Opinion | Is the worst really over for India’s agricultural sector?

Estimates of gross domestic product (GDP) released on 28 February confirmed that India’s economy is decelerating. While the pain was visible in most of the sectors—with manufacturing showing a contraction for the second consecutive quarter—the silver lining was growth in agriculture, which accelerated for the third quarter in a row to 3.5%.

For the full year as well, the advance estimates suggest a growth rate of 3.7% for agriculture, as against 0.9% for manufacturing, and 3% for construction. These three sectors together account for more than two-thirds of employment in the economy, underscoring their importance, agriculture in particular.

 

A look at the national accounts for a longer period shows robust agricultural growth during the first five years of the Narendra Modi government, with agriculture growing at 3.17% per annum between 2013-14 and 2019-20. This is remarkable, given that the broader economy is witnessing a slowdown. However, a variety of other indicators show that the rural economy has been going through possibly its worst phase, with declining wage growth and farmer incomes causing serious distress.

 

A clue to this disconnect between the national accounts and other indicators lies in a breakdown of the former. The GDP data for the agricultural sector shows that the crop sector, which accounts for 56% of total agricultural output and employs a majority of the farmers, has been growing at only 0.3%, the lowest in two decades. By comparison, the sector grew 3.3% per annum during the 10 years under United Progressive Alliance governments.

The agricultural sub-sectors that showed high growth between 2013-14 and 2018-19 were livestock (8.1%), forestry (3.1%) and fisheries (10.9%). It is a puzzle what drove the high growth of livestock at a time when the crop sector was experiencing negligible growth. This defies past trends and is also difficult to believe, given contrasting trends in other indicators of livestock.

Whether the high agricultural growth rates are for real or mere statistical artefacts may not be known, but the poor performance of the crop sector confirms the declining income of farmers, the majority of whom depend on crops for subsistence. Not surprisingly, even real rural wages are declining.

 

Hopes were kindled in the last three months as agricultural commodities showed signs of inflationary pressures, with food inflation hitting double-digit rates. But a careful analysis of the data rules out rising rural demand as the cause of that inflationary trend. Many price pressures were due to the mismanagement of cereal supplies by the government and supply shocks in vegetables. In such circumstances, farmer income could not have risen. Some of this was also a result of food prices rising internationally.

 

However, recent trends in international markets suggest a softening of food prices led by an overproduction of cereals and easing edible oil inflation. This trend will gain strength in the wake of the recent slide in crude oil prices. With the global economy displaying signs of a slowdown, prices of agricultural commodities are likely to fall sharply. They tend to follow movements in crude oil prices, as was seen during the latter’s collapse in August 2014. In all likelihood, a similar decline in agricultural prices is upon us.

 

A second factor that may exacerbate the income troubles in agriculture is the presence of massive foodgrain stocks with the Food Corporation of India. This may slow procurement of farm produce and lower price realizations, particularly cereals but also other crops.

 

Lastly, the global slowdown due to the coronavirus outbreak is likely to dampen demand in the economy, and in turn hurt the agricultural sector.

 

These factors are likely to worsen agricultural incomes, and domestic policy has limited room to manoeuvre. But this is also an opportune time to revive rural demand. The last time such an opportunity arose following the sharp drop in oil prices back in August 2014, the government had squandered it away. This time, it could pass on some of the windfall from the drop in oil prices to rural consumers. This could help lift rural incomes. The government could also increase spending in rural areas to help boost demand and prevent a collapse in agricultural prices.

 

Whether the government uses the opportunity or fritters it away again will be known in the coming months. What appears certain for now, though, is that the worst of the rural slowdown is far from over.