Why Bharat won’t lift a troubled economy
9 min read 03 Aug 2020, 08:57 PM ISTMany theories have been floated about a farm economy-fuelled revival. Here’s why those hopes are unrealisticIndicators like tractor sales or increased govt procurement of foodgrains affect only a small slice of the agri economy. It would be misplaced to read these as signs of a rural revival
PremiumOne of the theories that emerged quickly after the pandemic began to spread was that the agricultural economy would save the day for the Indian economy. In a year in which the wider economy is expected to contract, agriculture is expected to continue to grow. Some early data—such as the jump in tractor sales and robust motorcycle sales—gave wings to what was at best a very weak theory.
The weakness of this thought comes from the assumption that the agricultural economy and the rural economy are one and the same thing, which they aren’t.
Rural is not only agri
The Nabard’s All India Rural Financial Inclusion Survey 2016-17 published in August 2018 found that only 23% of the income of an average rural household came from what can be categorised agriculture (19% from cultivation and 4% from livestock rearing).
Interestingly, even in an agricultural household, only 35% of the income came from cultivation. In comparison, 34% of the income in agricultural households came from wage labour.
In a note dated 20 July, analysts at Credit Suisse point out that agriculture forms around 29% of the rural economy. The non-agricultural rural economy consists of construction, manufacturing, financial services, communication and the government. With cities running out of land, a bulk of the new factories have come up in rural areas in the last two decades. This has helped in job creation and in the movement (albeit slow) of people from agriculture to manufacturing, a more productive sector.
In fact, of the 63 million micro, small and medium enterprises (MSMEs) which contribute to around 30% of India’s gross domestic product (GDP), around 50% are in rural areas. These MSMEs have been going through a tough time during the pandemic.
As the Reserve Bank of India’s latest systemic risk survey points out: “The MSME sector is affected because of a lack of cash flows. Low demand, lack of manpower, stuck working capital and a lack of capital may lead to further stress on employment."
There have been huge job losses in the MSME sector. The third national multi-institutional survey on MSMEs in India estimates that 25-30 million jobs had been lost in the MSME sector by the end of June 2020. It further estimates that another 10-15 million jobs will be lost by August.
The MSME sector employs around 110 million individuals. Hence, even at a conservative level of 35 million job losses, close to a third of the jobs in the sector would have disappeared by the end of this month.
In fact, the job losses in the MSME sector are clearly visible in the massive demand for work under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). Individuals who have lost MSME jobs—both in rural and urban areas—are looking for work under MGNREGS.
Between April and July this year, 125 million households demanded work under the scheme. In fact, between April and July 2019, 90 million households had demanded work under the scheme. Hence, the work demanded under the scheme this year has gone up around 38%.
What does this tell us? The government pays an average of ₹202 per day under this scheme. The scheme is self-selecting and pays a low daily-wage. Hence, only those who want to work under the scheme actually end up working in it. Work demanded under the scheme has gone up by 38% and this tells us that the non-agricultural part of the rural economy, which forms more than 70% of the rural economy, is not generating enough work, forcing people towards MGNREGS.
This can’t be good news despite the fact that some work is better than no work and helps in bringing down the unemployment rate. Also, not every household that demands work under the scheme gets work through it. Of the 125 million households which have demanded work this year, around 104 million households (or around 84%) have managed to get work. This has been possible given that the government has increased the budget of MGNREGS to more than ₹1 trillion this year.
Also, the all-India data for MGNREGS hides a very important point, which is the varied availability of work under the scheme across different states. States like Andhra Pradesh and Tamil Nadu have better coverage under the scheme in comparison to states like Uttar Pradesh, Bihar, Jharkhand, etc. A bulk of internal migrants in India’s cities come from the latter states and those are the geographies where more work under MGNREGS needs to be created.
The procurement paradox
Another reason offered in support of the rural economy doing well this year is the massive government procurement of wheat. The government buys rice and wheat directly from the farmers through the Food Corporation of India (FCI) and state procurement agencies at a minimum support price that it sets every year. Between April and June this year, the government has procured 388.81 lakh tonnes of wheat directly from farmers. This is a jump of 13.9% from the total amount of wheat procured in 2019-20. Over and above this, the price at which the government has been buying wheat this year has been increased by 4.6% to ₹1,925 per quintal (100kgs).
Hence, wheat farmers have made more money by selling wheat to the government this year than last year. Does this mean that the rural economy will now do well as these farmers might now go out and spend money?
Procurement at MSP benefits only those farmers who produce enough to be able to sell to the government. Over and above this, they need to be in a position to incur the upfront expenses involved in selling to the government. Also, most importantly, the procurement operations of the government are concentrated in certain parts of the country and tend to benefit the farmers in those parts.
