Two years ago, the rural consumer was the delight of consumer goods companies and financial firms as they sought to tap the growing demand in India’s countryside. After repeated spells of poor weather in the past two years, rural demand seems to have weakened sharply. Villagers appear to be trapped in a new cycle of distress, which threatens the resurgence of earlier years.
The past decade has been transformational for the rural economy in many ways. Yet, several deep-rooted vulnerabilities remained unaddressed. The combination of high economic growth, populist policies and good fortune had helped mask structural problems in the rural economy over the past decade. The latest crisis has exposed those fault lines once again.
Non-farm employment has grown sharply over the past decade
A large section of villagers has moved away from farm jobs over the past two decades. The share of farm workers in the rural workforce declined from 77% in 1993-94 to 73% in 2004-05, and further declined to 64% in 2011-12. The growth in non-farm jobs accelerated between 2004-05 and 2011-12 largely because of a massive construction boom, which generated new jobs for unskilled labourers.
The share of horticulture in agricultural output has spiked
Agriculture has transformed over the past decade, with an increasing number of farmers opting to grow fruits and vegetables rather than rice and wheat. The share of fruits and vegetables in farm produce has risen sharply over the past two decades.
Fruits and vegetables account for nearly a quarter of agricultural output. Horticulture (which also includes flowers, condiments and spices) accounts for nearly a third of agricultural output, and is a key driver of India’s agricultural trade.
Horticulture offers higher returns to farmers
Horticulture offers much higher returns compared with traditional crops. For small farmers, growing such crops is more viable compared with growing food grains.
Growing non-farm job opportunities in villages and growing diversification within farms have helped raise rural incomes and living standards over the past decade. The rise in non-farm jobs has benefited even farm labourers, as it has raised demand for labourers, and contributed to a sharp rise in rural wages. The growing commercialisation of agriculture has led to a more intensive use of almost all inputs including labour, further pushing up wages. While the rural job guarantee scheme could have helped push up wages, additional spending on the welfare programme did not seem to have impacted wage growth much, as an earlier Plain Facts columnpointed out. Rural wage growth has been moving largely in line with the growth in farm output and the rise in construction activity.
Rising incomes have reduced poverty
Rising wages boosted the purchasing power of those at the bottom of the pyramid and led to a sharp fall in rural poverty. The dramatic fall in poverty ratios between 2004-05 and 2011-12 was largely because of the sharp decline in rural poverty.
While rural monthly per capita expenditure grew at an anaemic annual rate of 0.8% between 1993-94 and 2004-05, it grew at a much faster pace of 3.3% a year between 2004-05 and 2011-12 at constant prices.
The improvement in farms is also reflected in lower suicide rates
The revival in rural fortunes also brought down India’s farm suicide rates below the overall suicide rate of the country.
A decade ago, farm suicide rates were the key drivers of India’s high rate of people killing themselves. However, farm suicide rates have fallen below non-farm suicide rates over the past few years. This holds true even after adjusting for under-reporting by states such as Chhattisgarh and West Bengal.
“The frustrating thing about India is that whatever you can rightly say about India, the opposite is also true,” Cambridge University economist Joan Robinson had famously quipped long years ago.
Robinson’s observation seems to be particularly true of rural India, where about 70% of the country’s population, or 830 million Indians, live. Although rural India experienced transformative changes over the past decade, many old problems remained unattended.
The moneylender’s grip over the rural economy
One such weakness in the rural economy is the high dependence on moneylenders, who charge usurious rates of interest. Except for the top three decile classes in terms of assets, the percentage of rural households indebted to non-institutional agencies is higher than those who borrow from formal sources such as banks, other financial institutions and self-help groups.
The burden of debt from non-institutional sources is typically high because of the exorbitant interest rates. As much as 69% of all non-institutional finance is given at interest rates of 20% and above.
Farm credit has grown sharply
The high dependence on non-formal sources of credit has persisted despite a sharp increase in the credit intensity of agriculture. Over the past decade, agricultural credit as a share of agricultural gross domestic product has risen exponentially.
Bank credit is not reaching small farmers
Although aggregate credit intensity of agriculture is rising, small and marginal farmers (who make up 85% of rural households) have not benefited much, economists R. Ramakumar and Pallavi Chavan pointed out in a 2014 research paper. Urban and metropolitan areas have seen a sharp spike in disbursal of farm loans. Further, there has been an increase in the share of larger-sized loans since 1991.
Worryingly, the larger loan size has not translated into productive investments in agriculture. There has been a sharp fall in the share of long-term credit in total agricultural credit over the past two decades. “Consequently, the portion of agricultural credit that was used for fixed capital formation in agriculture became smaller,” wrote Ramakumar and Chavan.
Subsidies rather than investments dominate public spending on agriculture
The lack of private investments in agriculture has been compounded by a declining share of investments in public spending on agriculture. Rising subsidies, which offer short-term relief but do not help long-term growth, have crowded out public investments in agriculture. GFC (Public) in the chart refers to gross fixed capital investments in agriculture by the government.
Productivity growth has been anaemic
The absence of adequate investments has hit productivity growth in agriculture. Annual growth rates in food grain productivity have steadily fallen since the first decade after independence.
The use of high yielding varieties of seeds since the late sixties led to a spike in yields in the seventies and eighties, popularly known as the green revolution. However, productivity growth turned anaemic after the eighties.
Since the green revolution, the country has come to rely largely on subsidies to support farm incomes, rather than on investments that can raise farm incomes sustainably. The mess was exacerbated over the past decade. Such a strategy is increasingly becoming fiscally and ecologically unsustainable. Price incentives such as guaranteed minimum support prices which do not lead to productivity growth raise public debt, and stoke inflation. Subsidies on inputs such as fertilizers are not only regressive (as they benefit large farmers more than smaller ones and a few states more than others) but also harm soil health by damaging the balance of nutrients in farmlands. Power subsidies have led to a groundwater crisis in the country.
Unless short-term palliatives such as cheap loans and input subsidies give way to long-term investments such as those in water management systems, and research and extension networks, it will not be possible to sustain growth in rural incomes.
Raising productivity growth will raise farm profits and wages without stoking inflation, even while freeing up farmlands for industrial development. If only India could raise rice yields to China’s level, we would need just half the land that is currently used for rice cultivation to grow the same amount of rice.