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Rural incomes vs industry demand -- The blurry beanstalk

S. S. Bhandare

AS FAR as Budget 2001 goes, the Finance Minister, Mr Yashwant Sinha, has, given the constraints, done what best he could -- granting additional reliefs worth Rs 1,000 crore and making minor modifications to the Finance Bill.

The RBI has also unveiled the best possible package for a softening of interest rates and, at the same time, sought to restore the confidence in the financial system. The Commerce Ministry has done its bit by offering a responsive Exim Policy to comfort business and industry in the more liberalised import regime, following the removal of the remaining quantitative restrictions. The foreign direct investment policy has also been eased to facilitate increased inflows to various sectors. In short, the fisc al, monetary, trade and investment policies have been fine-tuned hoping that the economy would respond more positively in the current year.

Yet, a survey of the top brass in business and industry reveals a cautious and subdued outlook on production and investment plans. Almost everyone seemed concerned about the damage caused to business sentiments by the goings-on in the political and finan cial spheres.

More important, there is a growing credibility gap on the more vital aspect of implementation of the reforms process. One is also not sure whether there is some inherent resistance to entrepreneurial risk-taking following the ``irrational exuberance'' th at characterised the expansionary phase of 1993-97, or if the economy is facing structural limitations to incremental growth.

Will agriculture bounce back?

Whatever the reasons for the prevailing gloom, much hope is now pinned on three unpredictable events: i) a quick global economic turnaround, especially of the US; ii) normalcy returning to the stock market; and iii) the bouncing back of the agricultural sector.

The question that is nagging most economy watchers is: If the country has normal monsoon this year, will it trigger an industrial resurgence on the back of an imminent agricultural recovery? In fact, virtually every business/industry fora now seems to be of the view that only a recovery of rural income can sustain the economic growth momentum. And the reasons are not far to seek:

* First, the past two years have seen a setback for overall agricultural growth. The cumulative loss in the index of agriculture production in 1999-2000 and 2000-01 was some 4.8 per cent. Foodgrains production, in particular, declined by a massive 12.8 m illion tonnes in 2000-01 to 196 million tonnes. However, thanks to the structural shifts in production activities as well as the benefit of higher procurement prices, especially for foodgrains, there was no negative impact on the income from agriculture and allied activities.

Yet, there is evidence of an erosion in the spending capacity of the rural folk. This is because of agricultural incomes rising by a mere 1.2 per cent over the two years and the rural population growing at an annual rate of about 1.9 per cent during the period. A crude estimate suggests that the loss of potential rural purchasing power based on a normal growth trend could have been at least Rs 50,000 crore over the two-year period.

* Second, agriculture and allied activities still contribute to over 25 per cent of GDP and even a 5 per cent jump in this sector's output, which is likely considering past trends, would result in an incremental contribution of 1.3 per cent to real GDP. This would, at current prices, translate into an additional rural income of Rs 50,000 crore. In turn, this would have a galvanising impact on rural demand for industrial products. It is, therefore, imperative that both the Central and State governments p ursue agriculture reforms, with specific thrust on restoring the growth momentum of the sector.

Paradox of plenty

The economy is, at present, experiencing the embarrassment of plenty -- for instance, foodgrains stock, as of end-February, was a massive 46.8 million tonnes. Ironically, in 2000-01, when foodgrains output fell steeply to 196 million tonnes, the Food Cor poration of India stocked an additional 18 million tonnes. Admittedly, there is a time mismatch (of about a quarter) between the agriculture year (July-June) and the financial year. Yet, the contrast between production performance and the build up of sto cks is glaring.

In a way, this is not surprising given the fact that i) the procurement prices offered to farmers are higher than what they could possibly obtain in the open market, ii) the issue prices of foodgrains at many of the PDS outlets are believed to be higher than the open market prices, and iii) the rural population is suffering the diminution of purchasing power in view of the setback to the growth of agricultural production.

