Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

UPA’s flawed approach to rural India

The UPA has foregone long-term fixes in favour of populist palliatives

Over the past half a decade or so, the resurgence in rural consumption in India has been one of the key drivers of markets and the economy. The rural consumption story, as the markets call it, has so far survived the policy paralysis that has gripped the government, the boom-bust industrial cycle, and even a drought in 2009-10.

The latest consumption numbers reported by the National Sample Survey Office (NSSO) corroborate what consumer goods companies and market research firms have been saying for long. The official numbers provide the most compelling evidence on the decline in rural distress, with average real consumption growing nearly as fast in rural India as it did in urban India between 2004-05 and 2011-12.

The rural revival is indeed a remarkable achievement. But here’s the party pooper: an honest appraisal of the forces driving the recent boom suggests that the pace of rural growth will falter unless our rural strategy is radically reformed. India’s march against poverty cannot be sustained much further without reforming agriculture, which employs nearly half the workforce and accounts for most of the poor.

The evidence so far suggests that the rural boom was driven by three key factors: faster economic growth that led to a boom in sectors such as construction and raised demand for rural labour, a sustained rise in global commodity prices in the previous decade, and higher minimum support prices paid by the government, which trickled down to labourers. The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) may have possibly contributed, in the handful of states where it works well, by setting the floor for rural wages. But it is possible the latter gain may have been dissipated by high food price inflation.

With the global commodity boom tapering off and India’s slower growth crimping the government’s ability to raise procurement prices, price incentives will now cease to be an effective weapon to drive rural growth. The heavy reliance on price incentives and subsidies in the past years meant that long-term investments to raise productivity and farm incomes were neglected. The lack of structural reforms threatens to unravel the rural boom now.

The United Progressive Alliance’s (UPA’s) record in actual reforms has been extremely weak. Whether it be improving rural infrastructure or freeing wholesale markets and linking up farmer groups with private aggregators to eliminate middlemen, progress has been patchy. India’s farm trade policy remains unstable and highly unpredictable. The recent spurt in farm exports came about in spite of hostile policies rather than because of them. The inability to loosen arcane land laws continues to pose a major obstacle to capital investment, as current laws make it very difficult to lease and consolidate landholdings.

The opportunity to transform the farm sector was lost at the altar of populism. Most of the radical solutions the UPA advocated, ranging from the employment guarantee programme to farm loan waivers were aimed at providing temporary relief rather than addressing the structural problems of Indian agriculture. Subsidies, which again have little impact on long-term productivity, came to dominate public spending in agriculture. Public investments in agriculture—in water-management projects or in research and extension networks—account for only one-fifth of public spending today, with subsidies accounting for the rest.

Indian food policy has pursued the conflicting goals of keeping retail foodgrain prices low to protect consumers and of keeping procurement prices high to incentivize farmers. Apart from a massively wasteful distribution system it involves, such a policy mix is self-defeating as it puts a perennial subsidy burden on the fisc and stokes inflation. The mess will only worsen once the National Food Security Bill is implemented. Had the UPA fixed the supply-side constraints first, there would have been little reason to doubt its commitment to universal food security. But its current approach amounts to putting the cart before the horse.

When the UPA came to power in 2004, it was seen as a rejection of the India Shining campaign launched by the previous government. The perception that rural discontent drove the electoral verdict may not have been true—after all, alliances and break-ups at the regional level may have had a far greater impact. But underlying that perception was the reality of agricultural stagnation since the mid-1990s.

The UPA correctly identified mitigating rural discontent as a key priority. But in choosing to forego long-term fixes to rural India’s problems in favour of populist palliatives, it has raised rural India’s vulnerabilities even more. The UPA inherited stable finances, and benefited from a global boom. But it failed to develop a sustainable rural strategy over the past decade.

Is the UPA’s understanding of India’s rural economy flawed? Tell us at views@livemint.com

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