3 min read.Updated: 29 Aug 2019, 09:15 PM ISTHimanshu
The government’s prognosis overlooks the rural stress that is at the heart of the economy’s troubles
Last week saw a flurry of activity from the government aimed at reviving the economy. So far, it was in denial, but it has now woken up to the economic crisis that is spreading like wildfire. The vice-chairperson of NITI Aayog termed the crisis the worst since independence. Several members of the economic advisory council to the Prime Minister also expressed their concerns. As a first step, the recognition by New Delhi that all is not well is welcome. Most likely, the quarterly gross domestic product data to be released on Friday would confirm that the slowdown which set in two years ago is continuing.
While there is now acknowledgement of the problem, and there also seems to be an urgency to address it, there is still no recognition of the reasons why the economy is in this state in the first place. Going by the hurriedly-called press conference of finance minister Nirmala Sitharaman, it further appears that the steps announced are not only cosmetic, but also misguided.
Sitharaman presented the measures in six silos, most of them either roll-backs or clarifications of certain budget announcements. But the crisis in the economy was not precipitated by any of these budget proposals. Therefore, most of the announcements would only serve to assuage markets and the super-rich who were affected by them. With the slowdown spreading across the economy, there have been attempts by various industry bodies to extract as much stimulus as possible from the government, and some of them have succeeded in extracting concessions.
But the section of the population that has suffered the most, and whose neglect caused the crisis to spill over to various sectors, was not even mentioned during the conference. That is: the rural economy and all those affected by the economy’s demand crisis. While the government agreed to open up its purse to buy new four-wheelers for its officers, it did not occur to it that the real crisis is out in the countryside, where most are struggling to maintain essential consumption.
The reality of rural areas is clear from the trend in wages. As per the latest available data from the Labour Bureau, real wages in agriculture (average of all agricultural occupations) declined by 0.5% per annum in the two years to June 2019, whereas non-agricultural wages were stagnant. Some of this is also evident in the consumption expenditure data, which showed real consumption in rural and urban areas decline by more than 4% per annum between 2014-15 and 2017-18. The crisis in the countryside is also obvious from the fact that unlike urban areas, where retail inflation has exceeded 4% in the last four months, in rural areas, it has been near zero. Clearly, the situation in rural areas is far more serious, worsening in the last two years as the terms of trade turned sharply against farming.
Unfortunately, the rural poor, farmers and casual-wage workers have no voice, even though it is they who form the bulk of consumption demand with almost two-thirds of the population. There has been no effort to address their declining incomes. Recent data from companies with large rural exposure has also showed declining sales of everyday-use items such as biscuits, despite discounts. But these were left out of the economic package. With large-scale retrenchments in the manufacturing and services sectors, and a slowdown in construction, it is likely that rural areas will see an influx of returning migrants with no jobs. This will not only swell the pool of the unemployed, but also pressure wages further.
It is obvious that the extent of the Centre’s bailout of sentiments is directly proportional to the noise one makes and inversely so to the extent of slowdown various sectors actually face. While the finance minister may have uplifted the mood of foreign and domestic investors and mollified the super-rich by assuring them of all support, these are unlikely to be of any use if the base of our economy’s pyramid is crumbling. With banks flush with liquidity, no amount of interest rate cuts or extra cash infusion will revive the economy until the decline in consumption demand is addressed.
However, with the windfall gain of the surplus received from the Reserve Bank of India, the government could increase its spending to revive rural demand. The easiest way to achieve this would be by raising expenditure on rural infrastructure and through enhanced wages under the rural employment guarantee scheme. The problem is not of a lack of resources, but a lack of understanding why the economy is in a mess.