Agricultural Economics:- Meaning, Scope, and Nature, Agricultural Economics an Applied Science, Role of Agriculture in the Economic Development

Meaning of AgriculturalEconomics:

Agricultural Economics, as its title implies is that branch of economics that deals with all aspects of problems related to agriculture. According to Snodgrass and Wallace, “Agricultural economics is an applied phase of the social science of economics in which attention is given to all aspects of problems related to agriculture.”

Prof. Gray treats agricultural economics as a branch of the general subject of economics. It is only one of the many branches of applied economics. Such as Industrial Economics, Labour Economics, Monetary Economics, Transport Economics, Public Economics, International Economics, Household Economics, etc.

Scope of Agricultural Economics:

The foregoing definitions indicate the scope of agricultural economics. A common theme of the scarcity of resources and choice of uses runs almost through all of these definitions. That way, agricultural economics is not different from general economics.

All the tools of analysis used in general economics are employed in agricultural economics as well. We have the same branches of agricultural economics i.e. economics of production, consumption, distribution, marketing, financing and planning, and policymaking as in the case of general economics. A study at the micro and macro level for the agricultural sector is also generally made. Static and dynamic analyses are also relevant for the agricultural sector of the economy.

To be more specific, these definitions point out that agricultural economics examines how a farmer chooses various enterprises e.g., production of crops or raising of cattle, and how he chooses various activities in the same enterprise. E.g., which crop to grow and which crop to drop; how the costs are to be minimized; what combination of inputs for an activity is to be selected; but the amount of each crop is to be produced but the type of commercial relation the farmer has to have with people from whom they purchase their input or to whom they sail their product.

Agricultural economics does not study only the behavior of a farmer at the farm level. That is, in a way, the microanalysis. Agricultural problems have a macro aspect as well. The instability of agriculture and agricultural unemployment are the problems that have to be dealt with, mainly at the macro level.

And then, there are the general problems of agricultural growth and the problems like those concerning tenurial systems and tenurial arrangements, research, and extension services which are again predominantly macro in character. Such problems their origin, their impact, and their solutions are all the subject matter of agricultural economics.

Again, ‘agricultural economics’ as at present does not confine itself to the principles concerning ‘economizing of resource in agriculture’ only whether at the micro or macro level or from the ‘static’ a ‘dynamic’ point of view.

The scope of agricultural economics is larger than ‘mere economizing of resources. Agriculture is, as we know an important sector, of the overall economy. The mutual dependence of the various sectors of the economy on each other is well established. The growth of one sector is necessary for the growth of the other sector.

As such, in agricultural economics, we also study how the development of agriculture helps the development of the other sectors of the economy; how can labor and capital flow into the non-agricultural sectors; how agricultural development initiates and sustains the development of other sectors of the economy.

What this implies is that agricultural economics not only develops concerning the use of scarce resources in agriculture proper but also examines the principles (a) regarding the outflow of scare resources to other sectors of the economy and (b) about the flow of these resources from other sectors into the agricultural sector itself.

Nature of Agricultural Economics:

Agricultural economics makes use of the principles of general economics. The first point to be noted concerning the nature of agricultural economics is that, in general, it borrows most of its principle from its parent body of knowledge i.e., the general economics.

Even the main branches of agricultural economics are similar to those of general economics. But then a question arises. If the principles of general economics are not different from the principle of agricultural economics, why is there a need for a separate study of agricultural economics?

The answer lies in the fact that agricultural economics does not merely imply a direct application of principles of economics to the field of agriculture. The principles of economics are too general in nature and the general theory of economics has been considered as an abstraction from reality.

Before this theory is applied to agriculture which includes, besides crop production, forestry, and animal husbandry for the purpose of economic analysis, its principles have to be modified so that their postulates totally tally with the main features of the situation of obtaining in the agricultural sector.

