The illusion of a revival in Indian agricultural sector

Most recent economic indicators suggest a modest recovery compared to the first two months of India’s lockdown. But when compared to the data of last year, it also becomes clear that an economic comeback is likely to be a long-drawn affair. There is also a consensus that a recovery will be contingent on a revival in consumption demand, which had declined considerably even before the lockdown. 

The only hope during these grim times seems to arise from the agricultural sector, which is expected to not only show positive growth, but also boost consumer demand. Such hopes are bolstered by a normal monsoon and increased sowing this year, on top of last year’s record production of some crops. But how realistic are these hopes pinned on agriculture to revive demand and the economy?

Agriculture has stood out, with high growth in the last two years, when most other sectors and the broader economy were slowing down. The sector grew 4% last year, and at an impressive 3.2% per annum during the last six years. For the first five years of the National Democratic Alliance (NDA) government, the annual agricultural growth rate was 3.08%. At an aggregate level, these figures appear impressive, but they have failed to contribute to a resurgence of India’s economy, which has been slowing down for at least two years.

Part of the reason is that while the agriculture sector as a whole grew at more than 3%, there was wide variance in the performance of its sub-sectors. Agriculture comprises the crop subsector and allied sectors such as livestock, forestry and fishing. But it is the crop sector that most Indian farmers are employed in and derive their income from. The crop sub-sector doesn’t just form the largest chunk of agricultural value added, accounting for two-thirds of the total value added in the overall sector in 2013-14, it is also the key determinant of farmer incomes. 

However, its performance under the first five years of the NDA government was far less impressive than that of the broader sector, with its net value added declining at constant prices. Between 2013-14 and 2018-19, the crop sub-sector’s net value added fell 0.3% per annum, implying a decline in farmer incomes. 

Even though the value of output at constant prices for the crop sub-sector increased by 1.1% per annum, input costs increased by an annual 2.7%, resulting in a decline in the overall value added by the sub-sector. The increase in input costs was largely driven by higher electricity and diesel costs. These rose at 7% and 6.8% per annum, respectively, during the period, despite a significant fall in international energy prices.

However, the broader agricultural sector continues to show growth of more than 3% per annum. A big contributor to this is growth in the livestock and fishing sub-sectors, which posted 8% and 11% annual increases between 2013-14 and 2018-19, respectively. These high growth rates are surprising, given the past trends, and also attract suspicion since the crop sub-sector contracted during this period. 

In general, the livestock sub-sector tends to show a similar trend as crops. Moreover, there is reason to doubt these numbers, given that unlike the crop sub-sector, in which a large part of the data is derived from crop-cutting experiments and is therefore more reliable, estimates of the better-performing sub-sectors are based on less reliable methods. But even if the data is assumed to be accurate, a decline in the value added by crops means that overall agricultural growth might not be the best indicator of farmer incomes. The decline also partly explains the past two years’ broader slowdown in the rural economy despite good aggregate growth in agriculture.

Some of the trends that contributed to the fall in the crop sub-sector’s net value added remain relevant even after the pandemic. While output prices have fallen across the board for most crops in the last four months, the government has refused to pass on the decline in energy prices to farmers. In fact, in many states, the price of diesel has increased. 

However, unlike the past five years, farmers are now also reeling from falling poultry and milk prices, two commodities that saw among the highest growth rates within the livestock sub-sector. If these trends continue, it is likely that the value added in agriculture will be not only turn out to be lower than expected, it may actually deepen distress in the rural economy. If the government is serious about reviving rural demand, it must urgently subsidize input costs and raise the value added in the crop sub-sector through price support measures.