Rural distress undercuts GDP growth euphoria

The Mint, June 04, 2018
By Himanshu


The performance of the Narendra Modi-led government after four years were summarized by two results on 31 May. On the economic front, the Central Statistics Office (CSO) released the report card of economic performance of this government for the last year whereas, on the political front, the results of byelections for four parliamentary constituencies and 10 legislative assembly seats were announced by the Election Commission. On the economic front, data from the CSO suggest an improvement in the last quarter over the previous quarters with GDP growth at 7.7% as against 5.6%, 6.3% and 7% in the previous three quarters of 2017-18.
However, optimism on the economic front was met with pessimism on the electoral front which saw the Bharatiya Janata Party (BJP) losing the crucial parliamentary seat of Kairana (Uttar Pradesh) and Bhandara-Gondiya (Maharashtra) and narrowly winning the Palghar (Maharashtra) parliamentary constituency. The performance in the assembly byelections was also disappointing with the alliance led by the BJP winning only one out of 10.
Both these results appear contradictory at first sight with the electorate in crucial states where the BJP holds power by itself or with allies rejecting any signs of optimism on the economic front. Clearly, the electorate’s understanding of how the economy is performing does not match with the figures released by the CSO. To some extent, the pessimism of the electorate on how the government has performed on the economic front is based on its own experience of the distress that has been prevailing in rural India for almost four years now.
Behind the numbers thrown up by the statistical agency also lies the uncomfortable truth of the suffering of rural communities. As if the droughts in 2014 and 2015 were not bad enough, the hopes of a revival in fortunes were hit by demonetization and the tardy roll-out of the goods and services tax (GST) which hit the backbone of the rural informal economy. Most of this is known to the government and perhaps it was this fear of a backlash against the government which forced the prime minister to break the tradition of not campaigning in byelections and undertake an “indirect campaign” just before polling in a rally kilometres away from Kairana. Unfortunately, his promise of a solution to the long-pending issue of sugarcane arrears did not have any impact on the voting.
The behaviour of the electorate, however, is not at deviance from what the economic indicators suggest. The economy has been in a bad shape for quite some time now. Despite numbers suggesting an upturn, two of the drivers of the economy, namely exports and investment, continue to be at an all-time low with no signs of recovery. But the real driver of the Indian economy has been its domestic demand and all indicators suggest a virtual collapse of this. The growth of the economy may appear to be an improvement in real terms at 7.7% in the fourth quarter compared to 7% in the third quarter but the same numbers also show that in nominal terms, growth has actually decelerated from 11% to 10.9%. Much of the growth in real terms then is in fact driven by the fact that rural prices, taking agriculture as a proxy, have grown at only 0.42% per year.
While this does show higher growth in agriculture in real terms, it is at the cost of hurting the livelihood of farmers and the incomes they get from farming. It is this deflation that hurt the farmers. In nominal terms, the growth rate of gross value added (GVA) in agriculture has declined sharply from 11.6% in 2016-17 to almost one third at 4.6% in 2017-18. What matters to the farmers is the nominal income and that partly explains the anger in the farming community. The fact that prices collapsed despite normal rainfall confirms the collapse of domestic demand.
Another sector which shows an increase in growth rate is public administration which shows nominal increase of 14.4%, the highest among all sectors. Unfortunately, the increase in public spending which has benefited the middle class in terms of pay commission handouts has been at the cost of declining public investment in agriculture and a real decline in most rural development expenditure. Excluding public administration and agriculture, even real GDP growth shows deceleration from 7.4% last quarter to only 7.2% this quarter.
Clearly, the message from the electorate is that not everything is right with the economy despite the euphoria on the CSO numbers.
At the end of four years, the government may have little time to undo the damage its policies may have caused to the rural economy, but the least that the government can do is to lessen the pain of the distress to the rural population.
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