Inclusive growth is no mere slogan

But can agriculture contribute a new growth momentum to the economy?

Early commentary on the budget 2008-09 has focused almost entirely on a single parameter: the aggregate level of economic growth. Missing in all the punditry has been a serious effort to engage with the sources of growth in the Indian economy.

Evidently, the recent growth dynamic has had little to do with agriculture. As the Economic Survey just preceding the budget pointed out, growth in the agricultural sector, despite favourable environmental parameters, is expected to be a disappointing 2.6 percent this year.

This would, the Survey continues, “be translated into a lower overall GDP (gross domestic product) growth”.

What the Survey does not attend to though, is the nature of the relationship between agricultural growth and overall GDP. It is no mere arithmetical relationship. And the untold story of India’s growth experience over the last decade or so, has been that it has almost entirely excluded agriculture.

As a decade in the life of a nation, the 1990s could attract a variety of descriptions. For one thing, it was the decade of liberalisation, when India, after a seeming eternity of hesitation, finally decided to engage with the global economy. For another, it was when the Indian middle class, thwarted in its ambitions for generations, carried through its revolution of rising aspirations.

With all this, the 1990s could also be remembered as the decade when agriculture fell off the radar screen. Two points in time when the Indian economy was severely buffeted by weather adversities, capture the essence of this transition.

The two worst decades over the last quarter-century in terms of weather conditions have been 1987 and 2002. In 1987-88 when agricultural GDP fell by 1.39 percent, overall growth clocked in at 3.8 per cent. In 2002-03, the impact of adverse weather on agriculture was even more catastrophic, with GDP in the sector falling by 5.99 per cent. Yet overall GDP registered a growth of almost 4 percent.

The transformations of the last decade-and-a-half have meant that agriculture, despite being the sector that hosts by far the majority of the Indian population, is of less consequence for the economy than ever before. Indeed, much of the growth over this period has been driven by the revolution of rising aspirations of the great Indian middle class.

This is a story that emerges clearly in the rapid diversification of consumption patterns. Food clothing and shelter, the traditional core of the consumption basket, now comprise a much smaller proportion of aggregate private final consumption expenditure than it did in 1990-91.

To take merely food: from almost half the aggregate consumption expenditure in the Indian economy in 1990-91, it today accounts for well under 40 percent.

Yet this is a story that has stubbornly failed to reproduce itself in the rural sector. As a 2003 survey by the National Sample Survey Organisation (NSSO) found, the average monthly per capita expenditure of farmer households was Rs 503, just moderately above the rural poverty line of Rs 349 (itself a rather modest indicator). And of the total consumption expenditure, over 55 percent went into food.

Clearly, the flagging growth momentum in agriculture has meant much more than an arithmetical failure to contribute to overall GDP growth. It has meant that the vast majority of the working population in the country has been unable to participate in the growth story, because their purchasing power has been under severe pressure.

Various strategies have been advanced over time as possible antidotes to the persistent malaise of Indian agriculture.

Virtually all are agreed that investment in agriculture, which has fallen off rapidly over the years and only shown some hesitant signs of recovery in recent times, needs to be stepped up.

Others argue that the subsidies given to agriculture in the terms of cheap fertiliser and assured output prices, should be redeployed as productive investment.

There have been increasingly urgent efforts along both these dimensions in recent times. Yet it is uncertain how successful these administratively complicated and politically difficult operations have been.

Under pressure to do something, the Finance Minister has, unsurprisingly in the light of the political pressures of the imminent electoral contests, opted for a large-scale write-off of agricultural debt.

By all indices, the crisis of indebtedness in agriculture is acute. Two surveys conducted by the NSSO in 2003 have shown that of the 89 million farm households in the country, 43 million are indebted to some or the other degree. Indebtedness is extremely high in states with well-developed agricultural practices, such as Andhra Pradesh, Punjab, Maharashtra and Tamilnadu; as also in Kerala, with its large plantation sector.

Significantly, over 42 percent of the total debt of the agricultural sector was owed to non-institutional sources such as the local village money-lender or trader. This represents a significant backward movement for the agriculture sector, which was dependent to a relatively minor degree of 30 percent on non-institutional credit sources in the early-1990s.

Evidently, Chidambaram’s loan write-off fails to address the huge problem of the non-institutional debt of the farm sector. But in alleviating debt-induced distress at least to some extent, it may generate additional purchasing power in the farm sector, which could conceivably, impart a growth momentum to the economy.

“Inclusive growth” is no mere slogan. It is perhaps a survival imperative for the Indian economy, with the growth impulse driven by the “great Indian middle class” over the last few years now flagging. Chidambaram’s seeming populism perhaps disguises certain hard-headed calculations of economic pragmatism.

Where the fiscal resources for the loan write-off will be found is of course, another question. But if the improvement that Chidambaram claims on the fiscal front is real – rather than the illusory consequence of cleverly hiving off much of the expenditure burden to public sector corporations – then the additional burden should not be insupportable.