Mission 'achche din': Drag in farm sector can delay economic recovery

Factory output has fallen sharply and a depressing farm season this winter, along with a slump in rural wages, could prolong recovery. The drag this time could be the result of rural India not doing well.

business Updated: Dec 15, 2014 00:46 IST
Economy,Manufacturing,factory output

Even with the prospects of a year of high growth and low prices, a clutch of disquieting data on the ground suggests that things are still tough, potentially testing the Narendra Modi-led government’s ability to pull the economy up.

Output in factories has fallen sharply and a depressing farm season this winter, along with a fall in rural wages, could prolong recovery. Simply put, the drag this time could be the result of rural India not doing well.

According to a Planning Commission estimate, farm GDP needs to grow at a targeted 4% for India to grow at 9%, subject to other economic conditions.

After a partial drought, the farm economy, which provides livelihood to half of all Indians, is set to enter another depressing season. Robust farm-sector growth is critical to engineer a quick industrial turnaround in Asia’s third largest economy, which grew by 5.3% in the July to September quarter compared to 5.7% in the previous one.

Missing seasonal rains and a warmer-than-usual winter have meant that dry conditions have persisted, impacting winter sowing. Overall, farmers have planted crops on a smaller total area, due to poor soil moisture. The net sown area so far stands at 47 million hectares, compared with 50 million hectares last year. With likely rains and cold conditions, officials said sowing is likely to pick up now.

Agriculture accounts for only about 14% of India’s GDP, but farm income has a big influence on factories. For instance, a third of television sets are sold in rural markets and 40% of India’s cement demand comes from rural housing.

Overall, the current slump means the economy did not add as many jobs as it should have, and people dependent on agriculture are earning less money too, as food prices fall.

Analysts widely expect a return to multi-year high growth, aided by easier monetary policy, cheaper oil and reforms by the Modi government. Yet, six months on, hard numbers suggest otherwise.

October was particularly bad. Factory output – a good indicator of both industrial activity and mood of shoppers -- fell by 4.2%. The manufacturing sector, which accounts for 75% of total factory output, tanked by 7.6%. Weak industrial activity lead to other adverse impacts, such as job cuts and less pay. A strong manufacturing sector, on the other hand, creates jobs.

One reason for the slump has to do with this year’s drought.

“Demand for consumer goods have remained weak despite the festive season. And though inflation fell rapidly, a dent in farm incomes could have kept consumption demand low,” said Dharmakirti Joshi, chief economist with credit rating and research firm, CRISIL.

Across towns and villages, people are buying less white goods, such as electronics or cars: consumer durables output fell 35% showing lower spending power.

A fall in rural wages, or incomes, could be worrying as the government curbs MSP, or the guaranteed price it pays to farmers for their produce to correct earlier hikes. With subdued farm activity, the sails in overall economy could take longer to be back.

The NDA government will have to push reforms faster and much rides on its ability to steer key reform legislations through Rajya Sabha, where it is woefully short of numbers.

Not all analysts, though, see a prolonged impact of the current deceleration.

“Industrial production shrank 4.2% in October, worse than expected owing to fewer working days, a mobile plant shutdown and also some underlying weakness. In our view, the October industgrial production data are an outlier and we would not take this as a sign that growth momentum is flagging again,” said Sonal Varma, an economist with Japanese investment advisory firm, Nomura.

First Published: Dec 14, 2014 18:37 IST