As the Commission for Agricultural Costs and Prices points out in the context of wheat: “For example, in Uttar Pradesh, the largest producer of wheat in the country, only about 7% of wheat growers are covered under procurement operations and in Rajasthan, about 4% farmers are covered. On the other hand, more than 80% of wheat growers in Punjab are getting the benefit of procurement while the state accounts for around 3% of total wheat growers in the country."
The excess procurement comes with its own costs. It encourages farmers to grow rice and wheat at the cost of other crops—everything from pulses to oilseeds. Of course, the government doesn’t think about second-order effects and given this, there will be an increased procurement of rice later this year. But the impact of this on the rural economy will be limited.
The agricultural economy also consists of more than just rice and wheat. As supply chains have broken down and hotels and restaurants have remained shut, everyone from vegetable to fruit growers to dairy and poultry farmers have had a tough time over the last few months. There are no MSPs for vegetable and fruits given their perishability. It is worth mentioning here that since 2012-13, the total horticulture production (everything from vegetables to fruits to spices to flowers to honey to plantation crops) has surpassed the production of food grains. Hence, saying that the entire agricultural economy has been doing well isn’t correct. There are many farmers out there with very little government support.
Fall in remittances
Other than higher wheat procurement, the government has tried to help the rural economy through the distribution of free rice, wheat and pulses under the Pradhan Mantri Garib Kalyan Ann Yojana. The ₹1,500 which has been deposited in Jan Dhan accounts has also helped. Of course, the MGNREGS budget has been increased helping fund more work under the scheme. Essentially, this means money has been put into the hands of rural citizens. But can this help pull up the overall Indian economy as is being suggested?
Other than a do-gooder government, there are other factors at work as well. With many workers moving back to their native places from urban centres, internal remittances are bound to come down dramatically during this financial year. This impacts the rural economy in a negative way.
As analysts at Credit Suisse referred to earlier point out: “We find that the net monthly gain from oft-discussed reasons is approximately ₹75 bn, or 0.9% of rural GDP: ₹350 bn/month of fiscal support offset by ₹275 bn/month decline due to lower remittances, weak agri-perishables, and low agri credit growth."
Clearly, this is barely enough to get the rural economy going, forget the overall economy.
Weak state finances
Over the last five years, the total expenditure of the state governments has been around 89% more than that of the central government. In 2020-21, this is bound to take a beating as tax collections of state governments (primarily through a tax on real estate transactions, excise duty on alcohol and sales tax on petroleum products) have collapsed. Also, with the state governments having to allocate money towards fighting covid, expenditure on everything else will have to come down. This will impact rural growth negatively.
Besides, post-June, covid is now spreading beyond India’s big cities. As the Credit Suisse analysts point out: “Covid-19 is now spreading rapidly in Tier-3/4 cities (which some call ‘rural’), and possibly onward to truly rural areas; this would stall the rural momentum."
Again, this will impact some states more than others. The medical infrastructure varies across the country. Doctors are not uniformly spread all across India. Karnataka with a population that is less than one-third of Uttar Pradesh has 1.23 lakh doctors. Uttar Pradesh has 77,549 doctors.
What this means is that as covid spreads through states which have a weaker medical infrastructure, the one big way for governments to tackle it will be to enforce local lockdowns. And this can’t be good news for the economy.
The tractor sales puzzle
Tractor sales in June have gone up and this has been widely cited as a sign of rural recovery. There are multiple problems with this argument. First, April to June is traditionally the tractor buying season. Given that April and May barely saw any sales, June sales could just be pent up demand.
But even if we ignore that, one needs to take into account that tractors are just too expensive for a normal farmer. In 2019-20, a little over 700,000 lakh tractors were sold in India. Assuming that an average tractor costs ₹500,000, this amounts to around ₹35,000 crore. The size of the entire agriculture economy in 2019-20 was at ₹32.6 trillion. Hence, tractors form an insignificant part of the overall agricultural economy and their increased sales only indicate that extremely rich farmers are doing well. They neither reflect the state of the overall agricultural economy, nor the rural economy for that matter.
To conclude, it is worth remembering that the share of agriculture in the Indian economy has been falling over the years. It had stood at 54.1% of the economy back in 1960-61 and has come down to 13.4% in 2019-20.
The question is: How can a sector, which is anywhere between one-seventh and one eight of the overall economy, revive the country’s economic fortunes?
During the last two decades, the farm sector has grown by a little over 3% per year on an average. Given this, there is no way that only agriculture doing well—even accounting for its positive spillover on the rural economy—can revive the overall economy, simply because its share is too small and it grows too slowly.
All these reasons essentially tell us that while the agricultural economy and the rural economy may end up being in a better shape than the urban economy during the course of this year, they are really not in a position to drive growth across the overall economy.
Vivek Kaul is the author of Bad Money.
