Context
Estimates of gross domestic product (GDP) released on 28 February confirmed that India’s economy is decelerating. The silver lining was growth in agriculture, which accelerated for the third quarter in a row to 3.5%.
How agriculture sector has performed in the last few years?
- Robust growth in the last 5 years: A look at the national accounts for a longer period shows robust agricultural growth during the first five years.
- With agriculture growing at 3.17% per annum between 2013-14 and 2019-20.
- This is remarkable, given that the broader economy is witnessing a slowdown.
- Rural economy seen from the other indicators: A variety of other indicators show that the rural economy has been going through possibly its worst phase, with declining wage growth and farmer incomes causing serious distress.
Crop sector growth rate at lowest
- A clue to this disconnect between the national accounts and other indicators lies in a breakdown of the national accounts.
- Crop sector growing at lowest in two decades: The GDP data for the agricultural sector shows that the crop sector, which accounts for 56% of total agricultural output and employs a majority of the farmers, has been growing at only 0.3%, the lowest in two decades.
- By comparison, the sector grew 3.3% per annum during the 10 years under United Progressive Alliance governments.
- Which sector of agri. is growing at a high rate? The agricultural sub-sectors that showed high growth between 2013-14 and 2018-19 were livestock (8.1%), forestry (3.1%) and fisheries (10.9%).
- It is a puzzle what drove the high growth of livestock at a time when the crop sector was experiencing negligible growth.
- The trend defies the logic: This defies past trends and is also difficult to believe, given contrasting trends in other indicators of livestock
- The declining income of farmers and a decline in wages: The poor performance of the crop sector confirms the declining income of farmers, the majority of whom depend on crops for subsistence. Not surprisingly, even real rural wages are declining.
- Inflationary pressure and hopes of growth in income of farmers: Hopes were kindled in the last three months as agricultural commodities showed signs of inflationary pressures, with food inflation hitting double-digit rates.
- Increase in rural demand not the cause of inflation: A careful analysis of the data rules out rising rural demand as the cause of that inflationary trend.
- Many price pressures were due to the mismanagement of cereal supplies by the government and supply shocks in vegetables.
- In such circumstances, farmer income could not have risen. Some of this was also a result of food prices rising internationally.
Trend pointing to the fall in agri. prices
- Softening of food prices: Recent trends in international markets suggest a softening of food prices led by an overproduction of cereals and easing edible oil inflation. Following 3 factors may contribute to its fall.
- Impact of fall in crude oil price: This trend will gain strength in the wake of the recent slide in crude oil prices.
- With the global economy displaying signs of a slowdown, prices of agricultural commodities are likely to fall sharply.
- Relation of food prices with oil prices: They tend to follow movements in crude oil prices, as was seen during the latter’s collapse in August 2014. In all likelihood, a similar decline in agricultural prices is upon us.
- Food-grain stock with FCI: A second factor that may exacerbate the income troubles in agriculture is the presence of massive food-grain stocks with the Food Corporation of India.
- This may slow the procurement of farm produce and lower price realizations, particularly cereals but also other crops.
- The coronavirus outbreak: Lastly, the global slowdown due to the coronavirus outbreak is likely to dampen demand in the economy, and in turn hurt the agricultural sector.
Conclusion
- Limited room to improve the situation: These factors are likely to worsen agricultural incomes, and domestic policy has limited room to manoeuvre.
- Opportunity to revive the demand: This situation is also an opportune time to revive rural demand The government could pass on some of the windfalls from the drop in oil prices to rural consumers. This could help lift rural incomes.
- The government could also increase spending in rural areas to help boost demand and prevent a collapse in agricultural prices.
- Worst for agriculture is not yet over: Whether the government uses the opportunity or fritters it away again will be known in the coming months. What appears certain for now, though, is that the worst of the rural slowdown is far from over.
