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Business News/ Opinion / Online-views/  Time for a rural stimulus

Time for a rural stimulus

While revised GDP data may suggest economy is doing better than previously thought, warning signs from the rural economy show it may not be sustainable

Part of the reason for the slowdown in demand in rural areas is the decline in public spending, which propped up rural demand for labour. Photo: MintPremium
Part of the reason for the slowdown in demand in rural areas is the decline in public spending, which propped up rural demand for labour. Photo: Mint

India’s Central Statistical Office (CSO) has recently revised the base year for calculating gross domestic product (GDP) from 2004-05 to 2011-12. The revised numbers show the economy had started showing signs of recovery with the growth rate of GDP in 2013-14 at 6.9% compared with an earlier estimate of 4.7%. While this may suggest the economy was doing better than what everyone thought, this may not be sustainable as there are sufficient warning signs from the rural economy.

The revised numbers also imply that the growth rate of the economy has been the highest in the 10 years of the Congress-led United Progressive Alliance (UPA) rule compared with any previous decade. This is partly due to the fact that the rural economy, agriculture in particular, has also seen the highest rate of growth for a 10-year period. Marginally lower than the target of 4%, the growth rate of agriculture was also accompanied by growing income of rural households. While cultivators gained because of high commodity prices and a shift of terms of trade in favour of agriculture, farm workers also saw wages increase at the fastest levels ever. While the rising income and the consequent demand from rural areas may not have been the principal driver of growth in the last decade, it definitely cushioned the economy against shocks.

Therefore, the challenge that will be uppermost in the mind of the finance minister ahead of presentation of the national budget is whether this momentum can be sustained. The preliminary indicators do not warrant optimism.

The first indicator that wage rates in rural India have declined in real terms as against a growth of over 6% in the past six years means the demand for labour may have bottomed out. While rural wages started decelerating in the latter part of the year to March, their turning negative should be a cause for worry.

Part of the reason for the slowdown in demand in rural areas is the decline in public spending, which propped up rural demand for labour. While the decline in Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) spending in real terms had begun in 2010, recent years have also seen a decline in other items of public expenditure like the rural roads programme. But a bigger reason is the declining profitability in agriculture, which was partially responsible for the rural wage rise as well as shifting labour away from agriculture to non-farm.

Some of this was accentuated since August, when along with petroleum prices, other farm commodity prices started declining. This is now true for most agricultural commodities, but much faster for those with international exposure. The data from the Wholesale Price Index suggests that prices of food articles have dropped by 5% since August 2014. Cotton prices, on the other hand, have declined by 27% since January 2014. This is also true for most of the cash crops with international prices also collapsing, mirroring the fall in petroleum prices. Among those affected are wheat, sugar cane, basmati rice, guar seed, tea, rubber and soya bean. To add to the misery, the freeze on bonus by states on minimum support price has also meant lower procurement by the government, thus denying farmers even the minimum protection.

Together with the erratic monsoon, this has led to lower sowing in the rabi season by 4 million hectares compared with last year. Along with a decline of 2.3 million hectares in the kharif season, this is marginally higher than the decline in total area sown during the drought of 2009-10. While this will certainly affect output, agriculture is facing another crisis. Unlike external factors in the case of prices and natural factors such as the monsoon, this is the outcome of the flawed policies of the UPA, which the new government is persisting with.

The introduction of the Nutrient Based Subsidy (NBS) scheme has not only led to an increase in fertilizer prices, but also distorted the fertilizer mix. Price of DAP (di-ammonium phosphate) has increased from 10,000 per tonne in 2010 to 25,000 per tonne by 2014. A similar increase is seen in case of urea open market price. The result of this has been a sharp decline in fertilizer consumption, which increased from 47.8 million tonnes (mt) in 2008-09 to 55 mt in 2011-12, but declined after the NBS scheme to 47.7 mt in 2013-14. Further, the ratio of N, P and K fertilizers has worsened from 4.3:2:1 in 2009-10 to 8.2:3.2:1 by 2012-13 (the recommended mix is 4:2:1). Not only will this impact agricultural output, but it will also affect farmer incomes.

Clearly, the emerging situation in rural India presents itself as the first big challenge facing this government. While the government has already announced its plans for Make in India, the challenge is to convert it into a Sell in India strategy. Preliminary evidence of declining sales of durables and tractors in rural areas does point to a decline in rural demand. Given that international demand will continue to be low, reviving rural demand is not only necessary, but also the primary task that this government should take in this budget. Unfortunately, the preliminary indications from the
nine-month rule of this government do not inspire confidence. Not only has it led to a decline in spending on MGNREGA and other rural infrastructure programmes, its strategy of cutting back on fertilizer and food subsidy will also backfire. But the least that is expected from this budget is some injection of rural demand through a rural stimulus.

Coincidentally, a similar pattern was observed during the first stint of the National Democratic Alliance (NDA) government. Between 1997 and 2004, not only did growth in wages decelerate, agricultural commodity prices kept low, terms of trade moved against agriculture and agricultural output growth was also the lowest. The end result of the six-year period was the worst agrarian crisis with rural distress leading to farmer suicides. Unfortunately, farmer suicides are back in the news. Let’s hope this NDA government does not make the same mistake.

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

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Updated: 03 Feb 2015, 11:45 PM IST
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