A recipe for deepening the distress of the rural economy

The general consensus on the state of the Indian economy can be summarized as follows: the economy was in a deep crisis even before the disruption caused by the pandemic. Second, the crisis is not due to supply constraints but to insufficient demand, especially in the rural economy.

Recent evidence suggests that the impact of the downturn and the pandemic has been borne disproportionately by those at the bottom. And finally, monetary policy has limited success in managing a crisis of this nature, with fiscal policy supposed to play the dominant role. Any assessment of the 2022 budget must be placed in this context.

In this context, the task incumbent on the Minister of Finance was to increase consumer demand in the economy and also to protect those affected by the downturn and the pandemic. The surest way to achieve this was to increase the incomes of those who worked in agriculture, directly as well as indirectly. Whilst the reality, as reported by the ONS Situational Assessment Survey, is that farmers’ income from cultivation actually declined in real terms in 2019 compared to 2013, the situation seems worsened over the past year with rising energy and fertilizer prices.

Ongoing elections to crucial state legislatures and farmer protests had forced the government to roll back fertilizer price hikes in May 2021 and absorb higher fertilizer prices by increasing subsidies. However, this budget significantly reduced the fertilizer subsidy by 1.4 trillion last year to 1.05 trillion for 2022-23. By the way, this is less than the actual subsidy of 1.28 trillion in 2020-21 when world prices were well below current prices. The other major cost in agriculture is the cost of energy, which also saw a sharp increase last year for diesel and electricity.

The temporary freeze on electricity charges and diesel prices will likely be lifted once elections in crucial states are over, leaving farmers to pay higher prices for energy as well. Given that costs paid are increasing faster than producer prices, which remain subdued due to weak demand in domestic markets, it is highly likely that farmers’ incomes will fall even more than in 2019. Despite the increase inflation, the budget for other support schemes, such as crop insurance, interest rate subsidies and cash transfer programs, remained more or less unchanged. Clearly, this is a sure recipe for reducing real farm incomes at a time when the rural economy is already in dire straits.

As if the shocks to agriculture were not enough, this budget also dealt a severe blow to the non-farm sector of the rural economy. at a time when agriculture no longer absorbs labor and the non-farm sector is experiencing disruption, the rural non-farm economy has served as a refuge for a majority of wage earners. The majority of them found employment under the National Rural Employment Guarantee Scheme (NREGS) which acted as a lifesaver despite paying below market wages. This was also recognized by this year’s economic survey. Surprisingly, the NREGS budget was cut by 98,000 crores last year for 73,000 crores for this year. By the way, this is also less than the actual expenses of 1.11 trillion for 2020-21. This happened despite rising wages over the past two years. The fate of other Ministry of Rural Development programs is no better, with most experiencing either the same allocation as last year or a slight decrease. The net result is a 12% drop in the rural development budget at a time when the distress of the rural economy is at its highest. With the likely withdrawal of the supplementary food allowance under the National Food Security Act from next fiscal year and rising retail inflation, the rural economy is facing a double whammy from the declining income and rising cost of basic necessities.

Given the distressed level of the rural economy, this budget needed to provide protection of income, employment and basic services for the majority in rural areas. At least it was expected to strengthen the existing mechanism, not weaken it. But this budget not only ended up weakening them, it also offered a recipe for aggravating the plight of the rural economy. In doing so, he also gave up all hope of reviving the economy, which is sinking into crisis year after year.

Views are personal.

Himanshu Associate Professor, JNU

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