Top Menu

Contribution of Agriculture to Economic Development


The following points highlight the three types of contribution that agriculture has made towards economic development. The types are: 1. Factor Contribution 2. Product Contribution 3. Market Contribution.

1. Factor Contribution:

Development of agriculture releases some resources for being transferred to the other sectors. As these resources are productive in nature, we call the transfer of these resources to the non-agricultural sectors as ‘factor contribution’ of agriculture.

Factor contribution can be in the following forms:

(a) Provision of Capital:


The non-agricultural sectors require funds for acquiring material capital. In the initial stages of their development, these funds will be generated in the agricultural sector and then transferred to the other sectors. In a closed economy in the initial stages, it is the agricultural sector which commands most of the income, capital and also labour.

Even when an underdeveloped economy is an open economy, the outside source of capital like foreign aid or foreign commercial investment can make only a limited contribution to the economic development. Further, foreign political influence is likely to accompany such capital and this may not be acceptable to the present day underdeveloped economies.

The transfer of capital to non-agricultural sectors can be voluntary or compulsory. It is voluntary when the agriculturists themselves invest their savings in the industrial projects. The agriculturist industrialist of England and the land owners of Japan present an important example of this type of voluntary flow of capital to the non-agricultural sectors.

The compulsory from of flow of funds is generally brought about by the government of the day through taxation on the agricultural sector its net proceeds being spent for the development of the non-agricultural sectors.


Land tax in Japan is often quoted as an example of this compulsory transfer of funds from the agricultural sector to other sectors. It formed 80% of the total tax revenue of the Government in the last two decades of the 19th century.

Forced extraction of surplus from agriculture by taxation, confiscation, imposition of levies or arbitrarily kept low prices of agricultural products, can be the other measures taken by the government to transfer funds from the agricultural sector to the non-agricultural sectors.

However, compulsion is not always necessary for the transfer of funds. Agricultural development itself may bring down the price of agricultural produce, reduce the cost of production in manufacturing and other sectors, increase their profits and thus indirectly help in the generation of capital in these sectors.

There is yet another way through which agriculture can provide capital to the non-agricultural sectors. Nurkse has referred to this process. According to him in densely populated agricultural economies, there already exists zero value labour i.e. labour whose contribution at the margin to agriculture is zero.


This is what we call disguisedly unemployed labour. This labour can be taken away from agriculture and utilized for producing some overhead capital, though of crude nature e.g., embankment, canals etc., some of which can help in the development of non-agricultural sectors. We may, however, note that this source of capital is available only in over populated economies.

(b) Provision of Labour:

Another factor contribution of agriculture towards economic development is through the release of labour by the agricultural sector for the non-agricultural sectors.

There are three potential sources of labour supply for the developing non-agricultural sectors, namely:

(i) Natural population growth,

(ii) Immigration and

(iii) Farm population.

The supply of labour from first two sources can never be smooth and adequate. Supply through population growth will be very slow in coming forth. It may also be noted in the interest of the nation to encourage population growth. Immigration has its own problems.

Differences in religion, language, customs, lack of knowledge etc., act as strong barriers for immigration. Under these circumstances, for a rapid development of the non-agricultural sectors, farm population remains the only dependable source of labour supply.

However, it may be noted that movement of farm labour to the non-agricultural sectors is not always easy. Transfer of labour from the agricultural sector to the developing non-agricultural sectors may not create a serious problem in over-populated countries.


There is already a surplus labour force in the agricultural sector of these countries and it can be easily drawn into the industrial sector without fall in agricultural output. The problem is more serious in sparsely populated countries.

There is no disguised unemployment there and any shifting of labour agriculture to non-agricultural sectors will bring down the agricultural production. However, a country moving on the development path cannot afford such a fall in agricultural production because of various reasons.

Firstly, it needs more raw materials from the agricultural sector and secondly, the labour shifting from agriculture to non-agricultural sectors will increase its consumption of food grains because of increase in its income.

So, in sparsely populated countries, it is desirable that the transfer of labour from the agricultural sector for the development of the non-agricultural sectors is also preceded or accompanied by an increase in the productivity in the agricultural sector itself.


This does not mean that agricultural development is not necessary for the overall economic development of an over-populated country. More agricultural output is needed for the developing industrial and other non-agricultural sectors even in over populated countries. Only difference is that labour may be more easily available for the developing non-agricultural section in over-populated countries.

Kuznet has expressed the importance of transfer of labour from the agricultural sector to non-agricultural sectors in another way. He feels that this transfer also, infect, implies a transfer of capital invested in the agricultural labour. He says “…we could still argue that internal migration of labour from agriculture represents a large transfer of valuable resources to the non- agricultural sectors and a large contribution to the country’s growth.”

May be, what he says is of somewhat doubtful validity in the initial stages, but it is perfectly correct in the later stages of economic development when agriculture has started using improved technology. The labour transferred to the non-agricultural sectors is now well trained and more educated.

