Agricultural exports appear to be the only sustainable and non-inflationary path to improving agricultural incomes
Neelkanth Mishra | Last Updated at February 7, 2018 05:58 IST
(This was published in the Business Standard: link)
Hard indicators of consumption in India point to a two-speed economy. Upper-end consumption appears steady: Growth in sales of cars and consumer durables, for example, is healthy, and airline traffic has been growing so rapidly that there is runway congestion at Mumbai and Delhi airports, and travellers at airports like Bagdogra struggle to find places to sit. However, indicators of broad-based consumption are weak. Although growth in cement and steel volumes has recovered from the lows seen in the last 12 months, it is still half of where it should be. Volume growth in consumer staples (soaps and shampoos, for example), also remains tepid.
The most compelling explanation for this divergence involves food prices. About half of India is a net producer of food (46 per cent of the workforce has primary employment in agriculture as per the 2012 employment survey), and the other half is a net consumer of food.
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Food prices being transfers from the consumer to the producer, high food price growth means more wealth transfers from the rich to the poor (in using this generalisation we deliberately overlook outliers in both groups: Rich farmers as well as the poor families not in farming. But our focus is on the broader trends).
Illustration by Binay SinhaIllustration by Binay SinhaThe gross value of output of agriculture in India is about Rs 25 trillion; assuming 60 per cent (that is, Rs 15 trillion) is consumed by the top half, a 10 per cent increase in prices means an additional Rs 1.5 trillion gets transferred to the agricultural ecosystem. If food inflation drops to just 2 per cent, like it has done in the past year, only Rs 0.3 trillion gets transferred. The Rs 1.2 trillion retained in the top half explain the pick-up in financial savings and the sustained growth in their consumption; the absence of this transfer is also the most likely driver of weak broad-based consumption.
Food price inflation has slowed primarily due to over-supply: Improving agricultural productivity (due to better access to roads, phones, electricity, and credit) is increasing supply even as food demand growth slows. Fiscal discipline has helped too — while slippages and high aggregate deficit levels are worrying (at nearly 6 per cent of GDP, India does have one of the highest deficits in the world), one must point out that deficits currently are the lowest in four decades.
Such a situation is rare in India: Since 1960, whereas average annual growth in agricultural output (as measured by real GDP growth) has been 2.5 per cent, average annual price growth has been 7.5 per cent. Thus, despite relatively weak output growth, aggregate income in agriculture kept growing at 10 per cent a year. This is an important reason for the number of workers in agriculture growing steadily at 1.6 per cent a year since 1951. Sustained high food price growth, though, had serious side-effects for the economy, such as chronic inflation, high interest rates, and frequent bouts of currency weakness.
But weak food price inflation has implications as well. If half of the workforce has weak income growth, their consumption slows. For example, they stop adding rooms to their houses or moving from kuchcha mud huts to pukka brick-and-cement houses. There is no easy mechanism to route financial savings from the top half to support consumption of the bottom-half through credit, or to create jobs at scale that provide alternative employment. There is a political impact too, as seen in the spate of farmer protests recently. With the next general elections approaching, the government has to address some of these concerns, particularly as food prices can engineer transfers that are bigger than anything the government can achieve. To put it simply, there are two ways to transfer wealth from the rich to the poor — increase taxes, and then through various government schemes, initiate directed transfers to the indigent; or raise food prices. In the first instance, the funds flow through the government, and in the second scenario, through agricultural markets.
Even if the funds were available, it is not easy for the government to spend hundreds of billions of rupees. This constraint may have been the reason central government expenditure in the coming year is budgeted to grow by a mere 9 per cent: Lower than nominal GDP growth, and creating a new low for the government expenditure to GDP ratio.
Thus the government is trying to shore up food prices: The promise in the Budget speech of setting minimum support prices (MSPs) that guarantee a 50 per cent margin to farmers, has been followed by removal of minimum export price restrictions on onion exports, and a sharp increase in duty on sugar imports to protect domestic prices. This perceived change in government priorities is perhaps another reason that the bond market is now pricing in rate hikes, fearing a spurt in consumer price inflation.
However, it is debatable how effective these steps may be. As has been observed by many, the 50 per cent margin may only help increase prices of paddy (that is, rice), as margins on other major crops that have MSPs such as wheat, tur dal, and sugarcane are already above the threshold. Rice is less than 10 per cent of total agricultural output, and only a third of rice produced is procured by the government, limiting the impact of MSPs. In the last few years, as rice production has crossed 110 million tonnes, retail prices have grown less than MSP: It is hard to engineer price increases in a commodity that is in oversupply. The removal of export restrictions on onions seems to have driven a knee-jerk price spike, but with strong production and limited export potential, sustained impact is debatable.
The much recommended solution is for tens of millions of farm workers re-skilling themselves to take on non-agricultural jobs: The end goal here is clear, but the path to it is not. Agricultural exports thus appear to be the only sustainable and non-inflationary path to improving agricultural and national incomes. Food processing for domestic as well as export demand can also create employment opportunities. Such growth in incomes would also create demand for manufactured goods that can stimulate the much awaited manufacturing revival. In recent months, there has been a welcome shift in government priorities towards farm exports: It could be several years though before the impact becomes visible.