Rural India-cause and victim of decline in economic growth
Manjari Balu September 15, 2019/Commentary
The sluggish growth in Indian economy and sinking automobile sector has impelled debate on the nature of stagnation, structural or cyclical. While there are multiple internal and external causes for the turbulent state of Indian economy, falling level of consumption in rural India is attested as an important factor. Rural economy, mainly bolstered by the agriculture sector is characterized to have permeating structural issues. The Gross Domestic Product (GDP) at constant price has recorded the lowest performance of 5 percent in the last 25 quarters and 7.9 per cent at current price. An expeditious state intervention is recommended as the ambitious target to achieve the target of a 5 trillion dollar economy by 2024 would become an impossible one . The dire status of agriculture has always been the concern of policymakers and growth in agricultural productivity has not got beyond 3 per cent in the last decade. Debilitating effects of falling consumption and low Gross Capital Formation are palpable with the performance of economy. Despite rapid urbanization, as per 2011 census, 68 percent of the country’s population and 72 percent of the workforce belong to the rural areas. A fragile rural economy is indicative of a paralyzed economy to advance overall growth. The efforts of the state to reduce lending rates are laudable yet would not guarantee to revive the rural consumption. The government has announced merger of major banks to recapitalize the state run banks in order to ease the credit flow. The credit woes of Non-Banking Financial Companies (NBFC) and burgeoning unemployment rates may get resolved to a limited extent in the near future. The Unemployment rate in rural areas jumped from 1.7 percent in 2011-12 to 4.8 percent in 2017-18. This sharp rise in unemployment in general rate has spurred continuous debates on ‘jobless growth’. Recent slack in automobile and fast moving consumer goods industry can be understood by dissecting the rural economic structure. Employment augments income which in turn drives the consumption and investment pattern.
Indian rural economy is characterised by large informal sector and perennial crisis in agriculture. Though the employment in agriculturereduced from 58 percent in 2004 to 48 percent in 2011, productivity to GDP has shrunk to around 16 percent. This implies the labour shift from farm to non-farm sector was not a consequence of mechanization or modernization in agriculture. Around 97 percent of the agriculture employment is informal in nature indicating a volatile nature of the wages and income. In the year 2011-12, agriculture sector employed 64 percent of the rural workforce but managed to produce only 39 percent of the output. The average daily wage rates of farm labourers fell from 11.08 percent in 2007-08 to 4.3 percent in 2018-19 (Derived from various government data). Between 2004-05 and 2011-12, labours engaged with agriculture declined at the rate of 2.04 percent and excess of 84 million workers were to be shifted to non-farm sector. A visible trend of falling Monthly Per Capita Expenditure (MPCE)on food items from 72 percent (1973-74) to 58 percent (2011-12) delineates positive relationship between income and consumption. The Rural Financial Survey conducted by NABARD (2016-17) reported agricultural households average consumption expenditure at Rs 7152 -higher than non-farm households MPCE at Rs 6187. It is the state’s onus to invest in priority sectors and incentivize private investments to absorb the human capital. Inextricable linkage between agriculture and non-agricultural sector is evidentfrom a study that observes a distinct correlation. An average increase of Rs. 100 in farm income is associated with an increase of Rs 64 in non-farm income. The fall in productivity and income in agriculture should not be overlooked as the fall in rural consumption can be traced to poor growth and income. A robust investment in rural especially agriculture sector is vital to facilitate a smooth intra and inter sector migration.
The moribund public investment in agriculture is 0.4 percent of the total GDP and private investment plummeted to contribute merely 1.8 percent in 2016-17 from 2.7 percent in 2011-12. The debates on the impact of public investment on private investment have traversed a long way post the reforms. Irrespective of the results that empirical evidences provide, a chief distinction has to be made between investments in agriculture and investments for agriculture. The latter includes asset creation and other significant infrastructural and technical investment to succour agrarian economy. One of the government’s flagship workfare programme, Mahatma Gandhi Rural Employment Guarantee Scheme (MGNREGS) had a twin intention to utilize human capital for the rural development, and to guarantee a minimum income during the periods of crop failure. Principally, such employment programs aimed to inject money in rural households would positively influence the farm income. Farm labourers have economic incentive to take up 100 days employment program and creating a labour supply shortagein farm sector that keeps the wage high. However, primary studiesshow that the poor convergence between departments has led to delayed payments, political interference, lack of knowledge and inadequate facilities. Wage payment delayed to labours was 56 percent in 2017-16, concomitant with low disposable income and thereby deficient demand. Decelerated real wage rates are witnessed in agriculture and non-agriculture sector for the past five years which inevitably causes rural distress. Revamping payment mechanism and policy adoption to enhance overall productivity as to accumulate income would revive the rural demand.
Consumer Price Index (CPI), which measures the changes in price level of consumer basket, has drastically fallen in rural sector. Budget expenditure on agriculture is growing and stands at INR 1,50,000 crore yet plunging CPI in agriculture labours implies lack of willingness among people to demand or consumption. The figure shows agriculture labourers have low CPI compared to the overall rural CPI. General uncertainty in agriculture sector and informal operations has led to such divergence. An inference can be made from poor performance of the industries thriving on rural market. Low growth coupled with high CPI would indicate supply side rigidity, low growth with low CPI would mean deficiency in demand. Demonetisation, argued to have a positive long term effect on the economy has to be revisited as Robert Lucas in his noble lecturenoted “Unanticipated monetary contractions can induce depression”. The possibility of disequilibrium created in money market due to demonetisation cannot be completely ignored. Goods & Services Tax (GST), unified tax system implemented has faced criticism for high tax rates of 28 percent on automobile sector. Untimely promotion of Electric Vehicles (EV) by the state when the economy is strangled with exploding population and unemployment ameliorated the slack in industries.
The intervention to revive the economy should pertain to rekindling the aggregate rural demand by chalking out long term strategies. Finance Ministry’s proposal to lower the lending rate to buttress the investment is necessary but not sufficient enough to address the demand problem. Paucity of substantial labour market data deters a comprehensive study; however, OECD reporthighlighted the inadequacy in quality jobs created in India since 2010. Low interest rates offered by bank would encourage investment but rural populace would be excluded as unskilled labourers. The income-demand cycle would continue until there is a balance of fiscal and monetary policies. Corporate companies exhibit optimism and assert that slowdown is temporary; however, lean consumption demand is a symptom of the structural fiasco faced in rural economy. A makeshift solution through fiscal policies might ease the situation for now but this warning signal to rural economy remains.
Manjari Balu is a Research Analyst with The Peninsula Foundation.