2. Product Contribution:

The product contribution of agriculture towards an overall economic development takes two forms.


These are described below:

(a) Provision of Wage Goods:

When the non-agricultural sectors are to be developed, people will have to shift from agriculture to various occupations in these sectors. But they will require food for their sustenance even after shifting to new sectors. In fact their demand for food grains is likely to increase as a result of increase in their income after their transfer to the non-agricultural sectors.

The demand for food grains can also increase because of another reason. The farming population still left in agriculture might find its income increased due to higher prices of agricultural products as a result of increased demand. This may spur it to increase its own consumption also.

As the non-agricultural sectors develop, their dependence on agriculture for other contributions like that of capital, labour, raw material etc., is reduced. However, dependence of the non-agricultural sectors on agriculture for provision of wage goods will be as strong as ever unless, of course, new scientific innovations also result in the production of perfect synthetic substitutes for food grains.

(b) Provision of Industrial Raw Materials:

The other product contribution made by agriculture for the development of the non-agricultural sectors of the economy, especially the secondary sector, is in the form of provision of raw materials.

A study of the history of industrial development of advanced nations will show that the agro-based industries were the first to develop in such countries. There are many reasons for priority being given to agro- based industries in the initial stages of economic development.


Firstly, it is easier to produce raw materials in the agricultural sector. Minerals which form, the other source of industrial raw materials involve extensive use of capital which may be available in the beginning. Secondly, agro-based industries, generally, have flexible techniques of production.

These techniques range from the extremely labour intensive ones to the highly capital intensive ones. This is the case, for example, with agro-based industries like textiles, sugar, grain milling, hide processing etc. In case of such industries, it is open for a firm to produce the commodities with a technique, as determined by the availability of capital etc.

In the initial stages, for example, labour intensive techniques can be used to produce the commodities. Later on, where more funds are available, the producers can switch on to relatively more capital intensive techniques for production. In case of mineral based industries, the option to select a technique is very much limited. All the techniques are generally capital intensive.

There is yet another factor which favours the development of agro-based industries in the beginning. It is said that it is easy to shift a labourers from a farm to a factory if the factory uses a farm product as a raw material.

The subject (psychological) cost of transfer of labour from agriculture to industry in such a case is very low. It is felt if a labourer shifts from the agricultural sector (the major source of labour in the initial stages of industrial development), he will feel more at home while working in an agro-based industry than in a mineral-based industry.

The preceding discussion clearly implies that more of industrial raw materials have to be produced in the agricultural sector in the initial stages of development. This could be achieved either by bringing additional area under cultivation or diverting land from food crops to industrial raw materials or by increasing the productivity of various crops.


Division of land from food crops to raw material will not be desirable because as industrialisation proceeds, more of food grains may be required due to increasing income of the people. The other two methods can be or rather have to be adopted for increasing agricultural production if agro-based industries are to be set up in the economy.

3. Market Contribution:

The contribution focuses attention on the flow of goods generated by the development of the agricultural sector-flow which helps the development of the other sectors.

This contribution can take various forms:

(a) Expanded Market for the Products of Other Sectors:

So far, we have been emphasizing that agricultural development is necessary for providing inputs necessary for the development of other sectors of an economy. However, any sector, for its development, does not only require the necessary inputs for production but also a wide market for its growing production.

Agriculture provides an expanding market for the products of the other sectors in the initial stages of development of the economy. Agricultural sector, while helping the development of the other sectors, also finds the income of its people increasing. This increased income, in turn, leads to an additional demand for the products of other sectors, not only for consumption purposes but also for production.

It may be noted here that, no doubt, the other sectors can sell their products in foreign markets, rather than depend on the domestic market provided by the agriculture sector. However, in practice, it is not wise to rely upon a foreign market in the initial stages of development.


Lack of sufficient knowledge about the foreign countries, excessive competition, unfavourable commercial policies of the foreign countries etc., will make the entry as operation of the domestic firms in foreign markets rather risky and unprofitable.

(b) Flow of Agricultural Products to Other Sectors of the Economy:

Development of agriculture makes another type of market contribution also to the economy. As agriculture develops and its production becomes more market oriented, many other institutions, generally non-agricultural in character, come into existence. These institutions include those providing processing, packing and distribution services.

David Metcaff focuses our attention on these two market contributions,’In a more effective way. According to him, Agricultural development through providing market for agricultural input & consumers’ good, promotes the development of industrial sector.

Developments industrial sector, in turn helps in the development of the agricultural sector through the spread of modern technology in agriculture and providing an expanded market for agricultural products. This is a virtuous circle which in the process gives rise to institutions facilitating two way exchange of commodities.

(c) Development of International Trade:

Surplus products from the agricultural sector, as a result of its development, can move to the international market. This, in turn, can result in the flow of necessary capital as well as consumer goods from outside.

The growth process of the economy as a whole can thus gain momentum. So, in a way, we can say that in the case of development of international trade, agriculture combines market contribution with factor contribution for the development of non-agricultural sectors.

, ,

hit counter