What happened to rural demand?

MNREGA workers 

Pointing to seven indicators that provide hope, Finance Minister Nirmala Sitharaman claimed the economy is getting back on the track. Replying to a debate on the Union budget for 2020-21 in Lok Sabha, she said: “Government is keen to work with everybody and we want the economy to gallop.”

Elaborating the steps taken to support the engines of growth – consumption, investment and exports – she listed the ‘green shoots’ that have started to emerge. While the Finance Minister detailed the measures taken to show that the economy is moving forward, media reports said on the crucial aspect of boosting consumption the government listed the increase in minimum support price (MSP) of all mandated rabiand kharif crops for 2019-20. If this is all it takes to boost decline in consumption demand, I wonder why rural demand, where it hit the most, slumped in the first instance.

After all, MSP is announced before every crop season, year after year, and a nominal hike in prices is always expected given the rise in cost of production. Paddy price was raised by 3.7 per cent for the 2019-20 marketing season, while the increase in wheat price for the same year was 6.1 per cent. In any case, what perhaps is not being realised is that only six per cent of India’s farmers get to market at the MSP announced. Prices for most other commodities in the open market had prevailed much lower for farmers. In other words, inefficient markets couldn’t have provided the stimulus needed to prop up rural demand.

With the outlay for MNREGA shrinking by 13 per cent, and a steep cut in food subsidies from a budget estimate of Rs 1.84-lakh crore to a revised estimate of R 1.08 lakh crore in 2019-20 to go up marginally to Rs 1.15-lakh crore for 2020-21 clearly showed that rural consumption did not receive any fillip. In addition, for the five major nutritional schemes that address malnutrition, the allocation was reduced by 3.7 per cent. The budget for mid-day meal scheme, National Health Mission and National Rural Drinking Water Mission too faced a cut. Add to it the allocations announced for agriculture and allied sectors, irrigation, rural development and panchayats which just got an incremental increase, there was in reality no fiscal stimulus for rural areas that could have boosted rural demand.

The question therefore is what happened to the declining consumption demand, especially in the rural areas? If rural demand was not a significant factor at times of a slowdown, with growth slipping to 4.5 per cent in the previous quarter, I see no reason why IMF should go to the extent of saying that a slump in rural demand in India pulled down growth, which in turn pulled down global growth. Since the Budget 2020 did not address the crisis of demand, nor were any special measures announced later to provide more money into hands of rural poor, what remains unanswered is how come growth can rebound without any tangible efforts being made to revive rural spending?

If without reviving rural demand economic growth can surge to six per cent in the next financial year beginning April, as the principal economic advisor to the finance ministry has claimed, it will be interesting to know what constitutes consumption demand for them. If consumption demand is only restricted to spike in sales of durables like mobile phones, refrigerators, air-conditioners, washing machines and automobiles etc it shows perhaps rural demand is not even factored in growth calculations. Otherwise there is no reason why the slump in rural demand remained outside the economic radar screen to be seen only in 2019 whereas rural incomes had declined or remained stagnant for over two decades. It is only when economic growth fell to less than six per cent and adequate explanations were not forthcoming for the downhill slide that mainline economists shifted focus to the hinterland for answers.

Since 70 per cent of rural households are dependent on agriculture, the depressing levels of farm incomes over the past two decades should have earlier reflected in the growth estimates. As per an OECD-ICRIER study, farmers suffered a monumental loss of Rs 45-lakh crore in the 16 year period between 2000-01 and 2016-17. Every year, the farmers encountered a loss of approximately Rs 2.54-lakh crores. So much so that even Economic Survey 2016 had estimated that average farm incomes in 17 states of India, which is roughly half the country, stood at a paltry Rs 20,000 a year. In other words, farm families in half the country were surviving on less than Rs 1,700 a month. Such a severe farm distress should have pulled down growth but it didn’t.

As if this is not enough, Niti Aayog estimates showed that during the period 2011-12 and 2015-16 the growth in real farm incomes was less than half a per cent every year. With demonetisation hitting the informal sector, the growth in real farm incomes in 2017 and 2018 was ‘near zero’. Going by the chronology of farm distress, and knowing that farmers barely had enough to manage their subsistent households, how could the acutely distressed rural farm incomes not pull down rural demand in turn? That’s a question that mainline economists and policy makers have conveniently ignored.

