August , 2020
Good agriculture may not sustain rural economy unless urban India grows
12:30 pm

Kishore Kumar Biswas


This year, agriculture is expected to be better depending on the better than expected monsoon. It has been a great relief for the country which is grappling with the Covid-19 pandemic. Good agriculture stabilises food supply, maintains rural employment and ensures income generation. A section of observers think that the Indian economy would survive this difficult phase with the help of the agricultural sector. But many economists think differently. They think that the agriculture sector is no doubt the backbone of the Indian economy but unless the urban economy begins to grow significantly, the rural sector cannot sustain growth.

Rural economy contributes about 46% of India’s GDP but employs around 70% of the total workforce. The sector consists of farming and allied activities and the non-farm sector. The non-farm sector includes construction, manufacturing and the services sector. A Mumbai based economist, Rajani Sinha, pointed out in a national media that the share of agriculture in rural output was 39% in 2016-17 but it employed around 64% of the rural labour force. Hence it is important to develop non-farm activities in rural areas without lowering the farm output to achieve high economic growth. Sinha also mentioned a report of NITI Aayog which had observed that income per farmer in India was around one-third of the income per non-farm worker.

Some of the long-term problems

Agriculture has not been in the forefront of government focus since the neoliberal economic policy regime started in 1991-92. Having said that, several specific policies have been undertaken periodically and sporadically. Considering the last two decades, agriculture grew by 1.76% per year during 1998-2004. Then it bounced back and accelerated by more than double to grow by 3.84% per annum between 2004-05 and 2012-13 (measured in the old GDP series).

Himanshu, Associate Professor of Economics, Jawaharlal Nehru University, pointed out in an article (The India Forum, 28 April 2019) that the agriculture sector revived due to increased credit availability, rise in farm investment and high minimum support prices (MSPs) in that period. Then the terms of trade shifted in favour of agriculture - a situation which was unprecedented since the 1980s.

During that period, the non-farm sector also benefited in the rural areas from transfer of funds from the central and state governments through various rural development programmes and the enhanced public distribution system. But later, the situation turned south. Himanshu mentioned that as against a growth rate of farmers’ income at 5.52% per annum between 2004-05 and 2011-12, it fell to 1.36% per annum between 2012-13 and 2015-16 and this deceleration of growth continued till 2017-18. There have been various reasons behind the fall of real income of the rural people. There were two (2014-15 and 2015-16) drought years, the sudden implementation of demonetisation, rise of cost due to increased fertilizers and increased irrigation cost due to high petroleum prices.

On the other hand, prices of many agricultural products - first of the cash crops and then of the other crops also fell - mainly due to low international prices of commodities. Therefore, the main crisis of the rural sector has been due to fall in incomes and real wage rates of the rural people prior to the Covid-19 period. As a result, the growth of the India economy took a downward path mainly because of the low real income of the rural sector which resulted in low effective demand in the economy as a whole.

Can the present phase reverse the situation of the rural economy?

Many economists do not think so. The first thing is how the real income of the rural sector would increase. Recently, Business Standard organised a webinar on the issue. Some of the points discussed there are noteworthy. First, Pronab Sen, Country Director, International Growth Centre and former Chief Statistician of India, pointed out that this time, the remittance loss which is already at around `60,000 crore in the last four months (mostly in rural India) must affect rural income. Pranjul Bhandari, Chief Economist at HSBC, thought that after the kharif season was over, the situation would be uncertain and rural demand may even fall. Unless the urban economy did not pick up, the rural economy will also suffer in India. Sonal Varma, MD and chief economist at Namura, observed that unless construction activities bounce back, it remains hard to see a pick-up in rural activity.

Outgoing Director of the National Institute of Public Finance and Policy, Rathin Roy, said that even the Covid-19 pandemic in India would not be able to diminish agricultural output. Sanjib Chinoy, chief economist at JP Morgan, believed that agriculture might not be the solution to rural woes as it constitutes less than 40% of rural consumption. Chinoy also observed that a large portion of consumption in rural areas was sourced from drawing down savings. But people are very cautious about spending from savings.

Soumya Kanti Ghosh, group chief economic advisor at the State Bank of India, said that allied activities were the cornerstone of the rural economy and unless that was revived, the rural economy won’t revive on a sustainable basis. He also said that the urban income was 1.8 times the rural income. Unless urban areas recovered significantly, it would not help the economy much. Both the rural and the urban economies are interlinked intimately. So, higher output in the agricultural sector alone cannot sustain the growth of the economy. It can at best be a temporary relief.

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