The Pivotal Role of Agriculture in Economic Development

Every economy that has industrialised successfully started out overwhelmingly agrarian. Britain, the United States, Japan, South Korea – all of them built their factories, railways and cities on a foundation of farm surplus. India is still living through this transition. Agriculture and allied activities account for close to one-fifth of the country’s gross value added, yet the sector remains the single largest employer, engaging around 43% of the national workforce. Understanding why agriculture matters so much to economic development – not just as a source of food, but as an engine that powers industry, trade and rural demand – is central to any study of development economics. The most influential framework for this comes from Nobel laureate Simon Kuznets, whose ideas still shape how economists and policymakers think about the farm sector’s role in growth.

Why agriculture is the starting point of development 🔗

In the earliest stages of an economy, most people work on farms simply because that is where the resources are. Land is abundant relative to capital, and food production absorbs the bulk of available labour. As development proceeds, resources gradually shift toward industry and services, which is why the share of agriculture in national output tends to fall over time even as the sector’s absolute output keeps rising.

India illustrates this pattern clearly. Agriculture’s share of GDP has declined from around two-fifths at independence to a much smaller slice today, even as production of foodgrains, milk, and horticultural crops has grown many times over. The Principal Scientific Advisor to the Prime Minister recently noted that agriculture still contributes 15 to 20 per cent of India’s economic output while sustaining a much larger share of livelihoods. This mismatch between agriculture’s share of GDP and its share of employment is not a flaw in the data; it is exactly the pattern development economists expect to see, and it explains why agricultural productivity growth is so tightly linked to overall economic progress.

Kuznets’s framework: how agriculture powers growth elsewhere 🔗

Simon Kuznets, who won the Nobel Memorial Prize in Economic Sciences for his pioneering work on national income accounting and structural change, argued that agriculture does not just produce food. It actively transfers resources to the rest of the economy in several distinct ways. Three of these are usually treated as the core of his framework.

Factor contribution 🔗

As farms become more productive, they need fewer hands to produce the same or greater output. The labour freed up does not disappear; it becomes available to industry and services, which are constantly on the lookout for workers. This is the factor contribution: agriculture supplies both labour and capital to non-agricultural sectors. Farm profits, once reinvested, become capital for setting up mills, workshops and trading businesses. In India, government schemes that promote farm mechanisation and irrigation efficiency indirectly support this transfer by raising the output each farmer can produce, which in turn releases surplus workers for construction, manufacturing and the gig economy in towns and cities.

Product contribution 🔗

Every economy needs to eat before it can industrialise. Agriculture’s product contribution covers two separate flows: food for a growing non-farm population, and raw materials for industry. Cotton feeds the textile mills of Gujarat and Tamil Nadu, sugarcane feeds sugar and ethanol plants, and oilseeds feed the edible oil industry. Without a dependable agricultural surplus, food prices would spiral as industrial employment grows, eroding real wages and slowing the very industrialisation that depends on cheap, stable food supply.

Market contribution 🔗

Roughly half of India still lives in rural areas, and farm incomes directly determine how much this population can spend on manufactured goods, from bicycles and mobile phones to fertilisers and tractors. When agricultural output and prices rise, rural purchasing power rises with them, creating a ready market for industrial products. This is why economists watch the monsoon and crop output so closely: a good kharif season lifts rural demand and feeds through to industrial sales months later. The Economic Survey has highlighted exactly this link, noting that rural demand tends to improve on the back of record kharif production and favourable agricultural conditions, supporting overall GDP growth.

A fourth link: agriculture’s foreign exchange contribution 🔗

Many economists extend Kuznets’s original framework with a fourth channel that has become especially relevant for India: the foreign exchange contribution. When farm produce is exported, the earnings can be used to import machinery, technology and other capital goods that a developing economy cannot yet produce for itself. This channel has grown considerably in scale. India’s agricultural and allied exports touched US$ 51.9 billion in 2024-25, and the government continues to push initiatives through the Agricultural and Processed Food Products Export Development Authority to expand this further.

