Rural roll call: distress signals

That the rural economy will be the focus of the Union Budget is a given. India’s rural economy has a huge footprint, supporting 70 per cent of the country’s population and accounting for almost half of India’s GDP and private consumption.

The recent rise in rural distress — that, too, in a pre-election year — has rightly set off caution lights in the corridors of power.

But the hinterland economy is not about agriculture alone. A bigger part of the activity is the non-farm sector that includes construction, manufacturing, and a variety of services.

According to a NITI Aayog report, rural India now accounts for half of the manufacturing sector and a quarter of the services sector. As for rural output, 40 per cent is from agriculture and rest from non-agriculture. Yet agriculture supports a disproportionately higher 56 per cent of the rural population.

The stress is visible both in the farm as well as the non-farm rural economy.

Good opportunity

Interestingly, farm stress has little to do with monsoon (normal or near-normal as they were in 2016 and 2017) but more to do with income. Despite good harvests in crops such as pulses, farmers did not get remunerative prices. Many crops are being sold below the cost of production or the minimum support price (MSP).

Sluggish rural wages and sub-normal performance of the construction sector (a key low-skilled, labour-absorbing activity) implies subdued non-farm rural activity and income.

Wage growth for agricultural and non-agricultural rural workers too fell below 5 per cent in November 2017 which is only marginally above the rural CPI inflation of 4.8 per cent. In real terms, therefore, rural wages have become near stagnant.

The Budget will be an opportunity to address some of these issues. The crucial question is, can the Government take measures to restore the health of the rural economy without increasing unproductive subsidy spend/or farm loan waivers and keeping a tab on the deficit target?

From a short-term perspective, the Budget needs to iron out distortions that squeeze farmer incomes. While farm loan waivers appear to be the popular and instant solution to calm dissent, they only provide temporary relief and do little to enhance income or prevent future distress. Moreover, such populist measures cause an additional burden on the exchequer and tend to be inflationary in the long run.

Need more focus

Rather than announcing a plethora of schemes, the Budget should focus on just a few and the authorities should focus on their relentless implementation. One of the pain points for farmers has been inability to get even the MSP particularly for non-cereal crops. To alleviate this, measures to step up procurement of non-cereals should be announced and support provided to States for executing it.

The Price Stabilisation Fund can be used to improve the procurement infrastructure for crops other than cereals. This should be complemented by flexible trade policy for timely intervention and ensuring that import prices do not fall below MSP.

To better equip farmers against supply and weather shocks, it is imperative to increase the appeal of crop insurance among farmers. While the Government has successfully managed to increase the penetration of crop insurance, it now needs to ensure timely payment of claims not just to curtail losses but also to encourage farmers to adopt insurance.

For the non-farm rural sector, the Budget needs to announce measures to support job creation and provide a buffer which can come in handy if the monsoons fail. The MNREGS will have to continue until the time we have a better alternative as it helps provide an income buffer to rural folk and contributes to the creation of assets.

But the incremental spending focus should shift to the construction sector — rural housing and infrastructure. Higher allocation and steps to boost this sector are needed as it is likeliest to absorb labour after agriculture. Even with a lower share in GDP, it employs more workers than manufacturing. In addition, the labour force used in construction is largely unskilled or semi-skilled, which is a key characteristic of the rural labour force. These measures will make good economic and political sense.

The writer is chief economist of Crisil

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