When Prime Minister Narendra Modi met some prominent billionaires last month, seeking quicker job-creation and investments, many industrialists complained that falling rural demand for goods was rocking their boats too.
Incomes of India’s 833 million mostly poor rural population – a huge market for all kinds of goods – are barely rising and it is a cause for worry. Farming contributes just 15% of India’s $2 trillion economy, but half of India’s 1.25 billion people rely on a farm-related income. Without rural prosperity, the government’s plans for an economy firing on all cylinders will be easier said than done.
India may be projected to grow at 7.5% in 2015-16, outpacing even China, but a slowing rural economy can pose major hurdles in sustaining this turnaround. A back-to-back drought has hurt corporate earnings, which will keep factories from adding more jobs. For instance, companies are producing far fewer goods because of sliding rural demand.
Flat rural wage growth and farm incomes have caused textile output to fall 0.6%, while that of television sets — half of which are sold in rural areas — have fallen 16% in July.
For India to grow at 8%, agriculture must grow at least 4%. Yet, the farm sector has barely crawled at 1.9% in the first quarter (April-June) this year. It could get worse when the effects of a widespread drought become visible in the next few months.
Alarmingly, a rural distress — marked by slowing wages, poor incomes and lower profits from farming — now looks getting entrenched.
Hariram Pandey, a paddy-grower with a three-acre farmin Bihar’s Madhubani — was in the capital recently, nominated by his state to attend a farm ministry fair. He wasn’t happy about his condition. “I switched to hybrid maize this year from paddy because of the drought. I loaned Rs 70,000. But maize prices are considerably down this year.”
Pandey’s anxieties mirror similar difficulties in many food-bowl states. Plotted on a graph, farm earnings, wholesale prices of food and agricultural exports all look like falling off a cliff. Income growth in rural areas is stuck in the mid-to-low single digits in 2015 so far, well below the 20%-plus rates in 2011.
Between April 2014 and February 2015, the value of India’s farm exports dropped nearly 3%, as prices in global commodity markets fell. In August this year, tractor sales were down 23%. Rural wages rose at a slower 4.6% pace in a 12-month period ending in June, compared to a 12% rise in the same period a year ago.
The distress took hold mainly after 2011-12 and took a sharper turn after 2014. Some analysts blame this on too much focus on big-ticket investments at the expense of rural economy. “Personally, I was a little disappointed about the focus moving away from the rural sector between May and December 2014,” said NR Bhanumurthy, an economist with the National Institute of Public Finance and Policy.
The upturn in farmers’ income beginning 2004–05 could not be sustained after 2011–12, according to a research paper by Ramesh Chand, a member of Niti Aayog. Chand says a key reason for the sudden rise in agrarian distress is that farm income growth has now plunged to “around 1%”.
“It’s time the government re-looked at state-level vulnerabilities on four parameters: dependence on agriculture income, indebtedness, extent of irrigation and crop insurance for a long-term solution,” said DK Joshi, the chief economist at rating firm CRISIL.