With agri-GDP likely to grow at 5.1-5.7% in FY14 and farm wages rising 20%, it is a golden opportunity for the companies to tap this potential boom in rural expenditure

Monsoon showers in 2013 have been one of the best the country has experienced in the last two decades or so. The June to September rainfall has been 5.6% higher than the Long Period Average (LPA). But if one counts the continuing rains in early October (till October 10), the excess rains turn out to be almost 7% above LPA, the best since 1995.

Apart from the favourable temporal trends of the monsoons in 2013, the showers have been encouraging in terms of their spatial spread too. Of the 4 broad regions of India: the north- east, the northwest, the central, and the south peninsular India, as categorised by Indian Meteorological Department (IMD), with the exception of north-east India, all the other three regions received normal or above normal showers. As a result of this bountiful rainfall, as on October 10, 2013, the 85 major reservoirs in the country are also operating at 116% of the last year?s storage, which is 118% of the average of the last ten years.

All this is a very good news for a country?s agriculture, where 53% of the gross cropped area is still rain-fed, and monsoons alone account for more than 76% of the total annual rains. No wonder then that years of good rains are associated with robust agriculture GDP growth. This year too is likely to be one of those. By how much one can expect the agri-GDP to grow as a consequence of this bountiful rainfall, and what implications can it have on the overall economy, is what we discuss here.

The study reviews the pattern of rainfall, as also the increase and structural transformation in irrigation cover since 1950. Studying this is important as it is the interaction of these factors, along with many others, that impacts the performance of agriculture over time. We have tried to capture that by using a log-linear regression model with different variables influencing variations in agricultural GDP. But, since the monsoon rainfall (June to September) of any year influences the agricultural performance during the agricultural year (July to June); we had to construct a new series of agri-GDP as per the agricultural year (July to June). For this we needed quarterly data of agri-GDP, which is given only from 1996-97. Hence the analysis is restricted from 1996-97 to 2013-14, a period of 18 years.

The model specification hypothesises that the performance of agriculture depends upon (1) investments in agriculture (both private and public, which incorporates the investments in irrigation and farm machinery, etc), as embedded in Gross Capital Formation in agriculture (AGCF); (2) agricultural price incentives, as reflected by the ratio of WPI agricultural price index to WPI of Non-agricultural prices index; and (3) rainfall, which is totally exogenous. The model is fitted to the past data from 1996-97 to 2012-13. It can explain 95% of the variations in agri-GDP with all variables being statistically significant. It is then tested to track the past values by comparing the actual agri-GDP with the estimated values from the model. Once it is established that the model is robust and can successfully track the past performance of agriculture, only then it is used to project the likely values of agri GDP for the agricultural year 2013-14 (July-June). Our results from this model indicate that the agri-GDP growth rate for the agricultural year (July-June) 2013-14 is likely to be between 5.2% and 5.7%. We also use an alternative model to double check our results. In this model, the AGCF is replaced by a simple trend variable; the idea being that the trend captures development of various investments and technologies that take place in agriculture over this period. Other variables remain the same. This model also suggests that the agri-GDP growth will be between 5.1% and 5.6%.

Comparing these likely agri-GDP growth rates in 2013-14 (agricultural year) with the last year (2012-13) performance, it turns out that the agri-GDP growth is likely to be about three times higher than last year. And it is likely to come largely from oilseeds, pulses, cotton, and coarse cereals belt of central and western parts of the country, which is less irrigated and thereby more dependent on rains.

Such an increase in agri-GDP is likely to boost the overall performance of the economy via its multiplier effect. Also, given that food inflation is hovering in double digits, it is likely to increase farm incomes by almost 15% in nominal terms. Combine this with the fact that farm wages of agricultural labour have been increasing by more than 20% per annum for the last three years, and likely to continue this year too, it should mean lot of income accrual in rural areas (15-20%) in nominal terms. This should surely trigger some increased demand for agri-inputs to durable and fast moving consumer goods (FMCGs) in rural areas. Those in the manufacturing and services sector, who can tap this emerging demand, can grow fast sending overall growth impulses in the otherwise sagging economy. Tractor sales are already growing at more than 20% per annum, urea at almost 10 %, but after the harvest, there is likely to be a surge in demand for mobiles and other FMCGs from rural areas.

Policy implications

A likely agri-GDP growth ranging between 5.2% (or 5.1%) to 5.7% (or 5.5%) has the potential to raise farm incomes by about 10-15% in nominal terms. Now if the incomes of the 49% of all-India workers are scheduled to rise, with farm wages already growing at 20% per annum for the last three years, there is a greater likelihood than ever for such rural prosperity to trigger an income/growth multiplier across the Indian economy.

This implies enhanced demand for credit to buy seeds, fertilisers, farm machinery, and after the harvest, the demand for several consumption goods in rural areas, besides propelling logistics, agro-processing and retailing. Additionally, such bumper crops are set to benefit the Indian companies with increasing footprints in the rural areas.

For the June quarter over the corresponding period last year, companies, especially the ones producing agricultural inputs such as seeds and agro-chemical makers, have recorded revenue growth rates ranging between 10% and 55%. Tractor sales alone have gone up close to 23% for the period between April-June vis-?-vis values in the corresponding last year. As per World Gold Council, the gold demand, more than 60% of which emanates from rural India, is expected to expand phenomenally owing to increasing farm incomes.

Now, there may appear sufficient conditions for one to believe that the economy is bound for an economic revival once the farm incomes increase. But unless the necessary condition of increasing rural or farm incomes is realised, the virtuous cycle of economic growth may just be a distant dream! Unless the policy makers play their facilitator?s role well, the ?automatic? cascading of bumper harvests to increasing economic activity in the country might not be realised. There is a greater need today of creating and delivering, timely, conducive and proactive policies by the Indian policy makers to realise the likely benefits.

Preparing well for a big harvest and taking action on the following may help. First, clear as much excessive grain stocks as possible to make space for the incoming crop. The government needs to liquidate at least 20 million tonnes of rice and wheat from its stocks in the domestic market and/or for exports, without compromising on the needs for Food Security Bill. Wheat could be sold at R1,400/quintal and rice at R1,900/quintal. This would immediately bring down food inflation from 12% to less than 7%, and also save on high carrying costs of grains and thus reduce fiscal deficit.

Second, announce de-listing of fruits and vegetables from APMC Act, and incentivise processors and modern retailers to buy directly from farmers. This would compress their value chains benefitting both the consumers and producers, saving on large wastages, and further bringing down food inflation. Once food inflation is down, subsidies on fuel and fertilisers can be cut more aggressively reducing fiscal deficit, while easing interest rates.

Facilitating conducive international trade rules so as to hedge the farmer from the falling domestic prices, owing to the increased supplies in the market, is another befitted policy in this regard. In the case that increased supply causes prices of some produce to crash, an alternate market needs to be created. Favourable monsoons and the resultant rural prosperity is seen as a key driver of growth in revival for the entire economy, but unless the nature?s efforts are coupled with policy incentives, the benefits are far from being realised.

Gulati and Jain are chairman and joint director of CACP respectively. Saini is a consultant at ICRIER

Excerpted from the CACP discussion paper ?Monsoon 2013: Estimating the Impact on Agriculture?