Inefficient food management

Indeed, the RBI, in its latest Credit Policy, had cautioned that ``the opportunity costs arising from fiscal and monetary perspectives of such large buffer-stock operations need to be carefully considered.'' Further, it points out that ``as the gap betwe en the procurement and issue prices widens, the large buffer stock tends to result in the food subsidy assuming the nature of producers' subsidy rather than benefiting the targeted consumers.''

It must be noted that even if there is a sharp recovery in foodgrains output and overall agricultural production, the current year is likely to pose major challenges for the policy-makers in managing the consequential economic situation.

First, the burden on the FCI to sustain higher levels of procurement operations. Given the current annual PDS offtake of 12 million tonnes, the foodgrains stocks would last almost four years.

Second, the burden on banks to provide incremental food credit. As of end-March 2001, Rs 39,991 crore was locked up for this purpose -- the increase over the year has already touched Rs 14,300 crore.

Third, the burden on the Budget on account of food subsidies, even at a relatively lower level of operation, was Rs 12,125 crore last year. These figures show the manner in which India's food economy is being managed.

In no other area of the economy is there a greater policy paradox. Admittedly, Budget 2001 proclaims many positive intentions, a la the reform of the PDS, free inter-State movement of foodgrains, amendments to the Essential Commodities Act, and so on. Li kewise, the Exim Policy proposes to give a massive push to agriculture exports. It will no doubt take quite a while for a cohesive policy framework, which not only promises more investments in agriculture but also promotes greater industry-agriculture in terdependence, to emerge.

A promising message for industry?

In the current situation, the moot question is about the implications of agricultural growth being restored and foodgrains production reaching the record 208 million tonnes in 2001-02. Obviously, this would mean the Government intensifying its procuremen t operations. With godowns brimming, there is not only the major challenge of building storage facilities, but also the twin burden of a) banks having to finance the procurement operations, and b) additional subsidies for maintaining the huge inventory i n the absence of increased offtake either for the PDS or exports. What is true of foodgrains would also be valid in varying degrees for commercial crops such as cotton, sugarcane, oilseeds, and so on.

Typically, from the industry standpoint, the issue is whether agricultural recovery will serve as a rescue factor -- a sort of ``lender of the last resort'' -- helping revive the demand for industrial products in the current year. There is much uncertain ty over the beneficial nexus. Apart from the fact that the benefits of a rich harvest would come with a time lag of 3-4 months (and only in the latter half of the year), there is the major issue of farmers being able to obtain the right price for their p roduce in the post-harvesting period.

The essence, hence, is not merely of the physical volume of production but the growth in incomes, which would be hampered by the likely deflationary price situation of farm products. Is the country, therefore, headed towards a low-growth equilibrium with an `oversupply' situation, except perhaps in some critical areas of infrastructure? And, if so, why? Nobody seems to have a clue.

The likelihood of the agriculture sector bouncing back seems bright, especially going by past trends -- two successive years of poor agricultural growth are usually followed by one of recovery. But this, by itself, is not going to be good news for the ec onomy in the absence of a programme to deal with the current glut situation and the attendant financing and fiscal burden.

For industry, the wait for a resurgence of rural demand -- its main growth driver -- is going to be rather long. Apart from the post-harvest time-lag, which is after October, there is the crucial issue of whether production growth alone would translate i nto increased rural incomes. The paradoxical oversupply situation would cause market prices to drift downwards. In the last two years, the terms of trade seem to be gradually becoming unfavourable to the agriculture sector. The message is clear: While ag riculture recovery is most desirable from the economy point of view, it does not necessarily promise healthy demand conditions for industrial products.

Evidently, there is a basic structural problem in the economy. It has, perhaps, much more to do with ensuring better spread of purchasing power. Reforms must be initiated more aggressively in the rural sector -- in terms of freer movement of goods, conso lidation of land holdings, structural shifts in the cropping pattern, corporatisation of agriculture, greater thrust towards food processing, building up of rural infrastructure, and so on. These measures, though not new, have not been implemented thus f ar.

he author is economist with the Tata group.)