Tracing the economic roots of discontent among farmers
The coming union budget will have to find a balance between two contradictory FDs: farm-distress and fiscal discipline. The choice is not going to be an easy one.
Ignoring farm-distress in the last full-fledged budget before elections could be politically suicidal. Meanwhile, there are at least two things that could make the government slip on the fiscal front. Rising oil prices have increased upside risks to inflation. Tightening of global interest rates means that the government’s borrowing costs are likely to increase too. A higher fiscal deficit would require more government borrowing.
What the government could do to balance these contradictory objectives and how it will actually do this is an answer best left to post-budget analysis. Why did things come to such a pass is a better question to ask at this moment.
Monsoon performance is still a major determinant of agricultural performance in India. The first two years of this government were rainfall deficient years. In this context, is it fair to blame the government for poor agricultural growth?
This government lists demonetisation and Goods and Services Tax (GST) as its biggest reform measures. Both of them have direct bearings on the tax-structure. Why the concern on fiscal front then? What has been the impact of these two measures on the government’s revenue generation ability?
This two-part series will try to answer these two questions.
The rural discontent story has a counter-intuitive element to it: 2014-15 and 2015-16 were rainfall deficient years. Year-on-year growth in agricultural Gross Value Added (GVA) at constant prices was -0.19% and 0.69% in these two years. Farm growth has performed better in the third and fourth years of the government. Annual agricultural GVA growth for 2016-17 and 2017-18 is 4.9% and 2.1%. Ironically, the farm-distress narrative has been stronger in the latter phase. The BJP’s poor showing in rural Gujarat and the mushrooming of farmer-protests in many states supports this view. Initially, the price crash due to post-demonetisation cash squeeze was seen as the reason, but there is no shortage of cash in the economy now. Why are farmers still angry? Is there more to the farm-distress story under the present government than demonetisation? The short answer is yes.
Farmers have experienced a growing mismatch between their production efforts and incomes under the present government.
Costs incurred by farmers are based on their expectations of future earnings. A farmer might decide to completely stop cultivation during a severe drought. This would lead to zero income but also zero loss. Good rainfall might induce the farmer to invest extra capital. If prices fall below expected levels, he could actually incur losses. This means that he can be worse-off in a good rainfall year than a drought year. If this trend persists, the farmer could come to the conclusion that the economic regime is biased against him.
Difference between year-on-year growth in quantity produced and agricultural GDP/GVA can be used to measure this, with higher values indicating that growth in farm incomes is not remunerative enough for farmers’ efforts in cultivation. This value has risen for three consecutive years under the present government. This is an unprecedented situation since the UPA-I government’s time.
It is not without reason that farmers are increasingly turning against the government despite a revival in agricultural growth.
What explains this development? Farmers sell their produce in the wholesale market. So, Wholesale Price Inflation (WPI) is a better indicator to track the prices they receive. If WPI for primary articles is increasing at a faster pace than overall WPI, it means that terms of trade are favourable to farmers. This is what was happening during most of the time the previous United Progressive Alliance was in power.
The long-term cycle turned around 2012. Since then farmers have been experiencing a continuous shifting of terms of trade against them. We do not have WPI numbers for 2017-18 yet. The post-demonetisation crash in perishable prices, which persisted beyond last fiscal year, must have further strengthened this trend.
Let us come to the question of government spending on the rural economy. We look at the share of spending by three key ministries: agriculture, rural development and panchayati raj to examine this. The share of central government spending on rural economy fell significantly between 2012-13 to 2015-16. Rural spending has picked up since 2016-17.
What about state government expenditure? We look at share of rural spending in total developmental expenditure to check this. Share of expenditure on agriculture and allied activities, rural development, special area programmes and irrigation and flood control has been around 25% since 2009-10. A very different picture emerges when one looks at trends in states’ absolute rural spending. Both total developmental expenditure and the rural component of it have been decelerating sharply since 2014-15.
Clearly, falling year-on-year growth in rural spending must have added to the rural discontent.
What explains this? The 14th Finance Commission (FFC) recommendations could have played a role. FFC increased states’ share in central taxes. This was compensated by cutting back on many centrally sponsored schemes. Many of these were directed towards the rural economy. Post-FFC, states are now free to spend the money wherever they want to. This may have resulted in a diversion of funds from developmental expenditure. The signs of state governments cutting back on rural spending were evident in 2016 itself.
Keeping inflation under check has protected the government from urban anger. FFC gave greater fiscal autonomy to states. Rural anger might well be the payback for these achievements.
This is the first of a two-part data journalism series in the run up to the budget. The second part will discuss revenue-collection scenario under Modi government.
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