As long as the growth continued to hover over six per cent, going to even right and nine per cent for quite a few years, rural India remained outside the economic radar screen. Once again, when growth picks up, rural demand will disappear from the economic discourse. #

What happened to rural demand? Deccan Herald. Feb 21, 2020

https://www.deccanherald.com/opinion/in-perspective/what-happened-to-rural-demand-806630.html?fbclid=IwAR2EIAZfKkPoG-EEkY0YoiMTroV_3omgD_yxFxkx0kcDaHYNWoeQbQTQN18  

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Budget 2020: A lost opportunity

Farmers work very hard only to find they have been shortchanged. 

It’s a lost opportunity. At a time when a slump in rural spending had led to a decline in rural demand pulling down country’s GDP to less than 5 per cent, providing more money into the hands of rural population – where 70 per cent households are engaged in agriculture – was being considered to be the surest way to prop up the economy. At a time when rural consumption is at an all time low, strengthening public expenditure in rural areas would have given a much wanted stimulus to agriculture. 

Knowing that the slowdown was not because of global factors but was driven entirely by domestic reasons -- lack of demand and slackening investments – most economists had suggested pumping in more money by way of direct income support to farmers and farm workers. At a time when bottom 60 per cent of the population holds only 4.8 per cent of the nation’s wealth, enhancing the budgetary allocation under PM-Kisan Samman Nidhi Scheme was considered to be an ideal route. Although I had suggested increasing the PM-Kisan allocation by another Rs 1.50-lakh crore, which would mean a direct income support of Rs 1,500 for a farming family per month, I was thinking at least the government would double the annual allocation for farmers – from the existing Rs 6,000 to Rs 12,000 per year. In addition, the budgetary allocations under MNREGA were anticipated to go up from Rs 70,000-crores, to at least Rs 1-lakh crores to make a meaningful impact. After all, farm wages have dipped to a five year low. 

Not only that the Finance Minister failed to utilise PM-Kisan and MNREGA for creating more rural demand, which would have led to increased consumption thereby leading to a higher economic growth, agriculture and allied sectors, irrigation and rural development and panchayati raj too did not receive any quantum jump in budgetary allocations. The total budgetary provisions this year are at Rs 2.83-lakh crores, which is hardly an increase over last year’s revised estimates of Rs 2.68-lakh crores. The outlay for farm credit has however been increased from Rs 13.5-lakh crore last year, to Rs 15-lakh crore this year. Studies have meanwhile shown that 41 per cent small and marginal farmers do not still avail credit from scheduled commercial banks. What needs to be understood is that farmers do not need more credit. What he needs is a higher income. 

In fact, the budgetary allocation for food subsidy has come down from 1.84-lakh crore to 1.15-lakh crore this year. This has raised doubts whether the government is intending to withdraw from procurement operations. Many farmer groups have raised this concern. Since the Finance Minister in the very beginning of her speech talked of liberalising farmers markets, more concerns have cropped up over the reduction in food subsidy. This assumes importance in the wake of recent developments where the Commission for Agricultural Costs and Prices (CACP) have recommended putting a stop to the open-ended food procurement policy. Already, Punjab and Haryana are under tremendous pressure to cut down on food procurement. Punjab has meanwhile amended the appropriate laws allowing for private sector participation and opening up for of private mandis.   

The 16-point action plan the Finance Minister spelled out as part of the Aspirational India that she talked about provides a roadmap for shifting to corporate agriculture. She said that the government would encourage those States which have implemented the three Model Acts that have been proposed earlier. These relate to land leasing law, market liberalisation and contract farming. Saying that agriculture needs to be made competitive, she listed a couple of programmes to double milk processing by 2025, increasing fish production to 200 lakh tonnes by 2025, integrating financing on warehousing receipts with e-NAM so as to encourage commodity trading. To launch Kisan Rail and Kisan Udaan for transporting perishable commodities too would be beneficial for agribusiness companies. Although much of the 16-point action plan that she listed have already been talked about in previous budgets but I didn't find any separate allocation for these programmes. .  

To lay out a roadmap for the direction of future agriculture is perfectly alright but there is a need to first ascertain how effective the pathway would be. Most of the reforms being brought in agriculture are borrowed from America and European Union. But what is not being explained is that if these policies were effective, why is it that agrarian distress in US/EU is at its peak? The spate of rural suicides in America, for instance is 45 per cent higher than the suicides in urban centres. Real farm income growth has been steadily on the decline in the US since the 1960s. India therefore needs to redesign agriculture in a way that it ushers in rural prosperity. #

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