Rural Economic Indicators under the Narendra Modi led NDA Government
- In Economics
- 11:25 PM, Sep 15, 2015
- Prashant Shrivastava
India is considered to be seventh largest economy in the world by nominal Gross Domestic Product (GDP) and is considered to be the third-largest by Purchasing Power Parity (PPP). It is an emerging economy with around 7% average growth rate recorded in last few years. Very recently India's economy became the world's fastest growing economy replacing China from the last quarter of 2014. The growth prospects of the Indian economy are seen as positive due to its young population, healthy savings and investment rates. With all these factors it becomes important to understand the economic indicators of this country.
Economic indicators are statistical calculation of predefined economic parameters used to analyze the economic performance. It helps in predicting the future performance. Economic data is used to interpret present and future possibilities and interpret health of economy.
Rural economic indicators are directly related to economic development that analyzes improvements in the quality of life with the economic welfare of people. The rural development indicators provide the status on the socio-economic condition of the rural area. As per the census of 2011 in India, the population is more than 125 crore out of which 72.2% population lives in rural area, as a result the rural economy indicator analysis is key for any government.
There is overall a mixed mood about the pace of reforms under Prime Minister Narendra Modi, but the rural economy is definitely in question under his leadership. Renowned rating agency Moody’s Investors Service has reported weak rural economic growth very recently in its ‘Inside India’ report. It has attributed it due to slow income growth and rural demand in the current fiscal year. The report is based on the development and research highlights for the past quarter.
Moody's further reports that it expects India's already weak rural economy to remain passive throughout the fiscal year ending March 2016. Moody's highlighted that the plans to reduce corporate tax rate by Modi’s government to 25 percent from the existing 30 percent in the next four years should be seen as "credit positive", as it will reduce tax expenses of corporates and increase competitiveness over the medium term.
The report says that rural income growth is stuck in single digit in 2015, which is far below 20% plus rates reported in 2011. It also reports that the rural consumer price inflation was 5.5% year-over-year in May 2015, which means that rural wages are diminishing in real time. The report says that the growth expectations are not met and it has disappointed. In addition the pace of reforms and policies under Prime Minister Narendra Modi are in stagnated state, based on survey conducted.
The report has fully attributed this for the government’s fiscal restraint. In 2014-15 government spending was Rs. 1.5 lakh crore less than that budgeted. This is due to the brakes applied by the government to remain within budgeted fiscal deficit of 4.1% of GDP. The report also attributed to slower rise in rural incomes to increase in minimum support prices (MSP) to keep inflation in check. The tight control in stopping the rise in MSP to keep the inflation in check has also added to reducing the rise in rural incomes. This could be clearly seen in announcing a 3.7% increase in the MSP for paddy for 2015-16 which is well below the 9.1% average annual growth seen in 2009-10 and 2013-14. Another reason attributed is to greater fiscal discipline by Modi government in administering the National Rural Employment Guarantee Act that has also added to the impact on rural incomes. Total expenditure for this scheme is reduced to Rs. 36,030 crore in 2014-15 from Rs. 38,800 crore from the previous fiscal. It is expected that the below-par monsoon will further undermine rural demand and will further add to impact on rural income.
The agricultural sector of India is the one of the largest contributor in India's economy. Over the years this contribution is declining share of its GDP around 15%. Still India ranks second worldwide in agriculture output.
Historically, India has classified and tracked its economy and GDP on — agriculture as one of the key contributor. Agriculture and related sectors like forestry, logging and fishing accounted for around 50% of the total workforce in country. As the Indian economy has diversified a lot and grown many folds over the last few years, agriculture's contribution to GDP has steadily declined, but still it provides the largest employment source and significantly contributes to the overall socio-economic development of India.
It is said that with the right adoption of technology and policies, India could contribute to feeding not just itself but to the world. Currently agricultural output of India lags far behind its developed world peers. Infrastructure such as roads, ware houses, electricity, ports, retail markets and services are not fully developed and need improvements under Modi government. Further, the average size of land possessed by farmers is very small. As per few estimates 70% of holdings of total number of farmers are less than one hectare in size. Irrigation facilities are inadequate, resulting in farmers still being dependent on rainfall, specifically the monsoon season. In addition at least one third of India's agriculture produce is lost from spoilage due to inadequate facilities for storage. This is one of the key input area for improvement for Modi government.
