In many ways, India’s agriculture sector presents a paradoxical picture. Contrasting the sustained buoyancy in real growth in gross value addition (GVA), the rewards yielded to the factors of production have contracted.
Secondly, the value of output and credit growth have decelerated significantly over the past decade.
And thirdly, the robust production track record is incongruous with claims of falling food consumption amid elevated inflation.
This plethora of incongruence begs a crucial question. Is the spectacular surge in agri GVA growth translating into rural prosperity? Because if it is, the decline in rural-urban migration and the rising trend of ruralisation in recent years should be celebrated. We take a closer look at the dilemma and conclude that the picture is less heartening.
The conundrum of robust agri GVA but falling wages
Agriculture’s real GVA growth of the eight-year period ending in FY24 averaged at a robust 4.9% and is projected to grow at 4.6% in FY25. But the real wage for agriculture workers has remained stagnant, growing at 0.8% CAGR, casting doubts over the relevance of high GVA growth.
What’s more? Over the five years ending FY24, the share of labour and capital income remained mostly unchanged at 56.5% and 43.5% respectively, and the real return per unit of labor and capital has declined by CAGR of 0.4% and 0.3%.
The labour and capital deployed in the sector over the past five years have grown at 4.8% and 4.5% respectively, more than the growth in gross cropped area grown by 1.7%. Hence, the evidence of excessive deployment of factors of production implies rising disguised unemployment and declining productivity. Thus, robustness in the real agri sector GVA is not leading to bountiful opportunities but income constraints.
What’s leading to rural labour oversupply and falling income?
A recent study by the Economic Advisory Council to the Prime Minister (EAC-PM) revealed a 12% decline in domestic migration since 2011 (or -1% CAGR), while the workforce has risen by 1.8% annually. This coincides with rising dependence of the workforce on the agriculture sector to 46.1% in 2023-24 from 42.5% in 2018-19. These trends indicate rising urban worker redundancy translating into diminished remittance from urban to rural, and an acceleration of land fragmentation resulting in lower productivity and real wages.
Rural occupation: Rising dependence on non-core activities in farming households
NABARD’s Financial Inclusion Survey shows that rural household incomes are derived from cultivation, livestock rearing, other enterprises, wage labor and services (government and private). Agri-dependent households earned Rs 13,661, higher than non-agri at INR 11,438 as they have more diversified income sources. Consequently, over 2017-2022, the share of agri households in rural income at 57% has increased from 48%, implying a reduction from non-farm households.
Considering the rise in labor force, particularly of females for whom real wages contracted, the real income for agri households grew modestly at 0.9% CAGR (2017-22), a trend that continued till 2023-24.
Within agri households, stressed income situations have forced an increased share of non-core agri activities relating to government or private sectors, and driven by MGNREGS, and low-paying services. The nominal income from wage labour contracted by 5.8% (2017-2022) while from other enterprises, and government and private services, grew by 32.7% and 16.9% respectively.
For the non-farm households too, the dependence on labour income has declined sharply (down from 54% to 26%) as its nominal growth has contracted.
Overall, rising ruralisation has increased rural income dependence on agri households. Rising labour participation in agriculture has resulted in contraction in core agri-based income.
Rural lending driving consumerism; need for economic activity-based lending
Relative to the rural wages, bank credit growth has grown faster, with a five-year average of 11.5% (FY19-FY24, adjusted from HDFC merger), predominantly led by personal loans (18%). Lending based on economic activity has lagged. Agri lending grew by 11%, transport operators by 11.8%, construction by 2%, trade by 7.6%, services by 9.1%, and industry by 6.3%.
Historical comparison shows a higher correlation between rural wage growth and rural lending.
The paradox, however, is that despite a slower average real agri GVA growth of 3.5% during FY09-FY14, real wage growth outpaced at 6% and was associated with higher rural lending growth of 13%. But ironically, higher real GVA growth of 4.7% over the past five years has yielded contraction in real wages (-0.6% CAGR). Thus, the current slower pace of rural lending at 11.5%, tempered also by recent large agri loan waivers, represents a fundamentally weaker asset quality for lenders. Gross fixed capital formation as percentage of bank agriculture lending has fallen from a peak of 96% in FY03 to 37% in FY23.
The broad assessment of bank credit and rural sector performance shows that income constraints have led to leveraged consumption trends even as the productive element of lending in the agri sector has declined. Rising consumerism has been propelling transportation activities and other services; rural industrial and construction have moderated.
Improvement in asset quality in rural lending would require enhancing economic activity-based lending in the rural manufacturing, construction, and productive services.
The food consumption-inflation puzzle
The national household consumption expenditure survey (HCES) resonates with slowing average income, but its indication of contraction in per capita decline in food consumption, particularly cereals, is puzzling. Adjusting for the high 5.6% cereal inflation, the monthly per capita consumption expenditure on cereals contracted by 3.2% and 2.2% in real terms for rural and urban areas respectively.
Hence, with a steady production growth of cereals at 2.1% 12-year production CAGR, it should have implied excess supply. Then how does one explain elevated inflation? Contrasting the survey data, national accounts show personal expenditure on cereals and bread growing at 4.4% during FY12-FY23. The only cogent answer to this puzzle could be the rising spread of food consumption or distribution to a much larger mass of people. It is also possible that the survey data may have underrepresented the impact of government subsidies, free food programs and other government dole outs.
Rural policies deserve a transformational shift
The agricultural sector is experiencing a decline in nominal indicators, with disguised unemployment and real wages decreasing. This is due to cascading entanglements between rural and urban economies. To address this, policy responses should focus on boosting funding for rural enterprises and income generation programmes.
Rural lending growth has been driving consumerism and related services. But given the rising proportion of rural household income from non-core farm activities, policy shifts facilitating credit flows into rural enterprises can be highly gainful.
Decentralisation is needed to implement programmes supporting rural enterprises, requiring greater transfer of authority and financial resources. Short-term solutions like free food and minimum income support may create a disincentive to work, potentially leading to a long-term decline in labour productivity.
Dhananjay Sinha is co-head of Equities and head of Research of Strategy and Economics at Systematix Group.
