With concerns mounting over the monsoon's anaemic performance thus far, Lord George Curzon's famous dictum about the Indian economy being a “gamble on the monsoon” may be well worth revisiting. Agriculture today accounts for less than 15 per cent of India's GDP. True, this figure only includes primary produce like sugarcane, oilseeds and cotton and not their derived manufactured products – sugar, edible oils or yarn. But even a calculation based on a more inclusive framework, factoring in the industries using agri raw materials, will not take the effective share to more than 25 per cent. Should the farm sector, then, continue to receive importance, beyond the fact that it still provides livelihoods to over half of the country's population?
The short answer is agriculture matters, even from a narrow business and economic perspective. Not in terms of the sector’s impact on GDP, but more as what it can do to price levels in the economy. The latest wholesale price index data shows overall year-on-year inflation for June, at 7.25 per cent, virtually unchanged in the last six months. The main reason for stickiness has to do with inflation in food articles, which has risen to 10.8 per cent, from minus 0.8 per cent in January. Given that food constitutes over 30 per cent of average private final consumption expenditure — the ratio being even more for labour class households — elevated prices here tend to exert upward pressure on wages, which, in turn, feed through to manufacturers' costs and generalised inflation. It is only this wage push inflation fear, underpinned by resurgent food prices, that has prevented the Reserve Bank of India (RBI), too, from carrying out much-needed cuts in its benchmark interest rates. A poor monsoon so far, with almost 70 per cent of the country’s area receiving deficient or scanty rainfall in the current season from June, has made matters worse. All this only reaffirms agriculture's continuing importance, although the links to GDP growth may not be as direct and obvious as during Lord Curzon's time (or even two decades ago, when its share, at a primary produce level, amounted to a third).
At the same time, food price increases are much less amenable to control through monetary policy. High interest rates can, at best, limit the transmission of these by slowing down overall economic activity that also helps restrain wage demands. But a sustainable solution to food inflation can only come from policies leading to improved supply response. These require organised interventions, both in dissemination of technologies to boost crop yields as well as in marketing. We need reforms enabling agro-processors to buy produce directly from farmers, rather than having to compulsorily go through mandi intermediaries. Neither producers nor consumers gain from such arrangements that keep markets segmented. A single national market, where produce and information flow freely, makes it easier for supply-demand imbalances to correct faster across time and space.