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Why higher govt spending is crucial to contain rural distress

Even as the Narendra Modi government has been making claims that India’s rural economy has gained pace under his rule, empirical evidence suggests that the health of country’s rural economy may not have improved much on account of declining or stagnant income levels. The situation, experts say, is unlikely to change in the near future as there are low chances of a revival in rural income generation.

A survey by brokerage JM Financial argues that while the farm income has been on the decline in the rural area, non-farm income has remained flat at the best, impacting rural consumption.

 Why higher govt spending is crucial to contain rural distress

Tough time for farmers. Reuters

The report has attributed the decline in farm income to a 14 percent shortfall in monsoon (this comes after a 12 percent deficit last year), unseasonal rains, pests attack, lower increase in minimum support prices and a decline in global agri commodities prices.

The non-farm income has been negatively impacted by declining utilisation of man and machine (read tractor and manpower use). There has been a 22 percent and 7 percent decline in spending by the agriculture and rural development ministries, which has been offset by a 49 percent higher infra spending and resumption of sand mining, thus holding non-farm income from declining, says the report.

"With wage growth spiraling down, small farmers income (60 percent from wages) has been on a downward trajectory while low crop realisation has led to a decline in income of large famers (cultivation 70 percent+ of income), all leading to weakness in consumption," the report said.

Monsoon shortfall, real estate

A spate of farmer suicides has put the rural economy in the spotlight recently. The second consecutive year of monsoon failure is adding to the already prevailing distress in the farm economy. A key reason for this is that agriculture in India is still heavily dependent on rainfalls, as only 48 percent of the farm area is irrigated.

In Madhya Pradesh, soyabean crop volumes have fallen 30-50 percent on year and the yield has also witnessed a fall across crops, JM Financial has said. In Maharashtra, while Vidarbha region has stable yield, interior Maharashtra has been impacted. In Karnataka, Andhra Pradesh and Telengana, yields have been impacted across most crops.

While Punjab is a well irrigated state, what has adversely impacted the farmers there is a white-fly infestation of cotton. According to a PTI report, the state's cotton output in the state is likely to shrink by 40 percent this year. It has also raised question about efficacy of Bt cotton, a GM variety which has been touted as pest-resistant.

Apart from the monsoon shortfall, what has further eroded the rural consumption story is a stagnancy in land prices. JM Financial notes that in the rural area a steady increase in land prices had created an inclination to spend. With the prices now stagnating, this wealth effect wanes and along with it the propensity to spend too, the report notes.

Corporates impacted

The falling rural income has already started impacting earnings of fast moving consumer goods companies and automobile-makers.

FMCG major Hindustan Unilever's net profit duirng July-September declined 2.62 percent to Rs 962.24 crore, partly because the company was forced to cut prices of its products in order to remain competitive. While experts hope price cuts to bring in higher volumes, there are also concerns that margins are likely to get impacted.

Religare said net sales of consumer companies under its coverage declined 0.9 percent due to sluggish consumer spending and a slowdown in rural markets amid erratic monsoons and low MSP hikes.

"Amid high competition, topline growth was largely led by volumes as price deflation punctured value growth," it said.

Increase spending

The government has indeed taken steps to combat the rural income decline. It has increased the wheat MSP by 5.2 percent on year, that of pulses by 10 percent and barley by 6.5 percent. Though the increase on an average is higher than past two years' growth rate, it is below growth rates seen in FY05-13. Further, it has mandated FCI to procure pulses, rather than state bodies.

But these are not enough. In order to effectively support, the government will have to immediately increase spending on job-creating schemes such as Prime Minister's Gram Sadak Yojana and MNREGA.

Modi's ascension to power in May 2014 coincided with a fall in crude oil prices, which proved to be lucky for him because inflation declined and also aided a 125 bps reduction in policy rates by the Reserve Bank of India (RBI).

However, as the government nears the second anniversary, Modi's luck seems to be waning, not only politically even on the economy front due to the deficient monsoon.

If he doesn't act fast enough, the farm distress is likely to prove to be his Achilles heel.

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Updated Date: Nov 16, 2015 17:40:47 IST