The data relating to the rural economy has been worrisome. The food inflation is at the lowest in many years, in fact, it was negative in the month before the recent state elections
Did rural distress play a big role in the loss of Bharatiya Janata Party (BJP) in the recently held Assembly elections? Most election analyses in the media have put this factor right at the top of the list of reasons why the BJP lost.
The data relating to the rural economy has been worrisome. The food inflation is at the lowest in many years, in fact, it was negative in the month before the recent state elections. Consumer Price Inflation (CPI) itself is low and below the mid-point range of RBI target range. While the economy enjoys the benefits of low inflation, the farmers are possibly not getting remunerative prices for their produce. The rural wage growth has lagged historic trends; it was around 3.1% at the end of the last financial year, undershooting the CPI.
The agriculture growth rate has been below the growth rate of other components of the GDP. In the quarter ending September 30, the agriculture sector grew at 3.8%, while the nominal gross value added (GVA) slowed down to 2.8%. While the government had announced higher minimum support prices (MSPs) for many crops, there has been little or no procurement at these higher levels since July.
The challenge with the rural sector lies in the scale mismatch. Across the country, half of the workforce directly depends on agriculture, but the sector produces only about 15% of the country’s gross domestic product (GDP). Including forestry and fishing, this share of GDP has come down almost 7% points between 2004-05 and 2017-18. The situation is even starker in relatively poorer states. In Chhattisgarh, where the Congress handed a drubbing to the BJP in the recent election, organised businesses like mining and other industrial activity generates almost half of state’s GDP but employs merely 5% of the workforce. Agriculture on the other constitutes only a fifth of state’s GDP but employs 80% of the workforce.
The Narendra Modi government on its part has worked on several programmes in the last four years to address the agricultural sector. The MSP hikes, though not yet visible on the ground, had to be take up after several four years of low food inflation and erratic rainfall through this period. Soil health cards have been issued to farmers across the country so that they understand the nutrient requirements of their land better. Several irrigation projects have been completed and many states like Jharkhand, Karnataka, Madhya Pradesh, Maharashtra, and Rajasthan have worked on creating micro-irrigation capabilities to deal with the vagaries of rains.
The central government also put in place a new crop insurance plan, which improved on previous designs. Lack of insurance has been a big negative in the agriculture sector. There have also been programs to encourage allied activities like animal husbandry, fishing, and organic farming. Several long pending food park projects have been expedited, bringing food processing industries closer to the farmers. Most of the 42 planned mega food parks should be completed in the next couple of years.
On the regulatory side too, the government released a model Agriculture Produce Marketing Committee (APMC) Act, which promoted ideas like lesser APMC control, better market access for farmers, creating scale in farming via ideas like pooling and farmer produce organisations, and contract farming. Different states have shown varying degree of interest in implementing these suggestions.
To improve market access, the government launched the e-National Agriculture Market (e-NAM) program, which connected almost 600 mandis via the Internet. Although the cross-state, cross-mandi trade has been slow to pick up, almost 1.3 crore farmers are registered on the platform, working with electronic auctions in their home mandis. The intention is to create a single national market, but this will need a market and licensing reforms by each state individually.
Recently, the government announced an ambitious agriculture exports policy, targeting $100 billion in agriculture exports by 2022-23. These exports have come from $43 billion in 2013-14 to $37 billion in 2017-18. One key reason has been successive droughts in several parts of the country. In this light, the $100 billion target sounds ambitious.
All these measures have helped improve productivity in the sector significantly. Production of food grain touched 280 million tonnes in 2017-18, up from 250 million tonnes in 2014-15. This increase, despite the drought years, is ironically not helping the farmers. As the supply increases, smaller farmers who cannot find market access easily, are forced to dump their crops, often not very high quality, to local traders at throwaway prices.
The long-term solution lies in moving away from the agriculture workforce away from the sector. This is easier said than done. Manufacturing in India is still picking up, and globally this sector is getting increasingly automated. Other big areas like construction and tourism have been their limitations. Construction requires big investments, but private investment cycle has been slow to turn. India has seen a record number of foreign tourist arrivals last three years, but the sector is limited to a few states.
There has been a lot of talk about farm loan waivers. States which have announced these loan waivers in the recent past have had issues implementing the political populism. Karnataka has been able to waive off loans of a handful of farmers. Punjab waived off loans for small farmers, but there is pressure on the government to do more. Uttar Pradesh loan waiver was funded by the state in its entirety. In Maharashtra, the government took almost a year in completing the loan waiver, after realizing there was no accurate way to identify all beneficiaries.
Most recently, Congress has announced loan waivers in the manifestos of the states it has won. The party needs almost ₨ 1 lakh crore, which the state treasury does not have. Even before the new chief ministers taking an oath, there are question marks on the loan waiver promise and its effectiveness.
Congress president Rahul Gandhi himself acknowledged in a post-election press conference that loan waivers weren’t the long-term solution. Raghuram Rajan, the ex-Governor of the Reserve Bank of India, has also cautioned against the populism of loan waivers destroying the credit culture in the economy. Whether or not the 2019 Lok Sabha elections are fought on the promise of a blanket loan waiver, the topic is here to stay.
While other options are identified and nurtured, the central government must act decisively in addressing the rural sector challenges. As per the State Bank of India estimates, there are 22 crore small and marginal farmers in India, which represent almost 5 crore families. One way to support this group would be to create an income support program. Such income support though can lead to serious unintended consequences – it may squeeze labour supply in the economy and have a deleterious impact on investments made by individuals in areas like education. Alternatively, a crop support program like the one employed by the government of Telangana (Rythu Bandhu) can be implemented.
Any such program must account for the fiscal capacity of the government to intervene. Such intervention would also necessitate cutting down on subsidies elsewhere in the agriculture value chain, which has its own political implications and consequences.
The long-term solution stands on four pillars – fewer people dependent on agriculture, creating a truly national market undertaking structural reforms, promoting exports without significant price and quota caps, and urban consumers paying more for what they consume, with a greater share of the pie flowing back to the farmer. None of these are easy to design or implement if designed. Nonetheless, this is what the sector demands from the government.
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Last Updated 17, Dec 2018, 11:34 AM