A few examples will make it clear. We study in economic theory, price formation under various market structures e.g., monopoly, perfect competition, and oligopoly. So far as agriculture is concerned, it is presumed that as the number of farms is very large and at the same time, their size is relatively small and the crops produced are undifferentiated (homogeneous), perfect competition is likely to prevail in the agricultural produce market.

In other words, we shall almost be completely ignoring the study of price formation of agricultural produce under conditions of oligopoly or monopolistic competition or monopoly. Then, there is the system of tenancy or crop sharing in agriculture – a problem particular to agriculture only. The study of this problem will necessitate modification of the principle of resource allocation as propounded in general economics.

The modification of the economic principles, required to be made before being applied to agriculture is so large and varied that there is a complete justification for studying agricultural economics as a separate body of knowledge.

Agricultural Economics and Applied Science?

A superficial glance at the preceding paragraph can give such an impression. And in-fact, some agricultural economists have called agricultural economics applied science.

According to Forster and Leoger, “Agricultural Economics is an applied science and as such is concerned with the identification, description, and classification of economic problems of agriculture to the end that these problems may be solved.” Also according to Gray, ‘Agricultural Economics may be defined as the science in which the principles and methods of economics are applied to the special conditions of the agricultural industry.’

However, Black does not agree with this view. Applied science, as we know involves the use of the principles of pure science in a particular situation. For example, engineering is an applied science. It suggests how to apply the principles of physics & other sciences to certain situations.

The principles of physics themselves are not modified. These stay intact. In agricultural economics, general principles of economics themselves are modified. According to Black principles of agricultural economics can be compared to mechanics and not physics.

If mechanics deserves to be called a specialized form of pure science, we can use the same term for agricultural economics i.e., a specialized form of pure science, rather than applied science. Agricultural economics is both a science as well art. We have earlier pointed out that agricultural economics should not be called an applied science but a specialized form of pure science.

As such a science, it explains the cause and effect relationships between various economic variables operating in agriculture. And Relationships, as found to exist, can be used for solving various problems affecting agriculture. As such Agricultural economics is also an art. Further, as is the case with ‘General Economics’, Agricultural Economics is a normative science also.

Role of agriculture in the Economic Development

1. Contribution to National Income: The lessons drawn from the economic history of many advanced countries tell us that agricultural prosperity contributed considerably to fostering economic advancement. It is correctly observed that “The leading industrialized countries of today were once predominantly agricultural while the developing economies still have the dominance of agriculture and it largely contributes to the national income. In India, still, 28% of national income comes from this sector.

2. Source of Food Supply:

Agriculture is the basic source of the food supply of all the countries of the world—whether underdeveloped, developing, or even developed. Due to the heavy pressure of population in underdeveloped and developing countries and its rapid increase, the demand for food is increasing at a fast rate. If agriculture fails to meet the rising demand for food products, it is found to affect adversely the growth rate of the economy. Raising the supply of food by the agricultural sector has, therefore, great importance for the economic growth of a country.

An increase in demand for food in an economy is determined by the following equation:

D = P + 2g

Here,

D stands for Annual Rate of Growth in demand for food.

P stands for Population Growth Rate.

g stands for Rate of Increase in per Capita Income.

2 stand for Income Elasticity of Demand for Agricultural Products.

3. Pre-Requisite for Raw Material:

Agricultural advancement is necessary for improving the supply of raw materials for the agro-based industries, especially in developing countries. The shortage of agricultural goods has its impact upon industrial production and a consequent increase in the general price level. It will impede the growth of the country’s economy. The flour mills, rice shellers, oil & dal mills, bread, meat, milk products sugar factories, wineries, jute mills, textile mills, and numerous other industries are based on agricultural products.

4. Provision of Surplus:

The progress in the agricultural sector provides a surplus for increasing the exports of agricultural products. In the earlier stages of development, an increase in the export earning is more desirable because of the greater strains on the foreign exchange situation needed for the financing of imports of basic and essential capital goods.

