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Farm & rural economy conundrum - is it real?

Share Written By
Mr.Dhananjay Sinha

Head of Research, Economist & Strategist

30 Jul 2018

While rising rural consumption demand is getting reflected in corporate & industry data, persistent and recurring farm sector vulnerability is a conundrum that confronts most analysts and policy watchers.

Official data on India’s GDP shows that nominal gross value add (GVA) for the agriculture sector declined to 4.5% in FY18 - the lowest since 3.8% in FY05 (agriculture GDP basis, represented by GVA data now). This is a considerable slide from the recent peak of 22% in FY11 and 13.5% in FY13.

The unrest in the agriculture sector is palpable. It reflects in farmer protests across the country spanning crops like vegetables, pulses, sugarcane, cotton, milk etc. Also, the widespread loan waivers starting from Andhra Pradesh & Telangana in 2014, and pick-up in the same post demonetization and UP election underscores the long-standing farm sector distress on the back of continued slide in its terms of trade since its peak of 2011-12. And as the general elections are nearing, the number of states now amenable to large loan waivers are rising.

As per our calculations, the terms of trade for the agriculture sector has declined by 8.5% since its peak in FY11, around 30% of which occurred post the demonetisation shock. The terms of trade captures the realised price of the farm sector produce relative to the cost index and hence it is a reliable indicator of its profitability. 

Delay in the MSP announcement and weak farm sector realisations of the past have possibly led to the 11.5% year-on-year decline in kharif crop sowing till date at 27mn hectares (as on July 13, 2018). The southwest monsoon till date has been normal.

Empirical evidence shows that negligence of the agri sector has resulted in severe political damage to the incumbent governments. Lack of recognition of the agrarian distress was an important contributor in the fiasco of NDA’s “India Shining” campaign in the 2004 elections. The inability of the Modi government to fulfill the promises made to the farm sector was also seen affecting the BJP’s performance during the state elections of Bihar (2015) and Gujarat (2017), and will possibly have a bearing in the upcoming elections in Madhya Pradesh, Chhattisgarh and Rajasthan. Outcome of the recent by-elections, including those in UP, are also indicating similar sentiments.

Indeed, the significant deterioration in farm economics, which is evoking strong response from the opposition parties and regional political alliances, is now driving the central theme of BJP’s recent policy initiatives.

Hence, it is unsurprising that the massive farm loan waivers have found widespread support from BJP-ruled states as well as non-BJP states. Based on media reports and our assessment, value of the total farm loan waivers can be worth ~Rs3.0 trillion on an all-India basis. 

The center’s move to increase minimum support prices (MSP) for the current kharif season (for 13 summer crops; average hike of 15%) marks the highest increase since 2013. Importantly, it reflects a lagged intervention by the government to ameliorate the long-standing farm sector distress arising from declining net realisations, especially in the aftermath of demonetisation.

The demonetization and GST dislocations also appear to have affected the informal sector and is the possible the reason behind the spurt in demand for MNREGA jobs, resulting in nearly doubling of MNREGA allocation to Rs580bn in FY18. This is expected to rise further to Rs650-700bn in FY19, higher than the budgeted Rs570bn. These shocks affected the rural economy through twin channels of interdependence of non-farm incomes on the farm sector and also standalone non-farm activities. Indeed, growth in rural wages has plummet to 3-3.5% in recent months from 6-6.5% prior to the demonetization shock.

So, clearly, the concerns surrounding the farm sector appear at odds with the strength emanating from the industry-related data.

Sample these. Tractor sales have been robust over the past two years, growing at 20% p.a. during FY17-18 and the momentum has continued in Q1FY19. Similarly, Two Wheeler sales have perked up in FY18 with a growth of 15.6%, strongly led by rural-centric states (up 23%). Indications from consumer companies suggest that after three years, the rural market has bounced back with double-digit sales growth, which is now outpacing the urban markets. As per management commentaries, there is renewed enthusiasm among consumer companies to extend their rural reach and accelerate new product launches to exploit this opportunity.

A closer look at industry-wise data, however, throws up some interesting insights. The 20% tractor sales growth over the past two years is mainly attributed to contraction during the prior two years (which were drought years). Tractor industry is also receiving strong support from the farm loan waivers announced by several states.

