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January 29, 2017

Rx for rural

India’s rural economy has a huge footprint, supporting 70% of its population andaccounting for almost half of India’s gross domestic product (GDP) and privateconsumption. The recent rise in rural distress, therefore, rightly set off cautionlights in the corridors of power. As for rural output, ~40% is from agriculture.Interestingly, this time around, farm stress has little to do with monsoon (normalor near-normal as they were in 2016 and 2017). but more to do with income.Despite a good harvest, farmers did not get remunerative prices for theirproduce. Even today, many crops are being sold below the cost of production.Sluggish rural wages and sub-normal performance of the construction sector (akey, low-skill-labor absorbing activity), too, hurt non-agricultural rural activityand income. Such a backdrop generally would worry any government, more so ina pre-election year. Three things the Union Budget can focus on are:


  • While continuing with the Mahatma Gandhi National Rural EmploymentGuarantee Scheme, the focus should shift to boosting spending on theconstruction sector. Higher allocation and steps to boost the sector (ruralroads, low-cost housing) are needed because it has the highest employmentintensity after agriculture. It employs more workers than evenmanufacturing. About two-third of the labor force used in construction isunskilled or semi-skilled, which is a key characteristic of people migratingfrom agriculture, so it’s a synergistic rub-off. This will act as a buffer in twoways: if monsoon underperforms this year, such jobs will offer an offset, andif normal, will boost consumption
  • Introducing flexible trade policy for timely intervention and ensuring thatimport prices do not fall below minimum support prices
  • Stepping up procurement of non-cereal crops and supporting developmentof farmer producer organizations to reduce the hold of middlemen

From a medium- to long-term perspective, development of marketinfrastructure and the futures market, step-up in public investment in irrigation,effective insurance schemes, mechanism to reduce price volatility in perishablecrops, and dissemination of knowledge to improve farmers’ decision makingability would go a long way in strengthening the agricultural economy as well asenhancing farmer income.