Johnson and Mellor believe, “Because of the urgent need for enlarged foreign exchange earnings and the lack of alternative opportunities, substantial expansion of agricultural export production is frequently a rational policy even though the world supply-demand situation for a commodity is unfavorable.”

5. Shift of Manpower:

Initially, agriculture absorbs a large quantity of the labor force. In India still, about 62% of labor is absorbed in this sector. Agricultural progress permits the shift of manpower from the agricultural to the non-agricultural sector. In the initial stages, the diversion of labor from the agricultural to the non-agricultural sector is more important from the point of view of economic development as it eases the burden of the surplus labor force over the limited land. Thus, the release of surplus manpower from the agricultural sector is necessary for the progress of the agricultural sector and for expanding the non-agricultural sector.

6. Creation of Infrastructure:

The development of agriculture requires roads, market yards, storage, transportation railways, postal services, and many others for an infrastructure creating demand for industrial products and the development of the commercial sector.

7. Relief from Shortage of Capital:

The development of the agricultural sector has minimized the burden of several developed countries that were facing a shortage of foreign capital. If foreign capital is available with the ‘strings’ attached to it, it will create another significant problem. The agriculture sector requires less capital for its development thus it minimizes the growing problem of foreign capital.

8. Helpful to Reduce Inequality:

In a country that is predominantly agricultural and overpopulated, there is greater inequality of income between the rural and urban areas of the country. To reduce this inequality of income, it is necessary to accord higher priority to agriculture. The prosperity of agriculture would raise the income of the majority of the rural population and thus the disparity in income may be reduced to a certain extent.

9. Based on Democratic Notions:

If the agricultural sector does not grow at a faster rate, it may result in growing discontentment amongst the masses which is never healthy for the smooth running of democratic governments. For economic development, it is necessary to minimize political as well as social tensions. In case the majority of the people have to be kindled with the hopes of prosperity, this can be attained with the help of agricultural progress. Thus the development of the agriculture sector is also relevant on political and social grounds.

10. Create Effective Demand:

The development of the agricultural sector would tend to increase the purchasing power of agriculturists which will help the growth of the non-agricultural sector of the country. It will provide a market for increased production. In underdeveloped countries, it is well known that the majority of people depend upon agriculture and it is they who must be able to afford to consume the goods produced.

Therefore, it will help stimulate the growth of the non-agricultural sector. Similarly, improvement in the productivity of cash crops may pave the way for the promotion of the exchange economy which may help the growth of the non-agricultural sector. Purchase of industrial products such as pesticides, farm machinery, etc. also provides a boost to industrial dead out.

11. Helpful in Phasing out Economic Depression:

During the depression, industrial production can be stopped or reduced but agricultural production continues as it produces basic necessities of life. Thus it continues to create effective demand even during adverse conditions of the economy.

12. Source of Foreign Exchange for the Country:

Most of the developing countries of the world are exporters of primary products. These products contribute 60 to 70 percent of their total export earnings. Thus, the capacity to import capital goods and machinery for industrial development depends crucially on the export earning of the agriculture sector. If exports of agricultural goods fail to increase at a sufficiently high rate, these countries are forced to incur a heavy deficit in the balance of payments resulting in a serious foreign exchange problem.

However, primary goods face declining prices in the international market and the prospects of increasing export earnings through them are limited. Due to this, large developing countries like India (having potentialities of industrial development) are trying to diversify their production structure and promote the exports of manufactured goods even though this requires the adoption of protective measures in the initial period of planning.

13. Contribution to Capital Formation:

Underdeveloped and developing countries need huge amounts of capital for their economic development. In the initial stages of economic development, it is agriculture that constitutes a significant source of capital formation.