However, the current strength appears modest when seen over a longer time frame. The CAGR of tractor sales since FY14 is a modest 3%, implying that FY18 volume of tractors sold was only marginally above FY14. Also, much of the recent rebound has come from Eastern and Southern states. Since FY14, average growth in tractor sales from Western and Northern states has been -0.11% and 0.2%, respectively.

In contrast to Tractors, the spurt in growth of Two Wheelers to 15.6%has been more recent (mostly in FY18). Average growth in the previous three years was 5.7% p.a., with similar averages across rural and urban areas. Buoyed by the stronger rural demand, Hero MotoCorp saw its volume rebounding to 14% in Q1FY19 after consistently delivering sub-par performance during FY13-17. UP, with 78% rural coverage and 14% share of national Two Wheeler sales, grew by 26% in FY18 after averaging at 1.9% in the previous three years. Likewise, Madhya Pradesh grew by a robust 27% in FY18 vs 2.7% in the prior three years. The story is similar in from Chhattisgarh and Rajasthan.

Contrasting these rosy numbers is some dismal data from Agri Input sector, which has reporting a moderate performance over the past 5-6 years. For instance, Fertilizer consumption growth averaged just 1.1%. Signs of revival in Fertilizer consumption (6-7% growth) till mid-2016 were stymied by demonetization with virtually no growth in FY17-18.

So, if one looks at these trends, there is actually no paradox behind the persistent distress in the farm sector and the recent robust industry data showing strong rural conditions. There is no denying that the farm sector has been reeling under stress since 2012-13, when the deterioration in farm sector economics started. And, till recently, the Modi government had been unable to fulfill its promises, including farm price realizations at 150% of the comprehensive cost of cultivation, and doubling of real farm incomes.

Other poll promises included favorable land acquisition of farm land, higher public investment in agri & rural development, welfare measures for aged, poor & marginal farmers, taking technology closer to the farmers, reinvigorating food processing industry (leading to higher exports) and Fasal Bima Yojna. Fruition of these promises can at best be considered partial.

However, the recent policy response has been quick and large, many of which are not unfamiliar. The damage done to the farm sector due to demonetization, especially to the horticulture sector (which suffers from weak post-harvest infrastructure), has been significant. These have sparked off disproportionate fiscal responses, especially the farm loan waivers, resulting in state government allocation for rural & agri sector rising by a huge 36% in FY18, following the 14% growth in FY17.

Likewise, allocation to the rural & agri sector by the Centre also increased by 40% during FY17-18 over the average allocation of the previous four years. Allocation to MNREGA has nearly doubled and food subsidy budget is likely to rise to Rs1.8tn following the recent 15% MSP hikes for the ongoing kharif season.

We also observe that the government has stepped up the procurement of foodgrains, including Rice, Wheat and Coarse Grains, with the outstanding buffer standing at 73.3mt in May’18 (up 17% yoy). It is also higher than the previous peak of 72mt in 2012.

Given the limitations of policy interventions in the farm sector, the government appears to be working towards a broader theme of uplifting rural economics (not just farm incomes), including higher rural sector allocations in Budget (MNREGA, rural housing and infrastructure), farm loan waivers, direct benefit transfer, power for all, better MSP prices, aggressive food grain procurement, import restrictions etc.

To summarize, the build-up towards the general election and disruptions caused to the farm sector by demonetization have impelled considerable fiscal and policy commitment towards the farm and rural sector. This will continue to support consumption demand in the near term, given the multiplier effect of government spending.

But, these policy responses are not sustainable since most of them do not address the core issues of sustainability facing the farm and rural sector. As we have seen over the past 30 years, these reflationary responses will not last too long. What we need are potent structural reforms to ensure a more sustainable and prosperous agri & rural economy. They include major transformations like better value addition, encouraging industries to increase their participation in the farm sector, collective organised farming, robust farm insurance, diversification of income based on skills and formalization of rural services sector. Measures such as the financialization of the rural sector, direct benefit transfers etc are indeed steps towards structural reforms and will require long-term strategies, which will have to transcend short-term political considerations.