The disconnect between India’s strong headline GDP growth and fragile household situation has multiple dimensions. Recently, it reflected in the worries over shrinking urban middle class. But the narrative is now shifting back towards rural resurgence, on the back of strong agriculture sector performance. But that presupposes a different ecosphere for the rural economy, insulated from the larger growth versus reality paradox. Is it really the case?
Following the retrospective upward revision of India’s GDP data, the average eight years CAGR for agriculture real GVA stands at 4.9 per cent (FY16-FY24) and is projected to grow at 4.6 per cent in FY25. But with real wages for agriculture and non-agriculture labourers growing by a measly 0.8 per cent CAGR, it casts doubts over the relevance of high GVA growth.
The labour and capital deployed in the sector over the past five years have grown at 4.8 per cent and 4.5 per cent CAGR, respectively, compared to real GVA growth of 4.7 per cent, while gross cropped area has grown by 1.4 per cent. Hence, there is evidence of deployment of excessive factors of production, implying rising disguised unemployment and declining productivity, and therefore leading to contraction in rewards for factors of production. Over the five years ending FY24, real return per unit of labour and capital has fallen by CAGR of 0.4 per cent and 0.3 per cent. As a corollary, it would imply that the robust agriculture sector real GVA growth is propped up due to unprecedented, disguised unemployment.
What’s leading to rural labour oversupply?
A latest study by the Economic Advisory Council to the Prime Minister (EAC-PM) has revealed that domestic migration has declined by 12 per cent (or -1 per cent CAGR) since 2011, while the workforce has risen by 1.8 per cent annually. Thus, featuring the rising ruralisation, the decline in remunerative urban employment has coincided with rising dependence of workforce on the agriculture sector to 46.1 per cent in 2023-24 from 42.5 per cent in 2018-19.
Consequently, remittance of income from urban to rural has declined, farm land fragmentation has accentuated, and rural workers are forced to take up low productivity rural works, particularly in the agri sector.
Rural occupation
The NABARD’s Financial Inclusion Survey shows that rural household incomes are derived from cultivation, livestock rearing, other enterprises, wage labour and services (government and private). Agri households earned ₹13,661 (2022, 8.9 per cent 5-year CAGR), higher than non-agri at ₹11,438 (9.5 per cent CAGR) as they have more diversified income sources. Accordingly, with a household size of 4.2, the average rural per capita income works out to ₹3,023 per month.
The share of agri households in rural income at 57 per cent has increased from 48 per cent, implying reduced rural income from non-farm households.
Considering the rise in labour force in low paying self-employment, particularly of females for whom real wages contracted, the real wage from agri households grew modestly at 0.9 per cent CAGR (2017-22), a trend that continued even till 2023-24 (PLFS).
Within agri households, stressed income situation has forced an increased share of non-core agri activities relating to government or private sectors, driven by MGNREGA, rural construction and low paying services. The nominal income from wage labour contracted by 5.8 per cent (2017-2022) while from other enterprises and government and private services grew by 32.7 per cent and 16.9 per cent, respectively.
For the non-farm households, the dependence on labour income has declined sharply (to 26 per cent) as its nominal growth has contracted (-5.8 per cent CAGR).
Overall, while rising ruralisation has increased rural income dependence on agri households, increased labour participation has resulted in contraction in core agri-based income. Higher rural allocation by governments, construction, MGNREGA, and private enterprises have consequently been the key drivers of average rural income.
Rural lending driving consumerism
Bank credit growth has outpaced rural wages, with a five-year average of 11.5 per cent (FY19-FY24), predominantly led by personal loans that has grown at 18 per cent CAGR. Lending based on economic activity has lagged; agri lending grew 11 per cent, transport operators 11.8 per cent, construction 2 per cent, trade 7.6 per cent, services 9.1 per cent, and industry 6.3 per cent.
Historical comparison shows a higher correlation between rural wage growth and rural lending. The slower average real agri GVA growth of 3.5 per cent during FY09-FY14 implied higher real wage growth of 6 per cent and was associated with rural lending growth of 13 per cent. But ironically, higher real GVA growth of 4.7 per cent over the past five years has yielded contraction in real wage. Thus, the current pace of lending at 11.5 per cent, tempered also by recent large agri loan waivers, represents a fundamentally weaker quality. It is significantly driven by leveraged consumption. Gross fixed capital formation as percentage of bank agriculture lending has fallen.
Rural consumption pattern indicates a rising proportion of households owning televisions, two-wheelers, mobiles and computers; strongest growth is seen for auto loans and other personal loans, including loans against property.
The broad assessment of bank credit and rural sector performance shows that income constraints have led to leveraged consumption trends even as the productive element of lending in the rural areas has declined.
Improvement in asset quality in rural lending would require enhancing economic activity-based lending in rural manufacturing, construction, and productive services.
Falling food consumption puzzle
The Household Consumption Expenditure Survey (HCES) highlights the impact of slowing average income on food consumption, showing a decline in per capita consumption of food, especially cereals. The irony is that cereal inflation has remained high at 5.6 per cent (CAGR FY12-FY24), while real expenditure on cereals fell by 3.2 per cent in rural areas and 2.2 per cent in urban areas against sustained rise in in production (2.1 per cent).
The only cogent answer to this puzzle could be the rising spread of food distribution to a much larger mass of people; the GDP data shows real spending on cereal and breads growing higher at 4.4 per cent. Hence, either the HCES data is under-representing the impact of the government’s free food programmes or the production estimates are overstated.
Key takeaways
The larger context for the agri sector economics funnelling from the rise in disguised unemployment, and associated decline in real rewards to factors of production is that, despite the acceleration in real GVA growth, all nominal variables related to the sector have slowed considerably. Given that the rising disguised unemployment is linked to reverse migration from urban areas, these trends reflect a cascading phenomenon between rural-urban economies.
Changing rural occupation and household income situation imply that the appropriate policy response to rising ruralisation, consequent to falling employment elasticity in the formal sector, should be to enhance allocations towards encouraging rural enterprises, exports and other income creating programmes. Extended free-food distribution programme, aggrandised with various minimum income doles by State governments, are short-term palliatives that can perpetuate productivity erosion. Reversing the rising disguised unemployment in agriculture will be crucial for undoing the falling labour productivity and real wages.
The writer is Head of Research - Strategy & Economics, Systematix Institutional Equities