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Small Scale Agro-Industry in India: Low Productivity Is Its Achilles' Heel

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Small Scale Agro-Industry in India: Low Productivity Is Its Achilles' Heel Ind. in. ofAgri. Econ. Vol. 5, Vo. 3, July-Sept. 2003 SUBJECT III EMERGING TRENDS IN AGRO-PROCESSING SECTOR Small Scale Agro-Industry in India: Low Productivity is Its Achilles' Heel G. K. Chadha and P. P. Sahu* AGRO-INDUSTRY IN A DEVELOPING ECONOMY Agro-based industry refers to the subset of manufacturing that processes raw materials obtained from agriculture and its associated sectors such as animal husbandry, forestry and logging and intermediate products derived from other industries such as semi-processed hides and skins for manufacturing leather and leather products, and edible oils for manufacturing hydrogenated oil. For a typical economy, some part of agricultural production does not directly go to final consumption; before reaching the final consumption basket, it undergoes the 'value- adding' process the form and content of which understandably varies from commodity to commodity. The value-adding processes range from simple pre- servation such as drying, grading and storage to production of high-value products such as manufacture of textiles, paper, rubber, etc., through modern capital-intensive methods. Looked at from the other side, for its input requirement, agro-industry draws partially, and directly, upon agriculture and partially upon other agro-based industries which, in turn are engaged in primary processing of raw materials received from agriculture. Developing countries have long promoted value-added processing of primary products as a path to industrialisation. This trend has been sustained by a number of factors. First, in general, increasing human population continues to give a boost to the demand for processed agricultural products. As incomes increase and the pace of urbanisation picks up, they further induce disproportionately rapid growth of the demand for higher-quality processed and packaged foods, since an increasing proportion of population becomes more health-conscious and opt for a greater variety in diet. The process of value adding to agricultural production and fostering of farm: non-farm linkages starts gathering momentum; this, in • turn, generates higher employment and incomes for the farm families, besides making agriculture a more effective contributor to industrial growth (Sarkar, 1997, pp. 166-167). Second, growing volumes of commercialised agricultural production leads to scale economies in processing and distribution which, in turn, induces increasing profitability and * Professor of Economics and Ph.D. Scholar, Centre for the Study of Regional Development/SSS, respectively, Jawaharlal Nehru University, New Delhi - 110 067. SMALL SCALE AGRO-INDUSTRY IN INDIA: LOW PRODUCTIVITY IS ITS ACHILLES' HEEL 519 entry of new enterprises into the industry. Third, the changing character of agriculture itself, say, a gradual shift from field crop production to allied activities such as animal husbandry, fishing, forestry and logging, etc., primarily because of demand restructuring occurring continuously under rising incomes and urbanisation, induces a steadily diversifying base of agro-industrialisation; agro-industry starts heading towards non-food processing activities such as cotton, wool and silk textiles, jute- mesta-coir and other vegetable fibres, wooden, bamboo and cane furniture and fixtures, paper and paper products, leather and leather products, and so on. Fourth thanks to the unbroken chain of strides in science and technology, the real international transport and communication costs have been falling, lending its own dynamism to an expanding flow of goods, including processed foods and other ago- related industrial products. Finally, in recent decades, the widespread relaxation of trade and foreign direct investment restrictions have stimulated capital formation in exPort-oriented industries, both upstream and downstream, from farm-level agricultural production in low- and middle-income countries. The effect of these changes on the form that agro-industrialisation takes and on its ultimate environ- mental, employment, earning and distributional effects depend on several simul- taneous and countervailing factors. Thanks to the structural transformation that the Indian economy has been witnessing during the past five decades, most noticeably during the 1 990s following a series of policy reforms encompassing practically each sector of the economy, the forward and backward linkages between agriculture and industry have also grown apace, most markedly in regions where agriculture has been growing at a fast pace (I3halla et al., 1990, pp. 57-70; Chadha, 1986, p. 168). On the one hand, the changing composition of agricultural inputs, including a varying degree of switchover from