Can Budget 2018 address slowdown in rural economy?

The results of the Gujarat elections, in which the opposition Congress outperformed the ruling Bharatiya Janata Party (BJP) in rural constituencies, and the growing number of farmer agitations in the country have focused attention on rural India ahead of this year’s budget. But addressing the rural challenge successfully will depend on an accurate diagnosis.

While it is undoubtedly true that organized protests by farmers and agrarian riots have been rising in the Indian countryside over the past couple of years, the trajectory of overall rural distress has not exactly been the same.

In fact, the Mint index of rural distress has been declining over the past couple of years after it rose to its peak in 2015, when back-to-back droughts had hurt the rural economy. The Mint index of rural distress is a composite index based on normalized values of three high-frequency indicators—rural wage growth, agri-GDP growth, and tractor sales.

The rural distress index is on a downward trajectory. Yet, the rural distress index is still higher than what it was when the Narendra Modi-led BJP government stormed to power in May 2014. This suggests that while the rural economy may not be in as dire straits as in the summer of 2015, the rural economic crisis is indeed real and has lasted quite long.

The roots of the rural crisis lie in structural problems—fragmentation of land holdings and the lack of land-leasing laws, market imperfections and lack of access to markets, lack of adequate risk-mitigation mechanisms in farming—all of which require structural solutions. The budget is unlikely to be able to fix these problems since they require institutional reforms beyond budgetary allocations.

While the budget can make provisions for farm waivers or higher farm subsidies, such policies may not be fiscally sustainable, and may even be counter-productive.

Besides, such policies may not directly impact the poorest and most vulnerable rural households. Such households with very small or negligible land holdings, whose incomes barely cover their consumption expenditure, tend to be less dependent on cultivation as a source of income compared to big farmers, as a 2016 Indira Gandhi Institute of Development Research (IGIDR) working paper by Sanjoy Chakravorty, S. Chandrasekhar, and Karthikeya Naraparaju pointed out. Small and marginal farmers who form the bulk of rural Indian households depend more on wage incomes and animal farming than on cultivation for their livelihoods, their analysis of National Sample Survey Office data shows.

Thus, measures aimed at big farmers may not trickle down to all rural households. The same logic applies to other farmer-centric schemes.

For instance, small and marginal farmers seem to have been largely left out of crop insurance coverage, a 2017 report from the Comptroller and Auditor General (CAG) pointed out, even as it raised questions on the implementation of crop insurance schemes in the country.

Even when it comes to agricultural extension services, small and marginal farmers tend to lose out, a recent field study in Assam by the economists Binoy Goswami and Ranjan Jyoti Bezbaruah pointed out. Extension workers are frontline agricultural workers, who provide independent advice to farmers on farm-related practices, and help them mitigate risks.

Although extension workers are supposed to meet all farmers, the researchers found that they tend to meet only the so-called ‘progressive’ or big farmers, who are expected to pass on information to smaller farmers.

In reality, the benefits of public extension services do not percolate to the wider farming community. As a result, smaller farmers are left to fend for themselves or have to rely for advice on private input dealers, who have a conflict of interest. Not surprisingly, only the public extension services tend to have a positive impact on farm incomes, Goswami and Bezbaruah found.

If the government wants to raise rural incomes equitably, and get the bang for its buck, it will need to fix existing farmer-centric schemes first before it funnels more money into them.

Reforms in the existing farm-related schemes must be accompanied with reforms to remove the stranglehold of middlemen on the farm-to-fork value chain, and to ease the ability of farmers to lease unviable plots of land to others.

The government would do well to begin with the reforms already identified by a committee appointed by it to raise farm incomes. It would also do well to end the hysteria around cattle farming since this affects animal farming by rural households. It is the small and marginal farmers who depend most on animal farming, and are affected most by the growing risks and uncertainties facing the animal trade. Over the past decade, it is income from animal farming that has contributed most to income growth of marginal farmers.

It is these changes rather than big-bang budget announcements that are likely to make a sustainable impact on the Indian countryside. But it will require great political will and administrative capacity to effect these changes. Offering sops to the vocal and influential class of big farmers is politically easier and safer even though it involves higher economic risks.