The agriculture sector provides funds for capital formation in many ways as:

(i) agricultural taxation,

(ii) export of agricultural products,

(iii) collection of agricultural products at low prices by the government and selling them at higher prices. This method is adopted by Russia and China,

(iv) labor in disguised unemployment, largely confined to agriculture, is viewed as a source of the investible surplus,

(v) transfer of labor and capital from farm to non-farm activities etc.

14. Employment Opportunities for Rural People:

Agriculture provides employment opportunities for rural people on a large scale in underdeveloped and developing countries. It is an important source of livelihood. Generally, landless workers and marginal farmers are engaged in non-agricultural jobs like handicrafts, furniture, textiles, leather, metalwork, processing industries, and other service sectors. These rural units fulfill merely local demands. In India, about 70.6% of the total labor force depends upon agriculture.

15. Improving Rural Welfare:

It is time that the rural economy depends on agriculture and allied occupations in an underdeveloped country. The rising agricultural surplus caused by increasing agricultural production and productivity tends to improve social welfare, particularly in rural areas. The living standard of rural masses rises and they start consuming a nutritious diet including eggs, milk, ghee, and fruits. They lead a comfortable life having all modern amenities—a better house, motor-cycle, radio, television, and use of better clothes.

16. Extension of Market for Industrial Output:

As a result of agricultural progress, there will be an extension of the market for industrial products. An increase in agricultural productivity leads to an increase in the income of the rural population which in turn leads to more demand for industrial products, thus the development of the industrial sector.

According to Dr. Bright Singh, “Increase in agricultural production and the rise in the per-capita income of the rural community, together with the industrialization and urbanization, lead to an increased demand in industrial production.” In this way, the agricultural sector helps promote economic growth by securing as a supplement to the industrial sector.

Relationship between Agriculture andIndustry

The industry is not the substitute for agriculture, rather they are complementary to one another. Both these sectors are so attached to each other that it is not possible to increase the growth of one sector without the improvement of the other sector. If agriculture is considered as the ‘heart’ of the country, then obviously industry must be considered as the ‘brain’.

The interdependence of these sectors are listed below:

(A) Impact of Agriculture on Industry:

Agriculture has hugely positive impacts on industrial development, such as:

(a) It regularly supplies raw materials like sugarcane, jute cotton, oilseeds, tea, spices, wheat; paddy, etc. to the consumer goods industries.

(b) It supplies cereals, vegetables, and other food items to the industrial laborer and fodders for the domestic animals in the dairy industries regularly.

(c) Farmer-households used to save their money in the bank and other financial institutions which ultimately is used by the industry owners in the form of investment.

(d) Both for consumer and capital goods Industries agriculture sector gives a ready market for the finished products.

(e) It regularly supplies manpower to the industries

(B) Impact of Industry on Agriculture:

This is needless to mention the impact of industry on agriculture.

The impact of industry on agriculture is as follows:

(a) It regularly supplies scientific tools and equipment’s like tractors, harvesters, pump-sets chemical fertilizers, etc. to agriculture increase the per hectare production.

(b)To increase the market for finished agricultural goods some infrastructural development like roads, railway, storage, etc. are very essential. In this connection, industry plays a vital role.

(c) Industries provide huge employment opportunities and therefore help to absorb all the surplus labor in our agriculture. This lea to more industrial development.

(d) Agricultural sector itself is a huge market for the different finished products of Industries. Farmers buy several industrial products like bi-cycle, torch, radio, etc. All these flourishment of industries.

Thus in nutshell, we can say that both agriculture and industry are complementary to each other. They operate hand to hand. The development of one sector depends on the growth and performance of the other sector.

Systems of farming Farm size and productivity debate

In this article, we will discuss the inverse relationship between farm size and productivity.

1. The most important explanation advanced in this regard, is in terms of the low opportunity cost of family labor and the resultant variations in the amount of labor input used on different size classes of farms.

