The mystery of agricultural growth

Latest data released by ministry of agriculture shows that sowing of rabi crops, expected to be higher than last year, is still lower than normal area sown


Decline in fertilizer sales and drought conditions over the past 2 years had raised doubt on the optimistic scenario projected by the government on crop sowing. Photo: Bloomberg
Decline in fertilizer sales and drought conditions over the past 2 years had raised doubt on the optimistic scenario projected by the government on crop sowing. Photo: Bloomberg

That demonetisation will cause Indian economic growth to slow is no longer a matter of speculation. While clear estimates of the extent of deceleration will only emerge after some time, preliminary estimates of automobile sales and the purchasing managers’ index (PMI) for manufacturing suggest a slowdown in the manufacturing sector. The PMI for manufacturing fell from 54.4 in October to 52.3 in November. The PMI for services fell to 46.7 in November from 54.5 in October, suggesting a contraction in service sector activity. Given that the construction sector has already been muddling along at its lowest pace of growth in two years, the hope of an economic miracle now rests on the agricultural sector.

The ministry of agriculture released the latest data on sowing of rabi crops on 4 December. Given that the agricultural sector had been suffering the impact of back-to-back droughts in the past two years, sowing this year was expected to be higher than last year despite significant regional variations in the monsoon this year. The latest data does confirm that sowing of rabi crops is more than the previous year. However, it is still lower than the normal area sown for prominent crops. While the overall area sown is higher by 30% compared to last year, it is short of the normal area sown by 1%. This in itself may not be a worry even though the sowing season is coming to an end. While this will certainly help the agricultural growth rate to reach 4%, there are serious concerns on whether this is enough to revive the rural economy, which has been hardest hit by the demonetisation exercise.

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Of particular interest is the trend in sowing of wheat which, at 17.4 million hectares, is 15% lower than normal areas sown by 1 December. It is lower than corresponding estimates of sowing at 21.3 million hectares in 2013 and 20.9 million hectares in 2014.

These concerns arise not just for this year but also for last year, which reported slow growth in agricultural output. Even though last year was the second consecutive year of drought, the estimate of wheat production at 94 million tonnes has raised some scepticism. While this is higher than the 90 million tonne estimate by the US department of agriculture, various estimates from the markets suggest that it may be lower than that. The National Commodity Exchange (NCDEX) market intelligence report for November shows market estimates of 82-88 million tonnes.

While there is no way to reconcile these differences, the fact that the government lowered the import duty on wheat to 10% from 25% on 23 September and wheat imports are expected to be around 3 million tonnes, casts doubt on the figure. Even the procurement figures for this year show that the actual procurement was 23 million tonnes, the lowest in recent years, compared to the projected procurement of 30 million tonnes. Even during the past two drought years, the procurement of wheat remained at 28 million tonnes. Although largely unnoticed, wheat prices increased from Rs1,578 per quintal on 1 April to Rs2,014 per quintal on 1 November. During the same period, international market prices fell by around 13%.

While these certainly raise doubt on the optimistic scenario projected by the government, another factor which adds to the suspicion is the decline in fertilizer sales. Fertilizer sales have been declining since 2013 and some of this may have been a result of the decline in area sown during the past two years. However, the latest data available from the ministry of fertilizer shows that fertilizer sales this year may be lower by 7% compared to last year. The bulk of this decline in fertilizer sales has been on account of the decline in sales of urea, the most common farm nutrient used in India. As per data until October, urea sales were 40% lower than corresponding sales estimates for last year.

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The third factor which suggests lower-than-expected buoyancy in the agricultural sector is the almost stagnant level of wages of farm labour. While agricultural wages have been declining in real terms since 2013, it was expected that increased agricultural activity may tighten the rural market, leading to higher wages. The data until September released by the labour bureau does not suggest that this is happening.

Given that the rural economy had experienced a period of distress in the past two years, a normal monsoon this year had raised hopes of a revival of rural demand.

Unfortunately, the data so far suggest caution in interpreting the data from the agricultural sector as signs of a revival of the rural economy. Farmers were yet to recover from the collapse of commodity prices in 2014, but with the demonetization exercise already making an impact on the prices of agricultural commodities in most markets, this will further weaken the farm economy.

With hopes of an economic revival after demonetisation hinging largely on agriculture, continued neglect of the sector will not only harm the prospects of rural revival, but also the economy as a whole.

Himanshu is an associate professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.

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