Expert seeks greater NREGA push to help reeling farm sector

A: This is after 30 years that we are having a back to back drought. In the last 100 years this has happened only three times. So, naturally the farm sector is in distress. There are many factors that have contributed to it. I think we need to look at them very quickly. One of course is the monsoon, second is production is down from about 265 million tonne last year to just about 250 million tonne. So, that is bringing less income into the farm sector.

The minimum support price which was being raised by the previous government at the rate of 12 percent year on year growth has been raised only about 4 percent. So, these are three or four factors which are really leading to farm distress because of which there is not enough wage employment happening in the farm sector.

Out of the 250 million people who work in the farm sector about 150 million people are wage earners, only the remaining 100 million are farmers. So, they are not getting enough wages. In fact the wage rate has come down from growth rate of about 18 percent year on year for the last 6-7 years to just less than about 5 percent now. So, all these factors are contributing to the distress.

Then of course NREGA where till last year the Budget was sufficient but now this year the Budgets have been squeezed and there is not enough employment happening there. So, these are the factors that are leading to the distress.

The question you asked me was what can the government do?

The first thing that the government needs to do is to enhance the Budgets for NREGA and also promote work under NREGA particularly in the water sector. So, we need to look at rain harvesting systems, we need to look at check dams, we need to look at de-silting of tanks, all this will create income in the hands of the poor.

If you look at the past 6-7 years the rural economy has been driven from the top as also from the bottom because the bottom of the pyramid started getting incomes because of NREGA and such schemes. So, we need to revive that because the farm sector is fairly in distress.

Reema: If the government’s intent is to increase the income in the hands of poor do you think this year the government perhaps could consider raising MSP prices a lot more than they did last year just in order to counter this rural distress? Apart from that question if you couple it with the fact that perhaps they could even enhance the budget for NREGA as you were suggesting, will this not hurt inflation structurally?

A: It will affect inflation marginally but look at it this way that the MSP was being raised at the rate of 12 percent for the last 7-8 years with the previous government. This year they have raised the MSP by only 4 percent which is actually 2 percent below the inflation rate which is now hovering around 6 percent.

So, I think they definitely have scope to increase the MSP to some extent and it may not have so much of an inflationary pressure which is what is worrying the RBI as also the government. However I think a little bit of inflation but if that brings in more money in the hands of the poor I think it is a risk worth taking.

Sonia: We will come to the impact on inflation in greater detail in a bit. But I wanted to get your view on what the impact could be on the demand side. Do you see consumption slowing down, because we spoke with a tractor maker earlier in the day and he indicated that there is no direct correlation between the slow down in monsoon and eventual demand from the farmers end. What in your own assessment could be the impact of a lower monsoon on consumption demand?

A: The farm sector now contributes only one third to the rural gross domestic product (GDP). So, in that sense, it is no longer that significant the way it used to be 10 years back. But the fact is that more than 50 percent of India’s working population is engaged in agriculture. So, therefore when we have a weak monsoon and we have less production, it impacts sentiment. It is something akin to the stock market.

The stock market moves in a direction which is often opposite to the profits of companies because it all moves on sentiment. It is the same thing here. When the sentiment goes down, then the farmer does not want to spend money, because he is worried that he may not be able to survive till the next harvest.

And then this has a cascading effect because he will then not spend money on buying his tractor, on buying agricultural implements. He will then postpone any wedding in the family because of which trousseau will not get bought or the durables are not going to be bought. So, this has a cascading effect. And even if you look at the numbers for the tractor industry, this March closing, the industry is down almost 25 percent.

Even Mahindra, which is the leader, is down 14 percent. So, there is a correlation; it may not be that direct, but the fact of the matter is these numbers are telling us that people are not buying in and I spend a lot of time in rural India and I can tell you that once the sentiment becomes negative, it takes quite a bit of doing to bring farmers back into showrooms.

Reema: A lot of the companies that we have spoken to have indicated that in the past the rural growth has outpaced urban growth but that differential has narrowed in the last few quarters. Do you expect that to continue, how do you foresee the next few quarters?

A: Absolutely and that is my worry that rural was growing twice as fast as urban for the last five years now if you look at the last quarter and the first month of this quarter, we find that rural growth is flattening and it is now down to the urban growth which is just four percent whereas it was growing at about 8-9 percent till last year.

If you remember, in the 2008-2009 global economic crisis, it was the rural demand which saved this country and we didn’t go into a massive recession like many other countries. So, my concern is that if there is no money at the bottom of the pyramid, then there is going to be no demand for FMCG’s and consumer goods from the bottom and if the farmers are at the top, are not going to get good MSP and are not going to have enough production, then it is going to impact their purchase because there has been a double whammy. They have produced less and they are getting a less additional price.

Sonia: So, what is your own assessment of how much all of this could impact inflation going ahead because the government has taken some administrative steps like the buffer stock release, the transportation losses have at least the government is trying to lower the transportation losses and if there is just a modest hike in MSP, you think all of this could actually help keep inflation in check despite a lower monsoon?

A: You look at this way that India is perhaps one of the few countries where 50 percent of our consumer index is around food because most of our people are poor, they are spending 50-60 percent of their income on buying food. It is only in urban India that it comes around to 30 percent because our incomes are double or more of rural incomes. So, even if it does cause a little inflationary pressure, we have to ensure that people are not left in distress and they are able to get at least two square meals.

Reema: In your conversation with various policy makers as well as people in Delhi, what is the sense? Will the government do what it takes to increase farm incomes-enhancing National Rural Employment Guarantee Act (NREGA) budget as well as upping the Minimum Support Price (MSP) or do you think they will be a bit conservative?

A: Any government of the day will have to realise that the popularity and the survival of government really depends on looking after farmers. We have had situations where when onion prices shot up, the government of the day was in danger of being pushed out.

So, the government recognises this and in any case with so much poverty and hunger, in our rural areas, the government will have to take immediate measures to correct the situation to the extent possible and the good news is that we are sitting on 50 million tonnes of food grain, so we are sitting on a huge buffer stock whereas the requirement is only 20 million tonnes.

So, therefore we can afford to distribute this food grain even if it means distributing it free to the poor.

Sonia: I know you interact a lot with the corporate world as well, you have advised many companies on their rural strategy. Are things going to get worse as far as these rural exposed companies are concerned in the FMCG, in the two-wheeler space in your mind?

A: You look at Hero Honda as a case in point, they get 50 percent of their sales from rural India but last year their growth was only four percent, the annual growth year-on–year (YoY) but even if you break that down, you will find that the rural growth is virtually flat, virtually nil and this is going to happen more and more.

Maruti has slowed down, the tractor industry has slowed down, light commercial vehicle (LCV), which depends largely on the rural market-if you take the Tata LCV results, they are around 29 percent this year compared to last year. So, the auto sector is badly hit.

In fact, the durables industry and the auto sector is much worse hit than the consumer goods because remember one thing that if you look at the hierarchy of purchases, the consumer goods purchase comes right at the bottom, so it doesn’t make a difference whether I downgrade or don’t downgrade a brand because at best I will be able to save Rs 50 in the family budget for a month but it is the durable which get postponed, it is the vehicles that get postponed in terms of purchases.