Rural demand may not drive industrial growth - NCAER

By Our Special Correspondent

NEW DELHI, SEPT. 10. The country's premier economic research institution, the National Council of Applied Economic Research (NCAER), does not share expectations harboured by a section of economists of better rural demand driving industrial growth.

The NCAER concedes that agricultural growth is important in raising incomes for the rural population, but it may not be sufficient to raise the growth rate of overall demand for non- agricultural output significantly.

According to NCAER's line of reasoning, the share of agriculture and allied sectors is now 24 per cent. Therefore, an increase in agricultural output by one per cent raises GDP by 0.24 per cent. If the income elasticity of demand for non-agricultural goods and services is between one and two, the increase in agricultural GDP by one per cent would lead to an increase in demand for non- agricultural output by 0.24 to 0.48 per cent.

As a first approximation, an increase in agricultural output by 5 per cent would imply an increase in demand for the output of non- agricultural sectors by 1.2 to 2.4 per cent. This is significant but not enough to restore non-agricultural output growth to 7 to 8 per cent. Some of the non-agricultural sectors may see higher growth in demand than the others. Further, these will be leakage in terms of imports. The impact of agricultural growth on non- agricultural growth may be even smaller than indicated by the overall income elasticity if demand. If agricultural output prices increase by a lower rate, consumption demand for non- agricultural products will also increase by a lower rate.

Thus, higher growth in the farm sector may benefit the population in rural areas. But it will not be adequate to also pull up the demand in non-farm sectors, concludes NCAER.

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