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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Four priorities for Finance Minister in Budget 2020

Pic courtesy: Business Today

There are three very significant findings that should shape the lists of economic measures that the Finance Minister Nirmala Sitharaman is expected to spell out while presenting the budget on Feb 1. Especially at a time when the challenge is to pull the country out from an economic slowdown, a few corrective steps in the right direction can surely pave the way for churning back the stalled wheels of growth.

A few months’ back media had talked about people thinking twice before buying a pack of biscuits costing Rs 5. This was followed by a consumer expenditure survey report of the National Sample Survey Office (NSSO) – which was later shelved by the government – concluding that the purchasing power of the rural poor is on a decline, computing that the poor in the villages are able to spend only Rs 19 a day to buy food. And more recently, the Niti Aayog itself has acknowledged in a report on Social Development Goals (SDG) Index 2019 released a few weeks back saying that poverty, hunger and inequality has grown in 22 to 25 States and Union Territories.

Taking these three reports together, and weaving a set of measures that brings more money into the hands of the poor, is what will drive the economy. This is what mainline economists call as generating more demand. Most economists agree that the problem is on the demand side, which means unless the poor is able to purchase a Rs 5 packet of biscuits without thinking twice, and unless the rural farm and non-farm wages show an upward trend, which in turn depends largely on revival of agriculture. With farm incomes dipping to the lowest in 15 years, and farm wages on the decline for the past five years, rural spending continues to be low thereby pulling down rural demand.

In other words, since agriculture engages nearly 50 per cent of the population, and has the potential to re-energise the dampening rural economy, Finance Minister’s focus should be on providing more income into the hands of farmers. In any case, let’s not forget that growth in real income of farmers has been almost ‘near zero’ in the past seven to eight years. Therefore, tax concessions to the corporate and the middle class can wait, but the poor can’t. In addition, to enhancing the budgetary provisions under MNREGA, the four priorities that Nirmala Sitharaman must focus on are:  

To begin with, providing an enhanced direct income support, through the PM-Kisan Samman Nidhi scheme, should be the first priority. Adding to the financial allocation of Rs 75,000-crore already made in the previous budget, another provision of Rs 1.50-lakh crore needs to be made under this scheme enabling farmers to receive Rs 18,000 per year as guaranteed income, which comes to Rs 1,500 per month. This amount may not be anything significant for the urban middle class but imagine the difference it will make to farm livelihoods in half the country where the annual farm incomes are a maximum of Rs 20,000 per year. This scheme is already applicable to all land owning farmers, and further it needs to be expanded to include tenant farmers. My first recommendation to the Finance Minister therefore is to provide an economic stimulus package for agriculture, which surely will go a long way in boosting rural spending.

My second suggestion is to set up a fund, call it price support fund or farm livelihood fund, under which a cess is imposed on all value added products which are based on agricultural commodities. For instance, Punjab produces 120-lakh tonnes of rice. If a cess of Re 1 per kg is imposed, Punjab alone will generate a price support fund of Rs 1,200-crore from rice. Take another example of Kerala, which produces 40-lakh tonnes of rice, which means Rs 400-crore can flow into the fund. Similarly, for wheat, a cess of Re 1 for every kg of atta sold, will bring in a huge revenue. Add to it major farm products like sugar, dals, milk and milk products, spices, edible oils, cotton textiles etc, a huge fund can be generated every year. Not only major agricultural commodities, value added products and processed foods too need to have a cess imposed, the cess value varying from a product to product depending on its profit margin.

All these years, farmers have been subsidising the consumers. An OECD-ICRIER study shows that between 2000 and 2016, farmers had incurred a loss of Rs 45-lakh crore on account of being denied their rightful income. The report also says that the loss farmers suffered helped consumers get a retail price advantage of 25 per cent. I think the time has come when consumers need to pay back farmers, and contributing through a price support fund is the most appropriate way.

In last year’s budget, Finance Minister had talked about Zero Budget Natural Farming (ZBNF) but had refrained from making any financial allocations. This was followed by the Prime Minister Narendra Modi asking farmers to move away from chemical fertilisers. Speaking on the Independence Day he had appealed to farmers to shun chemical farming. This is a very significant suggestion coming at a time when intensive agriculture is being blamed for at least a quarter of the greenhouse gas emissions (GHGs). Numerous studies globally have shown how chemical agriculture has led to serious environmental destruction, mining of underground water, and contaminated the entire food chain.

Although the name suggests Zero Budget, it does not mean that the promotion and expansion of natural farming does not require any budgetary allocation. My third suggestion to the Finance Minister is to provide at least Rs 25,000-crores for replicating Andhra Pradesh’ experiment with natural farming in a phased manner. This has to be followed up with the creation of a separate marketing network for organic produce.

And finally, lack of adequate marketing infrastructure is coming in the way of farmer’s getting the right price for their produce. Against the requirement of 42,000 Agricultural Produce Marketing Committee (APMC) regulated mandis there exists at present some 7,000 mandis. Although the government had two years back announced upgrading 22,000 village haats, the progress is very slow. Besides speeding it up, adequate allocations need to be made to widen and improve the network of available mandis, and village link roads. #

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