Can agriculture revive Indian economy?

Date:07-31-2020

The Indian economy is all set to contract this year due to the Covid-19 pandemic. There is only bright spot in this year’s economic story; the agriculture sector. A good rabi (winter) crop harvest, adequate rainfall during the ongoing monsoon and encouraging data on sowing on kharif (monsoon) crops, all point towards a good performance by agriculture. 

Finance minister Nirmala Sitharaman echoed these sentiments while speaking at the India Ideas Summit organized by the US India Business Council. “We have had a very good rabi crop. All of what were necessary, have been procured at reasonable price so that farmers are not left high and dry looking for purchasers. Now the estimate for kharif crop has also come. We can clearly see agriculture driving the revival”, Sitharaman said on Tuesday.

Can a high growth rate in agriculture boost demand? This cannot be taken for granted. Real growth rate calculations take into account value of production at constant prices. The constant price method is necessary to ensure comparability across time periods. Day to day purchasing power, and therefore demand, is more likely to be a function of current or nominal incomes.

A HT analysis of recently released National Account Statistics (NAS) data shows that real and nominal incomes need not move in the same direction for India’s farmers.

The NAS gives value of output for all crops at current and constant prices from 2011-12 to 2018-19. The value of output for crops can be taken as a proxy for farm incomes. In constant price terms, value of output of crops grew at the highest rate, 5.9%, in 2016-17. This was not the year of fastest growth in nominal farm incomes, though. The highest nominal income growth was 15.3% in 2013-14, when the real income growth was 4.9%. In 2012-13, when real incomes grew at 0.6%, nominal incomes grew at 11.6%. This is more than the 11.1% nominal income growth in 2016-17, when real growth was the highest. (See Chart 1)

To be sure, the headline numbers on value of output of all crops hide significant crop-wise differences. For example, real value of output for cereals and fruits and vegetables grew at the almost the same rate, 1.3% and 1.4%, in 2018-19. However the growth in nominal values was drastically different. It was 8.4% for cereals and 0.1% for fruits and vegetables. (See Chart 2A and 2B)

When read in consonance with wholesale prices index (WPI) data, which shows that fruit and vegetable prices are far more volatile than cereal prices, the divergence between nominal and real value of output does not seem surprising. WPI is a more useful measure as far as tracking farm gate prices is concerned. (See Chart 3)

While it is common to track rice and wheat output as a metric of agricultural performance, fruits and vegetables are as important as cereals when it comes to farm incomes. In 2018-19, the total value of output of fruits and vegetables in constant prices was Rs 3.74 lakh crore. For cereals, this figure was Rs 3.61 lakh crore.

A bumper crop this year might create a glut in agricultural markets. Given the fact that non-farm output, and therefore purchasing powers, are set to contract, this could well lead to a sharp fall in food prices. If this happens, the current value of output of crops and therefore growth in farm income may be lower than real growth in agriculture. This will have a direct bearing on agriculture’s ability to boost the rest of the economy. If the agriculture sector has to play a lead role in economic recovery, policy intervention is needed to make sure that farm prices do not crash and put a squeeze on farm incomes.