fine ideas which were to take fancy among some of the western countries and finally capitalism took birth. He raised his voice against the heavy-handed government regulation of commerce and industry of the time which did not allow the economy to tap its full economic worth and reach the level of well- being. Stressing ‘division of labour’ and an environment of ‘laissez faire’ (non-interference by the government), he proposed that the ‘invisible hand’ of ‘market forces’ (price mechanism) will bring a state of equilibrium in the economy and a general well-being for the countrymen. For such an economy to function for public well-being, he acknowledged the need of competition in the market.

Once the USA attained independence, the ideas of Adam Smith were made part of its public policy—just one year after the Wealth of Nations was published. From here, the idea spread to other parts of Euro-America—by 1800 the economic system called ‘capitalism’ was established which was later known by different names—Private Enterprise System, Free Enterprise System or Market Economy.

The decisions of what to produce, how much to produce and at what price to sell are taken by the market, by the private enterprises in this system, with the state having no economic role.

The Learning Poverty Count (LPC) and Learning Poverty Gap (LPG) in Rural Primary Education

Great strides have been made in India’s primary school enrollment, which is now nearly universal for both boys and girls at elementary level. Yet, both cross-country evidence and evidence from India suggests that educational outcomes are incommensurate with years of schooling: learning lags attending, as it were (Pritchett, 2013; Das and Zajonc, 2010; Singh, 2014).Here we present estimates of learning outcomes drawing parallels from the poverty measurement literature. Specifically, we estimate a learning poverty headcount (LPC) as well as a learning poverty gap (LPG). The LPC simply measures the number of children who do not meet the basic learning benchmark, whereas the LPG additionally takes into account how far each student is from the benchmark. In other words, the LPG measures the gap between the the basic learning benchmark and the average scores of those students who did not meet the benchmark.aSuch estimates are rendered possible by the Annual Survey of Education Reports (ASER) that have over time tested a sample of children between the ages of 5 and 16, residing in rural India. Students are tested in terms of a set of tasks in reading and arithmetic, which have remained constant over time. In a sense, these tests amount to an absolutely minimal or basic level of educational attainment–akin to the poverty or subsistence line. Specifically, we chose this line as being able to read a simple story (in the local language), and being able to do subtraction – roughly meeting the passing standard for grade 3. For the present analysis, we focus on children between in grades 3 through 8.Figures 1 and 2 illustrate how India has fared on these two metrics. The findings are stark. On math and reading, India’s absolute LPC is between 40 and 50 percent: in other words, roughly 40-50 percent of children in rural India in grades 3 to 8 cannot meet the fairly basic learning standard (Figure 1). Discouragingly, this poverty count score rises over time, substantially in the case of math. There is some consolation that since 2014 has the trend started to show some improvement; and also consolation that at least there are no significant differences in the LPC for boys and girls.

How do students perform as they progress through grades? Figure 3 plots the proportion of students in each grade who meet the grade 2 learning benchmark (the vertical distance from the horizontal black line). Unsurprisingly, in higher grades a larger proportion of students meet this basic benchmark. However, as students move to higher grades, the learning benchmark should also increase. While the ASER data does not allow us to directly compute it, the dashed green line is a hypothetical representation of the grade specific benchmark. Using this grade-appropriate poverty line, it is clear that learning levels of children in rural India are far below where they should be. It is sobering enough that learning poverty counts are around 40 percent, roughly where India’s consumption poverty numbers were in the 1970s. But if technology going forward is going to be even more human capital intensive as current trends suggest (dotted yellow line), the wedge between the opportunities offered to the future labour force and the capabilities to take advantage of them will widen even further. That is the true magnitude of India’s human capital How do students perform as they progress through grades? Figure 3 plots the proportion of students in each grade who meet the grade 2 learning benchmark (the vertical distance from the horizontal black line). Unsurprisingly, in higher grades a larger proportion of students meet this basic benchmark. However, as students move to higher grades, the learning benchmark should also increase. While the ASER data does not allow us to directly compute it, the dashed green line is a hypothetical representation of the grade specific benchmark. Using this grade-appropriate poverty line, it is clear that learning levels of children in rural India are far below where they should be. It is sobering enough that learning poverty counts are around 40 percent, roughly where India’s consumption poverty numbers were in the 1970s. But if technology going forward is going to be even more human capital intensive as current trends suggest (dotted yellow line), the wedge between the opportunities offered to the future labour force and the capabilities to take advantage of them will widen even further. That is the true magnitude of India’s human capital challenge.      

