Photo: Mint
Photo: Mint

Opinion | The mounting challenges of a two-speed Indian economy

The dualism of income stagnation in the farm sector and the rapid growth in rest of the private sector is our next big hurdle

The recovery from the demonetization shock of November 2016 has clearly been an uneven one. The latest estimates of Indian economic growth released by the government’s statistics office in the last week of February highlight the uncomfortable fact that India now has a two-speed economy. Agriculture is in the slow lane while the rest of the economy is moving ahead at a much quicker pace. The difference is even more stark when prices are considered in tandem with output.

The headline news barely needs repetition. The Indian economy lost substantial momentum in the third quarter of the ongoing fiscal year. It grew at 6.6% in those three months. The advance estimates for the entire year suggest that the fourth quarter is likely to be worse. A quick calculation shows that the Indian economy will expand at 6.3% in the fourth quarter. Compare this with the 8% growth logged in the first quarter of the current fiscal year. Economic growth in the fourth quarter is likely to be 1.7 percentage points lower than the expansion rate in the first quarter.

The sectoral growth rates tell us how the Indian private sector is growing at two speeds right now—one for agriculture and one for the other parts. In fact, one important reason why the overall economic momentum has slowed is because of an indifferent rabi season this winter in farms across the country.

Output growth at constant prices in agriculture, forestry and fishing has nearly halved compared to the third quarter of fiscal 2018. The picture becomes sharper when you add prices. Nominal farm output—production plus inflation—has grown at a mere 2% in the third quarter, as the collapse in farm gate prices has added to the pain of a poor rabi season. Farm incomes are now growing at perhaps the slowest pace in the past 15 years.

The industrial economy is doing far better. Manufacturing growth has bounced back this year. The Purchasing Managers’ Index for February 2019 shows that factories continue to hum thanks to a combination of strong production and new orders, though business optimism has begun to wane.

It is much the same with services in the private sector such as construction, hotels, transport, finance, and communications. The manufacturing plus services part of the economy would perhaps have done better had there been no liquidity crunch in the last few months of 2018 because of the near collapse of Infrastructure Leasing and Financial Services Ltd.

The bottom line: The rest of the private sector economy grew nearly six times faster than agriculture in nominal terms in the third quarter.

An earlier instalment of this column had focused on how India is facing a version of the famous Scissors Crisis that the Soviet Union faced in the early 1920s. Wholesale food prices have been falling while industrial prices are rising.

It is true that the rural economy has over the past three decades moved away from total dependence on farming. Farm distress does not automatically equate with broader rural distress. However, the new rural occupations continue to have deep links with agriculture and nearly half the Indian labour force continues to be primarily dependent on farming for its income. The poor rabi crop as well as the decline in food prices is bound to hurt.

What now? All may not be necessarily well with the rest of the economy either, especially given the global context. The global economy is weakening, international trade volumes have declined sharply because of the US-China trade war, and there are financial stability concerns in China. Two major consequences of this—lower commodity prices and a slower pace of US monetary policy normalisation—will act like buffers.

Indian macro policy is now clearly in easing mode. The last budget of the Narendra Modi government was expansionary. The Reserve Bank of India has already cut its policy interest rate while switching its monetary policy stance from calibrated tightening to neutral. The cyclical downturn and the low headline inflation have given policymakers room for such easing.

Many in the financial markets are expecting another rate cut in April, though bank interest rates have not come down because credit growth is running ahead of deposit growth. The decision to increase interest rates on provident funds soon after a rate cut by the central bank defies logic.

India will have three consecutive quarters of lower economic growth this fiscal year. The extent of the cyclical downturn—or growth recession—will depend on a host of factors such as the state of the global economy, the response to domestic policy easing, and the strength of the next monsoon.

The trickier problem is the structural one: The dualism of income stagnation in the farm sector combined with much more rapid growth in the rest of the Indian economy. The terms of trade between the two continue to be one of the central challenges in Indian political economy. The two-speed economy has implications for Indian politics, as well as economics, in the months ahead.

Niranjan Rajadhyaksha is research director and senior fellow at IDFC Institute. Read Niranjan’s previous Mint columns

Close