Will the govt change its development strategy to raise rural incomes?

While the earlier Modi govt fared well on rural schemes, both farming and construction activity in the village economy were muted

Rural development was the key focus area of the previous government. Toilets, houses, roads, electricity and LPG connections were words we heard quite frequently from the government, and from Prime Minister Narendra Modi, under the government’s previous tenure.

But looking at the broader rural economy as a whole, the last five years were peculiar in three aspects. Firstly, in terms of incomes, wholesale food prices grew slower than before. As a result, daily wages to labourers working on farms and construction sites did not grow substantially.

Secondly, tractor and automobile sales, which had boomed even during years of scarce rainfall, have slowed down in the recent quarters. While some experts think that this is a cyclical downturn related to long-term economic cycles and elections, others think consumption in India is plateauing, or is becoming saturated.

Finally, government action to fill up the gaps in rural development was strong. Well-built houses to rural families living on the edge, roads that connect the remotest villages to economic activity, access to electricity and clean cooking fuel, availability of toilets are perceived to be the promised ‘vikas’.

A glimpse of the achievements shows that a substantial part of the rural schemes has been completed (See chart 1). As these targets are near their full culmination, policy warrants a look back at the key indicators that would probably shape the rural economy in the coming years.

Farm and construction wages stagnate

Daily labour wages on farms grew by a meager 1.8 per cent in 2018-19, according Business Standard calculations. Here, the growth in average daily wage for general agricultural labourers has been deflated by the consumer inflation for the same class. Slower growth in wholesale prices of food (Chart 2), which are close determinants of farm incomes, is termed as one of the biggest reasons for slower wage growth.

Though playing in low-growth levels for a long time, real farm wage growth had improved from one per cent in 2015-16 to 3.6 per cent in 2017-18. This was too low compared to the real growth rate of the economy (gross domestic product), as Chart 3 shows.

But agriculture is not the only economic activity in the rural sector. In fact, construction has been providing more incremental jobs to rural folk since the last two decades or so. But real wages for construction workers grew slower than those for farmhands. Construction wages nearly stagnated in 2018-19.  

There were only three years in the period prior to 2014 when real wages grew faster than the overall economic growth: 2010-11 to 2012-13 (Chart 4). Here too, the nominal average agricultural wages have been deflated by consumer inflation rates for farm labourers. Economists have held that the period up to these years was marked by an increasing share of construction in the economy (Chart 5). In contrast, construction as a part of the overall value added in the economy has been shrinking over the last decade.

Share of agriculture has touched its record low in 2018-19, according to provisional estimates for the year, while real estate, which is more of an urban phenomenon, has been improving its footprint in the economy in terms of gross value added.

The story of agriculture and construction shows that the stagnation in rural wages and incomes is refusing to budge, despite the fact that rural housing and infrastructure projects have been the key fast growing drivers of the economy, as the Reserve Bank of India said in its recent review of the economy (in the monetary policy). It appears that strong and consistent growth in sales of cement and infrastructure companies is not being translated into faster income growth for the rural populace.

This has been corroborated to some extent by slowing down of sales of automobiles including tractors, as well as daily household items, such as fast-moving consumer goods. In March, April and May 2019, auto sales took a beating never seen in the past eight years.

Though there is no data to show whether the recent slowdown is a rural or an urban phenomenon, experts think that such a strong slowdown has to be a mix of both.

The revival of consumption growth depends on the revival in wages/incomes of the rural populace, which in turn depends heavily on the farm and construction sectors. Due to near completion of various rural schemes of providing households and villages with essential services, the government is likely to take up a more evolved strategy wherein rural wages rise and rural demand picks up, according to sources. The way in which this happens remains to be seen.