Narendra Modi is taking a long-term view on India’s structural problems. Till date since assuming power, the majority of policy measures taken are neither surprising nor breathtaking. They are being implemented gradually on a broad front. Big reforms are seen very few. Few of the reforms include greater amicable co-operation between state and central governments, restructuring the tax system, improving administration, allowing greater accessibility and ease of doing business, transparency in business and laws, labor laws changes and other long approvals related laws are modified to fasten approval process and furthering financial inclusion.
There has been reasonably good progress in second half of year 2014. India’s growth prospects already appear to be improving slowly, with forecasts for an uplift in consensus GDP growth in 2015 to 6% plus. Inflation has seen fortunate factors to bringing it under control. The fiscal deficit issue is now seen as much more contained.
From now onwards, much will depend on the speed at which Modi government can implement their reform agenda and will have to see on how their policies begin to have an impact in medium to long term. Controlling inflation below 6% through 2015 as economic growth accelerates with the business cycle and a relatively small output gap begins to close could still prove challenging. Central government fiscal targets are still likely to overshoot. The medium-term outlook is highly positive.
There have also been various labor market reforms to increase flexibility whilst still protecting workers. These include portable retirement accounts and more access to social security schemes for workers. A key objective of the Modi government is to promote financial deepening in rural India, via mobile banking and other non-traditional means of bringing financial services to isolated rural communities. Financial inclusion for every household is being pushed, with incentives to open bank accounts, providing accident and life insurance coverage, which will help in encouraging higher household savings and thus investment. A planned push for a more “Digital India” with fiber optic connections to villages should also improve the spread of e-commerce, mobile banking and ease of access to government resources.
Until recently, rural wage pressures were seen as an important factor contributing to India’s inflation problem, but this is no longer the case. Rural wage growth has fallen sharply over the past 18 months and is no longer out of control. There is some disagreement regarding the degree to which the previous government’s rural wage support policies, principally payments under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme, contributed to the emergence of strong rural wage pressures. There is no doubt, however, that strong rural wage growth in India from 2009 to 2012 did feed first into food prices and then into urban wages. Under the Modi government, the MGNREGA scheme has been retained as it serves key social objectives, though it has been made more flexible, with greater emphasis on obtaining value-added benefits for work done. The government has also shown greater discipline in administering the National Rural Employment Guarantee Act, a key legislation enacted under the previous government. Total expenditure related to the scheme fell to Rs 360.3 crore in year 2015, down from Rs 397.8 crore and Rs 388.0 crore in year 2013 and year 2014, respectively.
More transparency and decentralized decision making in public procurement and rural and social welfare reforms should all help at the margin to drive productivity and growth. So too in the medium term will greater efforts to scale back the direct role of government in the Indian economy, where privatization had almost crawled to a halt under the previous administration.
In a recent studies done by various agencies it is suggested that there will be negative shift for rural India’s economy which otherwise will remain positive. Firstly, Narendra Modi’s government is breaking down India’s established system of pal capitalism. Modi is making sure bureaucrats know change in process and corruption will not be tolerated. It means powerful industrialists can’t expect to get leaked information before bidding.
Another important concern is changes to the subsidy policy that diluted India’s rural economy under the former government. From 2007 onwards till Modi government took over, the cost of subsidies grew at a compound annual growth rate of 19 per cent. Government implementations of policies have long suffered leakages due to middlemen who are believed to tap off much of the funding before it reaches the actual people. As per some estimates as much as 40 per cent of the government’s spending is lost in such leakages.
There are examples of Narendra Modi’s government cutting back on such expenditure already. To date, the government has kept a tighter grip on hikes in the MSPs for key food grains than its predecessor. For example, despite this year’s weak monsoon, the MSP for rice and wheat – the price at which the government purchases from farmers is estimated to rise by 4 per cent year-on-year in the current fiscal year, compared with estimated average annual growth of 9 per cent over the previous decade.
It is expected that future subsidies on items from fertilizers, petroleum, grains, pensions and scholarships are expected to be paid as direct money transfers into the bank accounts of the rural and urban population. This will cut out any opportunity for leakages and role of middlemen.
With the fact that Narendra Modi is trying to do the things differently and able to hold the confidence of public it is expected that the overall rural economy will become better and will be on track in next three to four quarters.
By Prashant Shrivastava
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