Rice remains the single largest agricultural export, and India’s overall agri-export basket has grown steadily, with agricultural and allied commodity exports rising from US$ 48.76 billion in FY2023-24 to US$ 51.91 billion in FY2024-25. These export earnings do more than bring in foreign currency; they also connect Indian farmers to global price signals and quality standards, gradually pushing the domestic sector towards better packaging, cold-chain infrastructure and processing capacity. The government’s export policy has explicitly aimed to move value addition upstream, with officials describing the ambition to complement “Make in India” with what is informally called “Bake in India,” a renewed focus on processed agricultural products rather than raw commodity exports alone.

Agriculture as the base of industrial linkages 🔗

Beyond Kuznets’s four channels, agriculture connects to the rest of the economy through what economists call backward and forward linkages. A backward linkage exists when agriculture creates demand for industrial inputs; a forward linkage exists when farm output becomes the raw material for industrial processing.

These linkages explain why a poor monsoon does not just hurt farmers. It ripples outward, denting fertiliser sales, tractor sales, rural retail, and even two-wheeler demand, since a large share of these products are bought in rural India. Conversely, a strong agricultural year tends to lift industrial output with a lag of a few quarters, which is one reason economic forecasters track agricultural performance so carefully when projecting overall GDP growth.

The productivity gap: agriculture’s unfinished transition 🔗

India’s experience also shows the limits of relying on agriculture indefinitely. The sector’s share of employment, at roughly 43% as of the latest Periodic Labour Force Survey, down from 44.8% the previous year, is far higher than its share of national output. This gap means the average worker in agriculture produces far less economic value than the average worker in industry or services. Closing this productivity gap, through better irrigation, storage, market access, and skill diversification, is one of the central policy challenges facing Indian planners.

It is worth remembering that this gap is not a sign of agriculture’s declining importance. It reflects the sector’s success in continuing to feed the country and supply industry even as it employs a shrinking share of the workforce relative to output. The policy goal is not to shrink agriculture but to raise productivity within it while other sectors absorb the labour that agriculture no longer needs to hold onto.

Bringing the framework together 🔗

Kuznets’s insight was that agriculture’s importance to development cannot be measured by its share of GDP alone. A sector can shrink as a proportion of national income and still be indispensable, because its output, labour, capital, demand, and foreign exchange keep feeding every other part of the economy. For India, this framework helps explain a genuinely paradoxical set of facts: a sector contributing under a fifth of GDP that still employs close to half the workforce, exports worth over fifty billion dollars a year, and remains the single biggest determinant of rural demand for industrial goods.

This is also why agricultural reforms, irrigation investment, and rural infrastructure spending are treated as economic policy rather than merely welfare policy. Every rupee that raises farm productivity tends to show up, with a lag, in industrial sales, export earnings, and urban labour supply.

What do you think? Does India’s experience suggest that agricultural productivity growth, rather than agriculture’s declining GDP share, should be the real benchmark for judging the sector’s contribution to development? And which of Kuznets’s four channels do you think matters most for India’s next decade of growth?

References

1. https://www.mospi.gov.in/uploads/latestReleases/latest_release_1774607827733_3e8964a9-268b-4cc9-ad65-cfc8a9e32f08_Press_note_AR_PLFS_2025_23032025_V2.1_26032026_final.pdf
2. https://www.newsonair.gov.in/agriculture-contributes-15-20-to-indias-economy-scientific-advisor-ajay-kumar-sood
3. https://www.nber.org/system/files/chapters/c12916/c12916.pdf
4. https://www.newsonair.gov.in/indias-gdp-growth-projected-at-6-4-for-fy-2025
5. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2149703
6. https://www.ibef.org/exports/agriculture-and-food-industry-india
7. https://apeda.gov.in/export-policy