Why growth can’t be revived till rural demand picks up – The Financial Express–18.01.2018

The slowdown in the economy, it is clear, is partly the result of a moderation in consumption. Private consumption, which slowed to 6.5% yoy in Q2FY18, saw the slowest growth in five quarters and investments remain sluggish. Some of the consumption slowdown is related to the moderation in real rural wages, possibly due to the fewer number of jobs available. In October, 2017, the average rural wages for men grew at just 4.9% y-o-y whereas it had not grown at less than 6% in the previous five months. In the past, a bountiful harvest triggered a recovery in rural incomes and consumption growth. What is increasingly visible today, however, is that even a small surplus tends to make prices fall sharply and that, in turn, has crimped rural purchasing power. In the absence of vibrant wholesale markets not controlled by trader cartels, and poor local storage, farmers have little choice but to sell at prices dictated by traders and middlemen. So, it has become quite common for retail prices in big cities to be in the Rs 30-50 per kg range while farmers dump onions/potatoes at Rs 2-3 per kg in many production centres.

This could change if deep-pocketed foreign multi-brand retailers were allowed to sell food and buy from the farm gate. Investments in specialised infrastructure—cold-chains, warehousing and related agri-logistics would reduce the current wastage of around 20%—would take place immediately, and there would also be more contract-farming. Instead, as a committee on farm incomes noted, around 40% of the produce is sold in cartelised markets and just around a tenth to processors. And as Icrier professor Ashok Gulati has pointed out, while most agriculture commodities have been export-competitive in most years over the past decade, government policy has generally been restrictive, clamping down on exports as soon as local prices start rising. Indeed, even as onion prices in the retail markets in Delhi are around Rs 50 per kg, farmers are asking the government to scrap the current minimum export price of around $850 per tonne as this makes them uncompetitive when compared with exports from Pakistan or Egypt.

Also, while prices of fruit and vegetables at the farm gate have to be lower than those charged by retailers, given the costs of transportation don’t change according to prices, and the stranglehold of middle-men over the distribution chain, retail prices remain elevated. Not surprisingly, the committee noted that production and prices of horticulture had been volatile in most states over the past decade. Moreover, the growth in the area under horticulture had decelerated after 2010-11, once again, due to poor market connectivity. In April, 2017 the government had come up with a model law to aid better realisations for farmers by trying to create a single market within a state, setting up private wholesale markets, and allowing direct sales by farmers to bulk buyers and also a pan-Indian e-market. None of this, however, have really taken off. In the case of mandis, for instance, the cost of land are so high, it defeats the purpose of lowering prices—ideally, state governments should give mandis low-cost leased land, but this hasn’t happened. Till these hard marketing issues are resolved, even if the government does manage to increase irrigation facilities, it is difficult to see how farm distress can be addressed meaningfully.

via Why growth can’t be revived till rural demand picks up – The Financial Express

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