India’s farm woes proving costly

Recurrent droughts perpetuate poverty. More so in a country that is predominantly rural, with 60 percent of the population relying directly on farming, and nearly two-thirds of fields fed only by rain. The consecutive crop failures, due to too much and too little rain, have already pulled down the agricultural growth rate to 0.2 percent, from 3.7 percent in 2013-14. Food prices have started to creep up. Finance Minister Arun Jaitley has said agriculture has become a sector of concern. But this is not a recent phenomenon.

Down To Earth highlights a few indicators that show that the crisis over India’s agrarian economy and rural economy, in general, has been brewing for many years and could be far more serious than it seems. These indicators also show where the government went wrong in its strategies.

Declining rural wage: The Economic Survey 2014 celebrated the fact that the rural wage growth had declined to 3.6 percent in 2014 from 20 percent in 2011. “If the trends continue, rural wage growth can continue to decelerate, moderating inflationary pressures,” noted the survey, which looked at development only from the perspective of inflation. But it was oblivious of the fact that the decline indicated a major dip in income for 400 million daily wagers. 

There is no way to explain the dip in the rural wage rate. But indicators show that the slowdown in the real estate sector and construction industry in urban areas, which employ millions of migrant labourers, could be a major reason. According to Jayan Jose Thomas who teaches economics at the Indian Institute of Technology, New Delhi, construction has been the only source of non-agricultural employment for people in rural areas since mid-2000s. For rural men, it accounted for 70 percent of the net increase in non-agricultural employment. But the slowdown has triggered a reverse migration. Villages are now flush with more labourers than before, bringing down the wage rate. The situation will worsen in the near future, as economists say 10 million people will move to rural areas after the urban economy starts slowing down.

Another reason could be declining interest in the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), which guarantees 100 days of employment. Since the Act was launched in 2005, it has given a boost to the local wage rate. But fund allocations under the Act have reduced since the NDA government came to power. People in several rural pockets have been waiting for their wages for seven to eight months. This year, despite consequent crop failures, the Act registered 40 days of job demands—one of the lowest in recent years.

Declining food grain support price: In times of distress, the minimum support price (MSP), fixed by the government for a crop, and should have come to the rescue. But the government’s recent decisions point to downsizing official support for higher MSP. In the last three years, the increase in MSP for wheat and paddy has been 4-5 percent, much less than the inflation rate (see graph). In fact, soon after IMD predicted that the monsoon season this year could witness a deficit rainfall, the Reserve Bank of India suggested that the government should limit the increase in agricultural support prices to control inflation.

The government offers the second level of support to farmers by procuring more food grains so that farmers earn maximum out of their reduced production. But in 2014-15, the government procured 51 million tonnes of wheat and paddy, which is 30 percent lower than last year. The states are also using fewer food grains from the Central allocations under the Food Corporation of India. With farmers now selling their foodgrains in the open market, wholesale prices of paddy and wheat have crashed by 16 percent and six percent respectively. In several parts of Bundelkhand, farmers have sold wheat at one-eighth of MSP. In Punjab and Haryana, farmers are dumping stocks in front of government procurement centres.

Food price dip: Why did people spend more during high inflation years of 2011 and 2012, and are spending less now, a phase of unprecedented low inflation even touching zero percent? In November 2014, the wholesale price index recorded zero. According to an analysis of consultancy company CRISIL, the year-round fall in food and fuel prices should have generated a saving of Rs 509 billion for Indian consumers in 2014-15; by 2016 it would have reached Rs 1.4 trillion. Such high savings should have delivered a big kicker to consumer spending. But this is not the case. The answer lies in declining rural spending due to less earning. During 2008-12, as per NSSO surveys on consumption expenditure, rural people spent much more than urban consumers, thus significantly contributing to overall national spending. The period coincides with rural wage boom. It was such a big contribution that the country could tide over the global economic recession smoothly.

This year food grain production is expected to lower by five percent compared to last year. In an ideal situation, the prices would have gone up. But wholesale prices for paddy and wheat have crashed. The situation is not going to improve in near future as the global food prices are touching a historic low. The Food Price Index has fallen 22 percent from its 2011 peak. Indian farmers are already feeling the pinch of this crash; farmers growing export-oriented commodities, such as cotton, rubber, tea and sugarcane, have plunged into crisis due to dwindling realisations and surplus stock. With domestic and global food prices dipping, it is going to be an economic mayhem for farmers.

Credit bubble: Rural credit lending is rising. Ideally, this should have been good news for farmers in need of the precious credit. But as the recent crop loss and unfavourable government policies increase the debt burden, it will lead to a situation where credit lending agencies will be crippled with bad loans. Consider this. India witnessed an unprecedented growth in farm loans last year. By January this year, says investment firm Emkay Research, banks’ agricultural lending grew by 17 percent compared to last fiscal year; non-food credit grew by 10 percent. This is not just a year-on-year increase. The 70th round of NSSO released in February shows that agricultural lending grew by 24 percent during 2003-13. The agricultural GDP grew by just 13 percent during the period. This is worrying as it indicates that while other growth factors like production and consumption remain stagnant or are declining, agricultural GDP is growing due to credit growth. If agricultural lending from all institutional sources like the public sector and cooperative banks is considered, farm credit is around 60 percent of the agricultural GDP, according to Emkay’s assessment.

In a way, it is a credit bubble waiting to burst. Since over 80 percent of the borrowers are small farmers who don’t have the capacity to pay back, it leads to demands for the loan waiver. This year, Maharashtra, Telangana and Andhra Pradesh governments have demanded the waiver of a loan of Rs 920 billion; in 2008-10, it was Rs 650 billion. This threatens banks’ ability to sustain lending.

All these indicators point to one thing: farmers are at a critical stage, worse than the situation of early 2000s that resulted in a spate of farmer suicides. The government must act before it’s too late.