Normal monsoons last year after two years of drought, and rich harvests have affected rural workers and farmers differently, writes Pranjul Bhandari, Chief India Economist at HSBC in a research report.
- Lower rural unemployment and higher wages benefited the landless, who own less than 2.5 acres of land, and account for 70 percent of the farmers, as their income comes mainly from wages.
- The income of the landed comes from selling their produce, whose prices have fallen, so their incomes have suffered.
- Prices of produce have fallen owing to good harvests. Anecdotally, traders may have resorted to fire sales to cope with the liquidity crunch caused by demonetization. In the run up to the introduction of Goods and Services Tax, wholesalers may have run down their food stocks, depressing prices.
- The expenditure of the rural folk is of three types: consumption, investment and debt servicing. Lower inflation has boosted the purchasing power for consumption and investment goods (like tractors) but debt is denominated in real terms.
- Falling inflation raises rural indebtedness. Landed farmers are more indebtedness because they have access to banks. The rise in rural indebtedness explains the protests led by farmers and the demand for loan waivers.
- Four states have announced loan waivers equal to 0.5 percent of GDP. If another four make good on their threat (or promise), the size of loan waivers will rise to 0.75 percent of GDP wiping out the gains made through reduction of debt and deficit ratios.
- States have been borrowing at a 25 percent clip year-on-year for the past three years. This has raised the yield on their bonds by 70 basis points which is higher than the long-term average increase of 50 basis points. Additional market borrowing to finance loan waivers will divert more of their revenue to paying the interest bill and leave less for productive expenditure.
- Loan waivers will also affect the credit culture and make banks reluctant to operate in rural areas.
- Bhandari says inflation-targeting has been a great reform measure. It has “solidified the economy on the macro stability radar.” Measures will have to be taken to raise farm incomes by improving productivity. She is not in favour of increases in MSP, which protesting farmers have been demanding, as it will push up inflation.
- Food prices will rise in the coming seasons as temporary shocks like those caused by demonetization and the launch of GST will fade way. This will improve rural India’s terms of trade vis-a-vis urban India.
(Photo of workers in a guava orchard in Tamil Nadu. Photo by Vivian Fernandes)