2017 has been a bad year for the economy. The fact that the economy is in crisis, particularly the rural economy, is no longer a matter of statistics. The recent elections in Gujarat have laid bare the fissures in the rural economy that have been ignored for the last three-and-a-half years. With three of the major states ruled by the Bharatiya Janata Party (BJP) facing elections this year, the ruling dispensation can hardly afford to take things lightly. There is already some discussion on designing better mechanisms for price support measures for farmers in Madhya Pradesh and other states ruled by the BJP. While the political exigencies may lead to support for the rural economy, there is in fact a strong economic case as well, if aggregate economic growth has to be revived.
For most commentators, there is a sense of relief that the worst phase of the economy may be over. This belief partly stems from the fact that the overall economy has rebounded, reversing the deceleration in aggregate growth numbers. Most commentators also believe, erroneously, that the slowdown has been the result of demonetisation and the hurried rollout of the goods and services tax (GST) and with the economy slowly adjusting to these shocks, the economy may actually be on an upward trajectory. But this euphoria may not last long if the root cause of the deceleration is not tackled.
It is worth reiterating that neither was the slowdown the result of demonetisation and GST rollout, nor is remonetization and the economy adjusting to GST a sign of recovery. The slowdown precedes both these shocks and the real reason is the crisis in the rural economy. There is a lot of evidence to support this, the most important being rural incomes and wages, both of which have been falling in real terms over a period of more than three years. The droughts and the sudden collapse of prices after August 2014 aggravated rural misery but the structural issues remain important and unattended to.
It was the demand depression caused by rural distress that spilled over to the larger economy. Therefore, any attempt at reviving the economy has to begin with revival of the rural economy.
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Unfortunately, there are no signs yet that the rural economy is reviving. The usual symptoms of distress have in fact worsened. The revival in rural wage rate growth was short-lived and rural wages are again stagnating. Prices of most crops remain under pressure and despite a good monsoon in the last two years, crop production remains subdued. Kharif output this year is expected to decline by 2.8%. According to a report released by the ministry of agriculture on 28 December, reservoir levels are 5 billion cubic metres lower than last year. Recent estimates of crop sowing released by the agriculture ministry suggest that even rabi sowing may be less than the previous year. As on 29 December, wheat sowing is 1.7 million hectares lower than corresponding estimates for the previous year, which is a decline of 6%. Sowing of coarse cereals is lower by 1.1% and sowing of oilseeds is lower by 6.7% as on 29 December.
Rajasthan and Madhya Pradesh are among major states which grow wheat and oilseeds and a large decline in area sown does not augur well for the already fragile agricultural economy in these states, both of which have seen agrarian unrest last year. The only crop which has seen an increase in acreage is pulses, which has seen its area rise by more than 8%. For rabi crops as a whole, the area sown is 1% lower than the previous year.
While rabi sowing data suggests that the trend of decline in output of crop agriculture is likely to continue, it is the price volatility which is likely to add to the crisis in the countryside. So far, attempts to strengthen price support measures have not borne fruit. The challenge is not just the ability of the government to strengthen the existing framework of price support measures but also create a robust system where none exists. This is particularly true for horticultural crops where there is complete absence of any policy to deal with price volatility. Nor is there any effort to improve market access and remove cartelization in the supply chain. While the crisis in agriculture has worsened in the last three-and-a-half years, it continues to remain unattended. Available data from national accounts confirms that public investment in agriculture during this government’s first two years has declined in real terms by more than 4%.
Any hopes of a revival of the economy will squarely rest on the outcome of the agricultural sector. The distress in rural economy, unfortunately, is not limited only to the agrarian sector but has also spilled over to the larger economy with unemployment becoming a major challenge. Contrary to popular perception, these are not separate problems but linked to each other. The only way to revive employment growth is a revival in the agrarian economy. It is also the only way to revive overall economic growth. It is also politically imperative for the incumbent government, if it has to seek political legitimacy. More than 80% of the decline in oilseeds is in Rajasthan and almost 40% of the decline in area under wheat is in Madhya Pradesh. Lest the government forget, it is important to remind it that no government has been re-elected by ignoring the agrarian sector. The Atal Bihari Vajpayee government learnt it the hard way. Let’s hope that this government learns from its predecessor.
Himanshu is an associate professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.