Relation to World economy

Abridged version of Article Published in Mint, 25th March, 2009 by Rama Bijapurkar and Rajesh Shukla

There is a worrying groundswell of optimism that rural consumers will come to the rescue of an Indian economy which is in the midst of a sharp slowdown. This optimism may be misplaced. Hearing phrases such as “rural renaissance” or “rural India to the rescue” makes us nervous. Such talk bears overtones of the “Great Indian Middle Class” story of the 1990s, where we called victory at least a decade before we should have. Indian companies suffered thanks to the slow demand that followed ramping up of capacity. This time, let us examine the evidence more carefully—and granularly—before firms invest money behind the idea that a 700-million-people phoenix is rising from the dark waters.

First, let’s get the obvious facts that everyone knows out of the way. Rural India is a major part of India’s domestic consumption story not just because it has 70% of India’s population, but because it already has 56% of India’s income, 64% of expenditure and 33% India’s savings. The rural share of popular consumer goods and durables ranges from 30% to 60% and sales to rural India are steadily growing. Between 2005 and 2008, according to data from the Indian Revenue Service, colour television sets penetration increased by 7% and packaged biscuits by 10%. Aggressive categories such as shampoo even increased penetration by 37%. It is important to appreciate what even a 1% increase in such a mass as rural India represents. A 1% increase in refrigerator penetration over a five-year period means that more than 1.5 million refrigerators have been added. The new owners of colour television sets in the last three years are equivalent to the population of Sweden or half that of Australia. So, even at this low rate, rural India unleashes enormous consumption power.

Periodically, India has seen a consumption spurt because of a one-time burst of a combination of events. This recent spurt seems no different. Over the past four years, the monsoon has been good; the support prices for crops have grown at 10-15% (compound annual growth rate) in 2005-08 compared with 2.5-4% in 2002-05; in addition to a healthy flow of farm credit, there has been a one-time loan write-off of Rs65,318 crore as well as a sizeable cash outlay from the National Rural Employment Guarantee Scheme. At the same time there has been a steep change in rural road connectivity from less than 40% connectivity in 2004 to at least 70% connectivity at the end of 2008, according to IIFL research. In addition to road connectivity, there has been a real improvement in phone connectivity as well. This improvement in infrastructure has the potential to improve rural incomes in a sustainable fashion, although it must be pointed out that the effect of these will be felt much more now when this quantum jump is occurring than in the years to come. So, let’s be cautious before extrapolating too much.

Consider agriculture, which accounts for half of rural income. This has been growing very slowly, simply because agriculture is not profitable for the majority of farmers in India who work in small holdings. Only 4% of rural Indian households comprise large farmers with landholdings more than 10 acres. Thirty per cent of rural households are marginal farmers with less than 2 acres, and another 15% have 2-4 acres. Given all the problems farmers face in earning a surplus from agriculture, it is unlikely that we will see productivity-driven income growth (as opposed to price-driven growth) in the agricultural sector on a sustained basis. S. Sivakumar of ITC’s E-Choupal makes the point that even though we don’t see improvement in agricultural productivity, we are probably seeing some improvement in terms of income growths because of better price discovery. Hence it doesn’t appear that steady and sustained sizeable growths in consumption will come on account of agricultural income growth. In pockets we may see better crops, captive buyers, export-focused higher price- or acre-yielding farms, but we don’t know enough to say whether this is merely the tip of the iceberg or the tipping point. We eagerly wait to hear from experts on agriculture on this. Therefore, it is to non-agricultural income that we turn to see if this sector is indeed the future driver of sustainable consumption growths for rural India and, then, for India as a whole.

The popular view is that non-agricultural income, which accounts for a hefty 50% of rural income, is far more stable than agricultural income. Certainly, agricultural income is far more attractive, though that does not mean it is far more stable. Data from the National Service Schemes (NSS) show that rural households with non-agriculture as the main source of income are far higher spenders than agricultural households, and more urban-like in their proportion of food expenditure. Non-agricultural income is widespread, and of different kinds. Data from the National Council on Applied Economic Research (NCAER) show that not counting labour, 25% of rural households can be classified as solely non-agricultural income earners and they have a 38% share of rural income. This statistic is disproportionately higher than when weighted for population. Piecework labour accounts for 20% of rural income and 36% of the rural population, but it can be both agricultural and non-agricultural (depending on what kind of work is available). The bloated NSS number of agricultural labourers is based on a faulty question. As Dipankar Gupta points out in the September 2008 issue of Seminar magazine, even if a person works for one day on the land during a year, NSS classifies him as a “farmer”. “For the remaining 364 days this ‘farmer’ could be a bricklayer, a carpenter, a welder,” Gupta notes.
Farmers or those “self-employed in agriculture” comprise 41% of the rural population, and provide 43% of the income, according to NCAER. Even these farmer households whose main source of income is agriculture have a non-agricultural income stream. On an aggregate, 29% of all farm households also have non-agricultural income streams, led by large farmers.

Research from IIFL says that of the 54% of non-farm rural income, 12% is dependent on urban or overseas markets while 42% is dependent on farming or hunting. This is worrying indeed. If we were to attempt a conclusion based on the data NCAER has on occupation and share of earnings, perhaps most of the 20% share of rural income from salaried earners will be urban-dependent, but not agriculture-dependent, and most of the 15% share of rural income from those self-employed in non-agriculture is probably agricultural income-dependent. Most of the “other income”, accounting for a 3% share of rural income, is also in the top quintile. Therefore, assuming that higher the income, the more urban-dependent the occupation is, perhaps 20-25% of rural income is definitely urban-dependent but agriculture-independent, and we can’t really say much about the rest except to assume that it is dependent on the local economy, whatever that may be.
Therefore, before we celebrate that half of rural income is “safe” from agriculture, we must admit the sobering thought that about half of this “safe from agriculture” income is urban-dependent, another chunk in certain states is migrant-dependent, and the rest is determined by agricultural income.
However, there will be time periods and geographic pockets where sudden activity will affect (positively or negatively) non-farm rural incomes. Until we have facts that throw more light on this relationship at a very granular household level, based on on-the-ground anecdotal evidence it seems that in a good agricultural income year, non-agricultural income acts as multiplier for consumption; and in a bad year it acts as a moderator, but not as a saviour for rural consumption. It also seems that its multiplier effect is probably far greater than its moderator effect. So, it is too early to call victory. But we have a newer and better framework of rural consumption to watch and learn as we go along. Until then, we can only pray that agriculture can hold up for another two years while the urban economy recovers from this slowdown.