The clock has turned full circle: rural distress is climbing once again.

Let us rewind to the year 2004. The National Democratic Alliance surprisingly lost the national election. The new alliance that took power that year was led by a rejuvenated Congress. The party believed it had won because the previous government headed by Atal Bihari Vajpayee had ignored the rural areas. Manmohan Singh became the new prime minister. His speech to the nation on 15 August 2004 mentioned the need of a New Deal for rural India. The focus would be investments in irrigation, rural roads, electricity, primary education and agricultural infrastructure.

The actual strategy of his government over the next 10 years was quite different from what had been suggested initially. The United Progressive Alliance focused on policies that do not seem to have done much to free Indian farmers from the unending cycle of distress. Here are some elements of that failed strategy:

1. Agricultural prices: Farm support prices were pushed up in the decade after 2004. For example, support prices of paddy rose at a compounded annual growth rate of 9.09% in that period compared with 4.14% in the preceding decade. The terms of trade moved in favour of agriculture as inflation in manufactured goods was lower than food inflation. A new index of terms of trade created by a panel headed by economist Mahendra Dev shows that the terms of trade improved for farmers from 2005 to 2011, reversing an earlier decline. Not all this was because of explicit government policy to engineer a shift in the terms of trade. Food prices also moved up because of global trends as well as strong demand for proteins. All these factors combined to send food inflation soaring.

2. Rural wages: The price of farm labour also rose steeply in that period. One reason was that the Mahatma Gandhi National Rural Employment Guarantee Scheme put a new floor under rural wages. Demand for workers also climbed because of an unprecedented rural housing boom. The fact that rural wages rose more rapidly than rural productivity created an inflation bias. There is currently a lot of controversy whether funding for the rural jobs scheme has been cut. But the more interesting bit of data is that the cumulative funding for the scheme since it was introduced in 2006 has been in excess of 2.5 trillion. It is worth asking here whether this money could have been better spent on the sort of things that Manmohan Singh had mentioned in his 15 August 2004 speech: irrigation, rural roads, extension services and electrification.

3. Bank lending to farmers: The previous government essentially ordered public sector banks to ramp up lending to rural areas. Then finance minister P. Chidambaram stated upfront in his 2004 interim budget speech that his government would double credit in three years. That remained a core policy of the two Manmohan Singh governments (though it must also be added that the way total loan growth of banks exceeded nominal output growth suggests that a credit bubble was allowed to be built in those years). Bank lending to rural areas went up by a factor of almost five between 2004 and 2013, from 0.85 trillion to 4.5 trillion, according to data from the Reserve Bank of India. Interestingly, one grand tradition of Indian politics is that banks are first goaded to lend more to farmers but then panels are set up to examine why farmers are indebted. The Narendra Modi government is no exception.

4. The farm loan waiver: The first Manmohan Singh government announced a farm loan waiver in 2008, perhaps in preparation for the 2009 election. That entailed a 60,000 crore full or partial cancellation of debt for 30 million small and marginal farmers, and 10 million big farmers. It was claimed at the time that this would free Indian farmers from the debt trap, so that they would begin a new cycle of investment. Subsequent economic research has shown that the loan waiver has had a minimal impact on the investment decisions of rural households. World Bank economist Xavier Gine summarized the results of a recent study, of which he was a part: “While household debt was reduced and banks increased their overall lending, contrary to what bailout proponents claimed, there was no evidence of greater investment, consumption or increased wages as a result of the bailout. Instead, we find evidence that banks reallocated credit away from districts with greater exposure to the bailout. Lending in districts with high rates of default slowed down significantly, with bailed-out farmers getting no new loans, and lending increased in districts with lower default rates."

There is now growing proof that the strategy of rural rejuvenation followed over the past decade has not delivered the desired results. Each element of the strategy may have been a useful temporary palliative—rural poverty did decline in those years. And perhaps such palliatives are needed right now when farmers are suffering because of unseasonal rains.

But the general strategy does not seem to have delivered any structural gains in terms of creating new opportunity for farmers. Indian farming continues to operate under constraints such as fragmented landholdings, a looming groundwater crisis, lack of new technology, controlled markets, no access to risk management products and inadequate public investment in rural infrastructure.

However, the dominant view before Independence—right from the report of the first famine commission in 1880—was that the real sustainable solution to rural distress is rapid industrialization of the country. It was also the view of important nationalists such as B.R. Ambedkar, Madan Mohan Malaviya, V.D. Savarkar and Jawaharlal Nehru. The big failure of Indian growth has been that not enough industrial jobs have been created to offer people an exit from agriculture, unlike what has happened in most countries that have developed rapidly, the latest being China. There was some diversification of the rural economy in the first decade of this century, but that was largely because of the rural housing boom rather than the growth of organized industry.

The Modi government will undoubtedly have to provide aid to the villages at this moment of distress. But the experience of the past decade should serve as a useful warning: a structural crisis needs structural solutions.

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