By Ira Dugal
Ira Dugal is Editor – Banking, Finance & Economy at BloombergQuint.
The outcome of the Gujarat state elections, where the ruling Bharatiya Janata Party won but did not do as well as they may have hoped for, has sharpened the focus on the rural economy. The BJP lost significant ground in the farm-dominated Saurashtra region, suggesting that the agrarian economy is discontent. A number of brokerages have used that outcome as a reason to speculate that the government may push farm-focused polices in the lead up to the general elections in 2019.
While that may be a reasonable conclusion at most times, the problem at the current juncture is the lack of clarity on what is going on in the rural economy. Different indicators are throwing up different results, making it tough to understand where the real problem lies and, hence, what the optional solution for the problem is.
Is Low Inflation The Problem?
One narrative that had picked up earlier in the year was that inflation was too low, that farm prices had collapsed and, hence, farm incomes were under pressure. That story, however, played itself out quickly.
Recent readings of the consumer price index for inflation, suggest that prices in most categories are now rising and the problem of low food inflation has self-corrected. With the exception of pulses, most categories are now seeing an increase in prices on a year-on-year and on a month-on-month basis. Inflation in the food and beverage category stood at 4.41 percent in November 2017, having increased from 1.29 percent in January 2017. Rural inflation in the food and beverage category stood at 4.24 percent in November 2017 compared to 1.75 percent in January. The trend holds true for most sub-categories, except pulses. For instance, in the vegetables segment, inflation has gone from a negative 14.5 percent in January to 18 percent now. While the year-on-year inflation rate will reflect a low base effect, even the index level has increased from 119.8 in January to 168 in November, suggesting prices have normalised.
The argument that lower increases in minimum support prices is hurting farmers is also not borne out by the data.
Data for minimum support price increases over the last three years show that the percentage increase in the current year is higher in most cases, across both rabi and kharif crops. So will the often-cited solution of higher MSPs really solve the problem or will it end up pushing up inflation, which, in turn, will hurt real incomes?
Also, remember that India has a flexible inflation target (4 percent +/- 2 percent) now, limiting its ability to tolerate high inflation. As such, any sharp increase in MSPs may quite quickly lead to higher interest rates and prove to be counter productive for the broader economy.
Is Low Output The Issue?
While the problem of low prices may have played itself out, there may still be some pain to come from the output side. Second quarter national income data showed that Gross Value Added growth in agriculture remains weak at 1.7 percent. This, despite a second year of strong monsoons.
Growth was weak partly because of base effect but also because of moderation in kharif production. Data published by the Department of Agriculture and Cooperation shows that production of food grains during the kharif season declined by 2.8 percent as compared to a growth of 10.7 percent during the same period last year.
In its December review, the Monetary Policy Committee had noted that there have been shortfalls in both kharif production and rabi sowing. Both of these pose downside risks to the outlook for the agriculture sector. While rural incomes have diversified over time to beyond agriculture, lower farm output would undoubtedly depress sentiment in the hinterlands.
The key reason for the lower production in the kharif season, however, appears to link back to the rains. An uneven spread of rainfall early in the season is one reason cited for the lower production. Floods in certain states like Gujarat and dry spells in states like Maharashtra may have been factors at play.
If that has been the key reason, again, it remains unclear what policies need to be followed by the government to correct the problem in the short term. Spending on the rural employment guarantee scheme has already been increased by Rs 3,595 crore in a year when allocation to the program had hit a record Rs 48,000 crore. That, perhaps, is the best corrective at this stage.
Longer term, of course, the government can try and push crop insurance more aggressively to strengthen the ability of India’s rural economy to deal with distress.
Are Rural Incomes Under Strain?
Indicators on rural income also continue to throw up conflicting conclusions. Some commentators have argued that rural wage growth has weakened over the past few years and has impacted incomes. Others have pointed to the fact that rural incomes are now on the rise.
In a note dated November 22, brokerage house Motilal Oswal had analysed second quarter earnings of companies dependent on rural consumption and come to the conclusion that there were signs of a pick up.
“After three years of subdued rural consumption, there are now increasing signs of a pickup,” analysts Gautam Duggad and Nikhil Gupta said in their report while adding that catalysts are in place for the revival of rural demand.
While two successive years of normal monsoon portend well for farm output, the combination of MSP hikes, direct benefit transfers and farm loan waivers should drive up disposable incomes.
Motilal Oswal Report
Commentary from managements of companies that have significant exposure to the rural economy has also started to sound less pessimistic. Hindustan Unilever Ltd., for instance, said that it expects a gradual improvement in rural demand going forward after it reported a four percent pick-up in volumes during the July-September quarter.
If this trend holds strong over the next few quarters, then perhaps it could be argued that the strain on rural incomes is easing and not increasing.
With the problems unclear, where could the solutions for farm sector distress lie?
Neelkanth Mishra of Credit Suisse believes it could lie in putting more money in the hands of farmers and preparing them better for adversities. “We expect policy action, with the budget speech focusing on farm distress, and a ramp-up of DBT on fertilisers, crop insurance, and innovative price guarantee schemes for farmers,” Mishra wrote in a note following the Gujarat election results.
Economist Yoginder Alagh, says that policy makers need to focus on the shifting terms of trade for the agriculture sector. “What you need is a well modulated tariff policy,” Alagh told Bloombergquint while adding that the focus on MSPs is “vastly overdone.” “It is tariff policies, it is improvement of markets, it is investment, better infrastructure (that needs to be tackled),” Alagh said.
Featured Image Credits: Pexels
Stay updated with all the insights.
Navigate news, 1 email day.
Subscribe to Qrius