It is based on the argument that the smaller farms, characterized by peasant family cultivation, extend the input of labor right up to the point where the marginal product of labor is zero (i.e., point P in the accompanying diagram) or at least much below the ruling market wage rate. On the larger farms, the use of hired labor stops at the level (OC in the diagram) where its marginal product equals the market wage. Hence the smaller farms have higher.

This argument (put forth by Sen) based on the low opportunity cost of family labor on small farms is not sufficient to explain the inverse relationship on the following grounds:-

(i) If the peasant family farming and capitalist farming (hiring bulk of its labor) co-exist, one can argue that the opportunity cost of peasant family labor is the wage that is determined in the market through the employment of labor by various capitalist farmers and that the peasant family will try to equalize its opportunity cost of work in self-employment and wage earnings. In other words, a small farmer will not consider his labor as available at zero price if the capitalist farms also exist in the region.

(ii) Peasant family farmers even at the bottom of the scale, hire labor at the margin and even derive income from employment of family labor in alternative occupations.

(iii) Inverse relationship holds even when the larger farms (i.e., the farms using mainly hired labor) alone are ranked.

(iv) There also exists strong empirical evidence that the opportunity cost of labor on the smaller farms is not significantly different from the market wage rate.

Green Revolution and the Inverse Relationship:

The inverse relationship between farm size and productivity was claimed by many to be a confirmed phenomenon in traditional agriculture during the 1950s.

Under the impact of the new technology which is essentially capital-based (compared with the labor-based technology of traditional agriculture), the productivity advantage hitherto enjoyed by the small farmers with the relative abundance of family labor started moving in favor of the large farms which have a relative abundance of land also more easy access to capital.

Returns to Scale and the Inverse Relationship:

The size-productivity relationship is essentially a relationship between output, on the one hand, and a single input i.e., land, on the other. From this relationship, some economists tried to draw inferences about the nature of returns to scale in Indian agriculture.

Policy Implications:

The controversy regarding the inverse relationship between farm size and productivity is not simply an academic discussion but is of fundamental significance from the point of view of economic policy. The farm-size and productivity raise many issues

The choice occurs between:

(i) small family-based “peasant farms”;

(ii) large-hired labor-based “capitalist farms” and

(iii) large farms with cooperative types of organizations.

The debate on farms size and productivity is of immense importance for policy measures such as:

1. Ceilings of land holdings, redistribution of land, and consolidation of holdings.

2. Subsidizing farm inputs for economically weaker sections of farmers.

3. Price policy formulation such that it provides incentives to increase productivity.

4. Land tenancy, loosening and tightening of land lease market purchase and sale of land, etc.

Land reforms in India

Land is considered an important element of life and is highly valued in most of the world. The land is useful to man in many ways as a source of food, for a place to live, for wood, for a place to work, etc. In India, Before colonial rule, the land used to be in the hands of the community as a whole. However, during the British Raj, this has changed.

Lord Cornwallis has introduced Permanent Land Settlement for Bengal, Bihar, and Orissa in 1793. According to this, the tax farmers appointed by the British rulers will be covered as various Land Lords. Under this rule, they have to pay a fixed commission to East India Company. Thus these intermediaries are formed, called Jagirdars / Jamindar.

Emergence of Tenants

Following the Land Settlement Act, 1793, The farmers purchase lands from the Land Lords and hire them for their agricultural use. These people who hired the land are called Tenants.

·       Variations in Tenancy

·       Cash Tenants: They pay a fixed tax for the use and occupation of the land

·       Share – cash Tenants: They pay part of their rent in cash and another part as a share of the crop

·       Crop - share Tenants: They pay a share of crops only

·       Croppers: They pay the crop of the share. But they are not independent they work under the landlord

Landlord-Tenant Relationships

Landlord-Tenant Landlord – Agricultural LabourAfter India Independence, the government has decided to abolish the systems of Jamindaris and Jagirdari, to remove intermediaries between state and peasant. This was the first legislation taken by almost all the states called as Abolition of Zamindari / Jagirdari systems Act. In the 1950s