Non-food agriculture is more likely to be affected by the deceleration in industrial production than the food sector. Demand for agro inputs would moderate as sales of agro-based industries take a hit.
Recent trends in non-farm sector output reflect deceleration in growth. A combination of slowing growth and high inflation is clearly not the desired outcome of policy. Although day-to-day or month-by-month numbers are not quite enough to determine the prospects for the year as a whole, the overall scenario that is emerging is clearly one of slower growth — not just here but also at a global level.
In the Indian context, slower growth has become necessary to bring down the high inflation rate. Elsewhere, there are active attempts to raise output growth and prices have remained low. The divide between advanced economies and India in terms of policy choices is stark.
The high inflation here has been led by high commodity prices, and is now being passed on to manufactured products. Even with modest global inflation rates, high food prices remain a concern. Whatever little growth we see at the global level has put pressure on food prices.
The combination of slower growth and high inflation has been a frequent occurrence in drought years, leading to a decline in farm output and high prices. Non-farm output suffered, as farm sector-induced inflation led to other disruptions. Now, non-farm output growth is decelerating and the price rise is yet to abate. How would this affect the farm sector? The farm sector is more vulnerable to shocks of output on the supply side, but now the demand side shocks are becoming less rare than earlier.
It is rainfall and expected prices of output at the time of sowing and input prices paid that generally determine the outlook for farm output in any given season. The introduction of new varieties and investment in irrigation and so on are also important, but the process of production is not really affected by other factors such as industrial growth. Will the slowdown in industry affect the fortunes of agriculture?
A good harvest is likely to be a prop for some non-farm sectors, but the impact of slowing industrial growth on the farm sector plays itself out through many channels.
Farm output is not the only indicator of the health of the sector. Farm income is a more comprehensive measure of the sector's performance. Farm income is affected by what happens in sectors other than agriculture: demand for farm output comprises both a quantity effect and also a price effect. Demand for some of the agro-based inputs would moderate as sales of these agro-based industries decelerate. Weak demand conditions may have a similar impact on the prices of farm commodities.
There is also the fact that one of the triggers for the slowdown, the cost of credit, affects farmers as consumers even if their credit cost with respect to production is insulated from the rise in interest rates. Growth of real income may decline, even if output levels do not decline.
In this sense, non-food agriculture is likely to be more hit by slower industrial production than the food sector itself. Farm exports may also be affected by weak growth in the importing countries.
Unfortunately, the shift in private investment from non-farm sectors, where prospects are less bright, to agriculture is not easy. The increased cost of investment funds also deters new investments. The options open to those who have the financial savings are limited to investments in farm input industries.
The main impact of the slowdown in the industrial and non-farm sector will be felt by way of government finances. The ability of the government to provide input subsidies or even price support is dependent on revenues from the non-farm sector. The industrial slowdown would clearly affect government revenues. The widening budgetary deficits are likely to limit outlays on subsidies and particularly Plan expenditures. The government's attention is likely to shift to protecting growth of output of non-farm sector and employment there.
There are always the immediate policy priorities and the longer term perspectives. While moderation in growth may have been needed to cool down inflation, the longer term perspective requires us to invest in improving supply of farm output so that food supply is adequate and affordable.
Policies to help the farm sector and enhance the synergies between the farm and non-farm sectors should focus on efficient transport and distribution systems, as well as efficient storage systems. Market prices will have to include all these costs of investment in supply systems at some point in time. However, it is necessary to nudge the system to build this infrastructure now.
(The author is a Senior Research Counsellor, NCAER. The views are personal. firstname.lastname@example.org)