Hopes of an agricultural growth-led economic recovery may not fructify

P Vinod Kumar

WITH the rain gods smiling yet again, hopes of an economic recovery led by agriculture growth is fast gaining currency among the country’s think-tank. A 6.3 per cent growth in gross domestic product (GDP), led by an impressive 9 per cent growth in agricultural output is just one of the forecasts made recently by the Centre for Monitoring Indian Economy (CMIE).

The reasoning behind such optimism is that a good monsoon always leads to a bumper crop which translates into higher rural income, demand and employment. This would help industry shrug off its sluggishness in two ways: one, the derived or indirect demand emanating from the agriculture sector would see the manufacturing sector’s prospects looking up. Two, a higher rural income would perk up demand for consumer durables. The net effect: the economy will wake up from its slumber and scale new heights.

Indeed, higher rural demand is a necessary condition to perk up economic growth in a predominantly agrarian economy like India. This is evident from the fact that though the sectoral contribution of agriculture is only 28 per cent of GDP, about 70 per cent of the population still depends on it for livelihood.

But the optimistic projections of the economy riding high on a robust growth in agriculture is likely to go haywire if figures trickling in are anything to go by. For one, prices of farm produce may go further southward, which would see the causality behind the assumptions turning the other way around. To use jargon, the economy may well enter the textbook ‘vicious cycle of poverty’—lower income, lower demand, lower output and lower employment with a lag effect, if prices of farm produce soften further.

Whether the economy is in the twilight of recession or slowdown is one thing that the empiricists among economists have to sort out. Initial data suggests a 6 per cent plus GDP growth, leave alone the more optimistic 8.5 per cent forecast led by an upswing in farm growth. This may turn out to be a damp squib if one does a little number crunching.

The latest CMIE figures show that the wholesale price index (WPI) of primary articles has been showing signs of fatigue with the index moving up a modest 3.1 per cent on a year-on-year basis to 169.6 in June. However, on an average, WPI growth was down to 2.9 per cent in April-June 2001 compared to 4.3 per cent last year.

A closer look shows that prices of agricultural commodities are either declining or are stagnant across the board. For instance, the average wholesale price of rice in the Delhi market dropped by nearly 2 per cent to Rs 935 per quintal in July compared with the same period in the previous year.

Against this backdrop, the predicted bumper crop may fail to rekindle rural demand as the Food Corporation of India (FCI) and the State Trading Corporation (STC), with their granaries full are expected to lift less stock during the kharif season. Though FCI and STCs of Punjab, Haryana and Uttar Pradesh had mopped up over 90 per cent of the wheat that arrived in June, they are likely to go slow as their stock position has hit a record high. Foodgrain stocks have reportedly touched 65 million tonnes, much higher than the required minimum stock of 24.3 million tonnes. There are indications that the procurement agencies may lift lesser quantities of kharif output.

These factors can hit rural demand in two ways. First, the assumption of a bumper crop matched with an uptrend in output prices leading to a higher rural income may not yield the desired results, as farmers, used to the cyclical swings in fortunes, may not alter their demand pattern till they reach comfort level. This may fructify only after at least two-to-three successive good harvests at reasonably good price levels. This suggests that a revival in rural demand may have to wait for another year or so, even if the kharif crop is good.

In the worst-case scenario, low offtake by procurement agencies may lead to a crash in the prices of farm produce across the board, leading to a drastic crunch in rural demand. This, in turn, would reverse the process of an agriculture-led economic recovery. In other words, a bumper output not matched by good offtake and prices would lead to contraction in rural income, demand, employment and finally, the next output.

News on the industrial front is also worrisome with growth in output and prices slackening further. From 6 per cent growth in May last, industrial output has shown a secular trend decline with the Index of Industrial Production (IIP) crashing to 2.8 per cent, 2.1 per cent, 2.7 per cent and 1.9 per cent during February, March, April and May this year, a far cry from the 4-7 per cent growth registered during the corresponding months last year. It is the first time since industrial growth has slipped below the 3.5 per cent mark since November 1998. The forecast this fiscal is, therefore, rather grim with the growth rate pegged at 4.5 per cent over 5.1 per cent during the previous fiscal.

The other two factors that can lead to a recovery, namely, investment demand and urban consumer demand, are also bleak. With listed corporates reporting the lowest-ever sales growth of 5.92 per cent since 1998 and a 9.39 per cent growth in net profit figures during the first quarter of the current fiscal, the investment climate in the country is virtually under cloud. For instance, total investment planned in the manufacturing sector nose-dived to Rs 2,90,079 crore in April 2001, way below Rs 4,29,385 crore in October 1997. The sluggishness in investment demand also had a telling impact on sanctions and disbursements by three leading domestic financial institutions.

With overall economic growth slowing down, leading to a contraction in disposable income of individuals and consumers postponing their purchases, the demand for consumer durables has also taken a knock. The consumer durable production index grew by 6.4 per cent in April-May compared to 22 per cent during the corresponding period last year.

These figures suggest that an economic recovery riding on the back of any of the three plausible sources of demand—rural, investment, and consumer—looks bleak. Against such a scenario, a possible way of putting the economy back on track would be for the government to make certain efforts to create demand without bloating its balance sheet. One way is to introduce ‘food-for-work programmes’ in the infrastructure sector using the massive foodstock piled up with state-run procurement agencies. This could kill two birds with one stone: First, it will help the agencies dispose of their mounting stock and go for fresh procurement when the kharif output arrives. Second, it will help the government to stop worrying about raising money from the market to fund long-gestation and slow-return infrastructure projects, especially in view of the mounting fiscal deficit.

This might turn out to be a win-win situation for all as it would serve the purpose of kick-starting the economy without hurting any interests.