Ratings agency Moody’s has at least got the first part right. Farm distress is pulling down economic growth. “India’s farm sector expanded only 0.2 per cent in 2014-15, data released by the government in May showed, and thereby depressing rural income growth.”
This is absolutely right. But where Moody’s has gone completely wrong is its effort to link rural slowdown with the slow pace of economic reforms. In a report ‘Inside India’ which is based on a poll conducted by Moody’s global credit research, the rating agency pointed to “sluggish reform momentum”. Harping again and again on “disappointing pace of reforms’’ has therefore become a usual but overused expression, which is turning out to be a nothing but a cliché.
The problem with creditors (and credit ratings agency are supposed to operate on their behalf) is that they cannot look beyond reforms, which means cutting down on social security in the name of containing fiscal deficit. Such austerity measures have already created a socio-economic upheaval in Europe, and the crisis in Greece emanates from such faulty prescriptions. Even the IMF has reluctantly begun to accept that the ‘trickle down’ theory, the hallmark of global economic reforms, does not work anymore.
“Rural income growth has been struck in the mid-to-low single digits in 2015 to date, well off the 20 per cent plus rates clocked in 2011. Given the rural consumer price inflation came in at 5.5 per cent year-over-year in May, this means that rural wages are actually contracting in real terms,” the Moody’s report said. This certainly is a correct assessment. The lower the rural incomes, the less would be the capacity of the rural people to increase consumption as a result of which the demand for industrial as well as FMCG products decline. The wheels of economy come to a halt when rural wages decline.
Instead of pushing what is generally meant by reforms, what is urgently needed are measures that raise farm incomes to a higher level and at the same time attract more public investments in rural areas. The best way to do so is to raise the minimum support price (MSP) for farmers. The subdued hike in procurement price of rice by a mere Rs 50 per quintal, an increase of 3.67 per cent, is less than the 5.5 per cent rural consumer price inflation that Moody’s report point to. Similarly, the hike in wheat MSP is by Rs 50/quintal, a jump of 3.27 per cent, shows how deliberately farm incomes are being kept low. With such low farm incomes how does Moody’s expect a revival in rural incomes to the levels achieved in 2011? I would have therefore expected Moody’s to make a strong plea for raising the MSP for farm produce. But perhaps I was expecting too much.
This assumes significance in the light of a recent studiy highlighting the mounting rural indebtedness over the years. In his book Rural Credit and Financial Penetration in Punjab, Dr Satish Verma, RBI Professor at the Centre for Research in Rural and Industrial Development (CRRID) in Chandigarh, clearly shown how rural debt has been multiplying. In Punjab, the food bowl, the average cash loan per cultivator household has risen by a whopping 22 times in a decade. In just 10 years, the average debt per farmer has risen from Rs 0.25 lakh to Rs 5.6 lakh.
Incidentally, Punjab, ranks third in the country as far as farm debt is concerned. Chhattisgarh tops the chart with Rs 7.54 lakh, followed by Kerala at Rs 6.48 lakh.
Loading the farmer with more credit would surely help the sale of farm machines and equipment, which would add to the country’s growth, but is no reflection of the extent of agrarian distress that prevails. It is easy to say that “a sustained soft patch or India’s rural economy would weigh on private consumption and non-performing assets in the agriculture sector, a credit negative for the sovereign and banks,” but difficult to spell out an economic gateway from where the indebted farmer can exit. Moody’s reforms (like other rating agencies) have only pushed 600 million farmers deeper and deeper into a vicious cycle of credit, indebtedness and suicides.
Moody’s report also includes highlights from the first annual Moody’s and ICRA Credit Conference held in Mumbai in May. Well, if you invite only the creditors/investors to such conferences you certainly will not get a complete picture. #
* Moody's report is disappointing: Reforms is not the solution to raise rural incomes. ABPLive.in July 2, 2015.