traditional to modern inputs, has fostered a variety of backward linkages between agriculture and industry, with a considerable spin-off to agriculture itself (Chadha, 1989, pp. 146-153). On the other hand, the expanding level of output in agriculture, comprising field and plantation crops, dairying and animal farming, fishing, forestry and logging, etc., has promoted a rich variety of forward linkages. Ago-industrial development, a direct offshoot of such forward linkages, has seen its own vyjcissitudes, most recently because of a series of economic reforms first introduced in JulY 1991 and then, since January 1995, under the WTO-impelled open trade regime. substantial segment of the industry is currently facing a varying mix of institutional, technological and marketing constraints, firstly because its feeder-sector agriculture) itself is undergoing many technological, institutional and structural changes and secondly because, under the open trade regime, the Indian industrial sector in general and ago-industry in particular, are waiting to harness their overseas Potential in the midst of outside threats and challenges. It is high time that the ground raealities in India's agro-industrial sector are grasped, the institutional, technological Y, nd marketing constraints, especially from the view point of the multitude of tiny and 520 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS small enterprises, are thrown bare, and effective policy remedies are garnered for its smooth expansion. The paper is organised as follows. The next section briefly presents the data sources and few adjustments effected to ensure inter-temporal comparability of data. Section III looks through the size and performance of agro industries in India during the last two decades. In Section IV we analyse the level and growth of productivity in unorganised and organised manufacturing sectors in India. For unorganised manufacturing sector, however, the analysis is carried out both at the two and three digit level of industrial classification to identify the 'rising' and the 'declining' segmenis of the industry, to gain a purposeful policy perspective for the future. It also examines the locational and scale advantages/disadvantages among the tiny and small enterprises. Finally, a few concluding remarks are given in the final section. II DATA SOURCES AND ADJUSTMENTS The paper is exclusively based on secondary data, such as the quinquennial survey data on unorganised manufacturing and annual survey data for the organised segment. For the unorganised segment, we draw upon the National Sample Survey (NSS) data at three points of time, i.e., 40th Round (July 1984-June 1985), 51st Round (July 1994-June 1995) and the latest 56th Round (July 2000-June 2001; data for 2000-01 are extracted from the household level data on CD-ROM). To gain a comprehensive view of the manufacturing sector as a whole, the Annual Survey of Industries (ASI) data for the organised segment are also picked up for these very select years and tagged on to those for the unorganised segment. However, it is worth mentioning that the latest available data for the organised segment is for the year 1999-2000. A few crucial adjustments had to be effected to ensure inter-temporal comparability of data for the unorganised manufacturing segment, for the three chosen years. In their original outfit, the data for 1984-85 were based on 1970 national industrial classification (NIC), those for 1994-95 were based on 1987 NIC while those for 2000-01 were based on the latest 1998 classification. While at the two and three-digit level of industrial classification, the data for 1984-85 are comparable with those for 1994-95; it is not so for the 2000-01 data vis-à-vis those for 1994- 95/1984-85. Some clubbing of industrial groups under the 1998 classification has to be resorted to, to make the individual activity groups comparable with their counterparts under the 1987 NIC classification (Government of India, 1998 b, pp. 73- 82). In the Indian system of classification of business enterprises, an enterprise owned and operated without the help of any hired worker, employed on a fairly regular basis, is described as an own-account manufacturing enterprise (OAME). An enterprise run with the assistance of at least one hired worker, employed on a fairly SMALL SCALE AGRO-INDUSTRY IN INDIA: LOW PRODUCTIVITY IS ITS ACHILLES' HEEL 521 regular basis, is called an establishment. An establishment that employs a total of not more than five workers is known as a non-directory manufacturing establishment (NDME), while the one employing a total of six or more workers is categorised as a directory manufacturing establishment (DME). Directory manufacturing establish- ments that employ ten or more workers and use power and those that employ 20 or more workers without using power are categorised as organised manufacturing
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