A Silver Lining Emerges For India’s Farm Sector

India’s rural economy, which has been hit by weakness across the farm sector, could see support from rising prices and an improvement in reservoir levels.

India’s nominal GDP growth is estimated to fall to a 42-year low of 7.5 percent in 2019-20, showed advances estimates released by the government earlier this month. Farm sector nominal growth, however, is expected to rise to 9.8 percent — the highest in three years.

The pick-up in nominal growth, which is closely linked to incomes, comes as food inflation spiked to 12.2 percent in December—the highest in five years. While the spike in prices hurts consumers of food, it helps those who produce and sell these items. In particular, prices have risen across categories like vegetables and pulses. More recently, eggs and meats have also seen a price increase.

The higher prices will mean improved profitability for the farm sector, although the pace of increase will look lower than last financial year. According to a CRISIL report published in December, farm profits are expected to rise 7-9 percent year-on-year in crop year 2019-20 compared to a 26 percent increase last year. The sharp rise seen in 2018-19 was partly attributable to a base effect as profits per hectare had declined a year before.

Strong Rabi Crop

While nominal growth is expected to improve, real growth in agriculture is expected to stay steady.

The kharif crop saw disruptions due to untimely rains. However, the rabi harvest is expected to be strong as the area under cultivation has risen 8.6 percent.

One factor supportive of a strong rabi season crop has been the rising reservoir levels, which are running above the 10-year average. Total storage across important reservoirs was at 126.6 billion cubic meters early this year—74 percent of total reservoir capacity compared to 52 percent at the same time last year.

According to economist Abhijit Sen, while damage to the kharif crops is likely to be higher than estimated, the rabi harvest is expected to be good. The two may cancel out, he said.

After two years of erratic south-west monsoon, states such as Gujarat and southern states are expected to witness a healthy rabi output in crop year 2019-20, added CRISIL in its report.

Rural Wages Still A Concern

While some rural indicators can shown marginal improvement, a key concern emerging from weak wage growth persists.

The average wage rate for agricultural occupations fell further in October, showed the latest available data.

Average daily wage rate across agricultural occupations rose by 2.3 percent annually in October 2019, according to data by the labour bureau. Wage growth from April- October 2019 stands at 3.9 percent, according to data collated by BloombergQuint. Figures for November are yet to be released.

At these levels, the real wage growth after adjusting for inflation is flat to negative.

Average daily wage growth across non-agricultural occupations has been moderating as well, rising by 3.6 percent in October 2019. Economists believe that low wage growth in rural areas is one factor responsible for the fall in rural demand.

Siraj Hussain, visiting senior fellow at ICRIER, said that lack of employment opportunities was pushing more people to the agriculture sector, leading to the oversupply of agricultural labour. Lack of jobs in urban and rural areas is also forcing migrant labour to return to the agricultural sector, he said.

Hussain expects some pick-up in agricultural wages after the harvest of rabi crops.

Rural wages have failed to pick up as much of the price rise remains confined to a few vegetables, said Sen. Hetal Gandhi, director for CRISIL Research, added that the government’s rural jobs guarantee program—MGNREGA—has seen delayed payments and fewer work days in FY20, dragging down overall wage growth further. The employment scheme makes up about 15 percent of average farmer income, she estimated.