Economic survey introduction

Using  district-level  data  on temperature, rainfall and  crop production,  this chapter documents  a long-term trend of  rising temperatures, declining average precipitation,  and  increase  in  extreme  precipitation  events.  A  key  finding—and one  with  significant  implications  as  climate  change  looms—is  that  the  impact  of  temperature and  rainfall is felt  only  in the  extreme;  that is, when  temperatures are  much  higher,  rainfall  significantly  lower,  and  the  number  of   “dry  days” greater,  than  normal.  A  second  key  finding  is  that  these  impacts  are  significantly more adverse  in  unirrigated areas (and  hence  rainfed crops) compared to irrigated areas  (and hence  cereals).  Applying  these  estimates  to projected long-term weather patterns  implies  that  climate  change  could reduce  annual  agricultural incomes  in the  range of  15  percent  to 18  percent  on average,  and up to 20  percent  to 25 percent for unirrigated areas. Minimizing susceptibility  to climate change  requires drastically  extending  irrigation  via  efficient  drip  and  sprinkler  technologies (realizing  “more  crop  for  every  drop”),  and  replacing  untargeted  subsidies  in power and fertilizer by  direct income support. More  broadly, the  cereal-centricity of  policy needs to be reviewed.

INTRODUCTION

6.1 The bounty of  Indian  agriculture romanticized in that  famous Manoj  Kumar song—which  also  underlies the Prime Minister’s goal  of  doubling farmers’ incomes—increasingly runs up against  the  contemporary realities  of Indian  agriculture, and  the  harsher  prospects  of its vulnerability to long-term climate change. 6.2 The  last  few  seasons  have  witnessed  a problem  of  plenty:  farm revenues  declining  for a  number of  crops despite  increasing production and market  prices  falling below  the  Minimum Support  Price  (MSP).  But  in the  medium  to long term, the  ghost  of  Malthus looms over Indian agriculture.  Productivity  will  have  to  be  increased, and  price  and income volatility  reduced,  against the backdrop  of  increasing resource constraints. Shortages  of  water and land, deterioration in soil quality, and  of  course climate change-induced temperature  increases  and  rainfall  variability, are all going to impact agriculture. It is therefore opportune  to analyze the  effects  of  climate  on Indian agriculture. 

Why Agriculture Matters: An Irony 

6.3 First,  and  foremost, agriculture  matters in India for deep reasons, not least  because  the farmer holds a special  place  in Indian hearts  and minds.  The  first  salvo  of  satyagraha  was  fired by  Mahatma Gandhi on behalf  of  farmers,  the indigo farmers exploited  by  colonial rule. Not unlike  in early, Jeffersonian America (Hofstadter, 1955),  history and literature  have  contributed  to the  farmer acquiring mythic  status  in Indian  lore: innocent,  unsullied,  hard-working, in harmony with  nature;  and yet  poor, vulnerable, and the victim,  first  of  the  imperial  masters  and  then  of indigenous  landlords  and middlemen.  Bollywood (and Kollywood  and  Tollywood) has  also  played  a key  role in creating  and reinforcing the  mythology of  the Indian  farmer (for example, in  movies  such as  Mother  India, Do Beegha  Zameen,  Upkaar,  Lagaan, and more recently  Peepli Live). 6.4 Agriculture  also matters  for  economic reasons because  it  still  accounts  for a substantial part  of  GDP  (16  percent)  and employment  (49  percent)1. Poor  agricultural performance can lead  to  inflation,  farmer  distress  and  unrest,  and larger political  and social  disaffection—all  of which can hold back the economy. 6.5 The Nobel Prize winner, Sir Arthur Lewis  (among  others), argued that  economic development  is  always  and everywhere  about getting  people out of  agriculture and of  agriculture becoming over time  a less  important  part of  the economy  (not  in absolute  terms but  as a share of GDP and employment). The reason why agriculture cannot be the  dominant, permanent source  of livelihood  is its productivity  level, and  hence  the living standards it  sustains, can never approach— and have  historically  never approached—those in manufacturing and services.  That,  of  course, means that industrialization  and  urbanization  must provide  those  higher productivity  alternatives to agriculture. But  this  must  happen  along with, and in the  context  of,  rapid  productivity  growth in agriculture, to  produce  greater  food supplies for the  people, provide  rising farm incomes, and permit the accumulation of  human capital.  6.6 At the same time, Dr. Ambedkar  warned about the dangers of  romanticizing rural  India. He  famously  derided  the  village  as “a sink  of localism, a  den of  ignorance, narrow mindedness and communalism,” thereby  expressing a deeper truth—an Indian  social complement  to the Lewisian  economic  insight—that  in the  long run people  need  to  move  and be  moved  out  of agriculture for non-economic reasons. 6.7 So  the irony  is that  the concern  about farmers and  agriculture  today is to ensure that tomorrow  there  are fewer farmers and  farms but more  productive ones.  In  other words, all  good and successful economic  and social development is  about facilitating  this  transition in the  context  of a prosperous  agriculture  and of  rising productivity in agriculture  because  that will also facilitate  good urbanization  and  rising  productivity  in  other sectors of  the economy.