2022: When high prices ate into rural earnings more than in urban areas

War, weather and excess liquidity impacted Bharat, though year-end saw things looking up a bit

Year 2022 will perhaps be notable for the sharp spike in almost all agricultural commodities in the aftermath of the Russia-Ukraine war, the adverse impact of uneven weather, and excess liquidity pumped into the markets during Covid that fuelled speculative trade.
 

Prices of almost all agricultural items, be it edible oils, cereals, cotton, milk, eggs, fodder and even vital inputs such as fertilisers, saw a sharp increase.
 

High prices also meant that though farm gate realisations might have improved but a vast majority of rural population, just like their urban counterparts, saw inflation eating into their earnings.
 

Though the high inflation has since moderated for several items, it is still higher than last year’s level for some.
 

A recent analysis by Kotak Institutional Securities showed that real rural wage growth was negative for the 10th month in a row till September 2022. 
 

The contraction was largely due to elevated inflation, and the sluggishness in the rural economy has left demand for labour subdued, thus capping nominal wages as well, the report indicated.
 

A report showed that demand for work under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) rose to a four-month high in November 2022, according to government data, even as the Budget allocated for the programme was exhausted.
 

The data showed that more than 22.5 million people applied for work under MGNREGS in November 2022, the highest since August. As many as 25.2 million people had applied in July and 19.1 million in August, according to the rural development ministry.
 

Meanwhile, inflation in rural areas as measured by the Consumer Price Index (CPI) has been consistently above the 6 per cent mark since January 2022.
 

The high inflation is mainly due to an increase in cereal prices, though food items such as edible oils, milk, meat and fats, as well as non-food items such as fuel, have been contributors.
 

CPI inflation (rural and urban combined) for the month of September surged to a five-month high of 7.4 per cent, largely due to a spike in food inflation, before moderating to 5.88 per cent in November.
 

In November, rural inflation was 6.09 per cent, while urban inflation was lower at 5.68 per cent. The trend of rural inflation being higher than urban was constant all through the year, which meant people in rural India bore the brunt of high prices more than their urban counterparts (see chart).

GM and more
 

Among other developments, the biggest was the approval given by the Genetic Engineering Appraisal Committee (GEAC) to GM mustard, among a select few Indian crops – a first since BT cotton in 2002.
 

The approval and the subsequent directions meant that GM mustard could not be officially put for further studies in the Indian Council of Agricultural Research (ICAR) system, paving the way for its eventual commercial release, provided all parameters are met fully.
 

On the production front, in 2022, output of both wheat and rice, the two primary cereals produced in the country, dropped below last year’s levels, according to government estimates, though the extent of the fall varied between what has been officially pronounced and what the private traders calculated.

This has seldom happened in the recent past. 

While wheat output dropped in the 2022 rabi season due to a sudden rise in terminal heat just ahead of the harvesting stage, rice production fell in the successive kharif season due to drought and patchy rains in the main growing states – Bihar, Jharkhand, West Bengal and Uttar Pradesh.
 

According to official estimates, wheat production in the 2022 rabi season that ended in June was officially pegged at 106.41 million tonnes, according to the third advance estimate. This is 3.8 million tonnes less than last year’s output and 4.39 per cent lower than the first estimate of 111.32 million tonnes as heatwave in the main crop growing stage crimped output.
 

However, private traders say the production was much lower at 98-100 million tonnes.
 

A spike in wheat prices beyond what was being offered by the government meant that farmers opted to sell their produce to private traders, depriving the government of the chance to replenish its stocks adequately.
 

The Centre’s wheat procurement in Fy23 dropped by almost 59 per cent to 18.78 million tonnes as compared to the same period last year, while overall production also suffered.
 

The current open-market wheat price is around Rs 3,000 per quintal in North India, which is much higher than the revised minimum support price (MSP) of Rs 2,125 for the 2022-23 season.
 

Wheat prices have, in fact, seldom dropped below the MSP this year, something that has rarely happened in India in the recent past.
 

Similarly, in the case of rice, weather played spoilsport and drought in eastern India pulled output down.
 

But with inflation showing signs of cooling off and demand picking up across sectors, the rural sector could show some signs of recovery.
 

“The good news is that food inflation may reduce in the coming year, as may prices of fertilisers and fuel due to global recession,” S Mahendra Dev, distinguished professor at ICFAI Business School, Hyderabad, told Business Standard. “Also, liquidity is being sucked out of the markets, which will further cool prices down, but the extent of that remains to be seen.”
 

He said the southwest monsoon will continue to set the course for the rural sector, while agricultural growth in Fy23 will remain around 4 per cent.
 

“There is some uptick in rural demand for FMCG and consumer durables, which will hopefully sustain next year as well,” Dev said, “but agriculture exports could get impacted if global recession sets in.”

Month	Rural	Urban	Combined
January	6.12	5.91	6.01
February	6.38	5.75	6.07
March	7.66	6.12	6.95
April	8.38	7.09	7.79
May	7.08	7.08	7.04
June	7.09	6.92	7.01
July	6.8	6.49	6.71
August	7.15	6.72	7
September	7.56	7.27	7.41
October	6.98	6.5	6.77
November	6.09	5.68	5.88

Source: MOSPI

Gross Value Added in Agriculture and Allied Activities  ( In percentages)

Period	2020-21 2020-21			2021-22 2021-22			2022-23 2022-23
-	Constant	Current	Inflation	Constant	Constant	Inflation	Constant	Current	Inflation
Q1	3	6.2	3.2	2.2	8.3	6.1	4.5	17.4	12.9
Q2	3.2	8.5	5.3	3.2	6.9	3.7	4.6	15	10.4
Q3	4.1	8.8	4.7	2.5	9.6	7.1
Q4	2.8	6.4	3.6	4.1	15.2	11.1

Source: MOSPI