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LATEST NEWS UPDATES | Agriculture back in focus as growth estimate gets downgraded by banks like Morgan Stanley, Standard Chartered-Gayatri Nayak

Agriculture back in focus as growth estimate gets downgraded by banks like Morgan Stanley, Standard Chartered-Gayatri Nayak

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published Published on Sep 26, 2012   modified Modified on Sep 26, 2012
-The Economic Times

When the country was growing at more than 8 per cent for about a decade, services and manufacturing were the darlings of policy-makers, investors and talking heads. Agriculture, a segment that employs nearly half the hundred crore population of the country, was hardly mentioned even in passing. This year, thanks to a poor monsoon, suddenly the farmers are the centre of India's growth story, or the lack of it.

Never in the past decade has agriculture seriously rattled economists and investors. Since it contributed less than one-fifths to the gross domestic product, agriculture was considered to be insignificant in the overall scheme of things.

From Morgan Stanley to Citigroup to Standard Chartered and the Reserve Bank of India, nearly every other bank has downgraded India's growth estimate citing a possible poor farm output which is compounded by the global uncertainty owing to the sovereign crisis. It is a reflection of the hard reality that agriculture, notwithstanding its low contribution to the GDP, will remain significant enough for the overall growth just because of the sheer population that it supports. Indeed, the so-called India story was supported not only by the urban population but also by rural India.

Early last month, American investment bank Morgan Stanley had warned in a research that inadequate rainfall would affect India's growth by 30-40 basis points (bps) because of the impact of weak monsoons on agri-GDP. Later, several other research firms, banks and brokerages, too, lowered their growth forecasts because of concerns over the outlook for agriculture. This September monsoon arrived with a bang. The water levels in the reservoirs went up enough to take care of the needs of the season. In a small way, this improved the prospects for agriculture. However, with the Kharif crop - which accounts for almost half the share in the country's farm output - not expected to keep in line with the trend growth, even improved rains in September are unlikely to revise the farm sector outlook.

All these developments then raise a question. Why is the market taking this sector so seriously? One of the arguments put forward is that, in the past, whenever agri-GDP failed, it was offset by a better export growth or higher pick-up in services growth. But, this time round, both exports and services, too, have failed to look up. And, hence, the impact of agriculture on the overall economic output is even more conspicuous.

"In the past, whenever agriculture has failed, the impact on the overall GDP used to get neutralised by higher exports, rising investments or fiscal action. But, this time, none of these factors are present," said Abheek Barua, chief economist, HDFC Bank.

Looking at the sector from a longer-term perspective, in the post-reforms period, agriculture has not got any policy attention that it deserved even though the government has always made a noise about its policy goals for inclusive growth. Even the big-bang reforms that the government announced last week has no policy measure that would even remotely impact agriculture, though the permission for 51 per cent in FDI in multi-brand retail could be seen as the harbinger of good times for farmers.

An analysis of sectoral GDP numbers since the 1950s shows that it is only the services sector that has benefitted from reforms. While the share of industry has slipped marginally since 1991, that of agriculture has halved to 14 per cent in the last 21 years from 29 per cent in 1990-91. And, in the post-crisis period after 2008, the growth of agriculture has further slowed. The Reserve Bank of India deputy governor KC Chakrabarty noted last week, "The policy focus (in agriculture), so far, has been on using higher MSP (minimum support prices) to generate supply response and public investment on expanding the irrigation potential."

Despite Indians being among the highest savers, agriculture has seldom been an avenue for investments. Gross capital formation for agriculture is less than 7 per cent of GDP, while 52 per cent of the population depends on agriculture for their livelihood according to the 2001 census data.

Two major developments in the recent past have lifted the importance of this sector from the policy perspective - rising food and commodity inflation reflecting the poor supplies of agricultural produce, the increase in the potential demand from rural India due to higher wages for agricultural labourers. Most surveys have shown that less than half the rural economy depends on agriculture for its livelihood. But the rest of the rural economy comprises a combination of services and manufacturing that depend on agriculture. Increased incomes within the farm sector are likely to have spilled over to these support sectors largely in the form of increased demand, and pushed up earnings in the non-farm rural sector.

According to Saugata Bhattacharya, chief economist, Axis Bank, consumption surveys have indicated that rural monthly per capita expenditures (MPCE) increased from Rs 928 in FY10 to Rs 1,281 in FY12 (a 33 per cent increase over 2 years in nominal terms, broadly in line with nominal GDP growth). One possible explanation is an increase in investments in rural India (including real estate and gold). Besides, some also point out to the rise in the prospects for agro-based industries which are now labeled as a sunrise industry. "Scalability through value-addition remains huge in agriculture. It works through two levers - investment in agro-based infrastructure and, second, through direct investment in food-processing industries," said Shubhada Rao, chief economist, Yes Bank.

These can be looked at seriously since the relative bottlenecks compared to setting up an industrial unit in the non-farm sector could be minimum. Besides, given the huge supply-side constraints for various farm products not only in the domestic market but also in the international market, such investments could not only increase the contribution of the farm sector in generating employment and output, but also address the concerns over food inflation.

Of late, the Reserve Bank of India has also started voicing its concerns on the agriculture prospects giving the subject much more detailed analysis in its various communications. Last week, RBI also put in the public domain, a time-series data beginning 2004 on the average daily wage rates for rural India indicating that it now considers this sector more seriously.

'This dataset on rural wages has been an important component for RBI in determining its monetary policy stance, whose publication now helps in understanding some of the concerns regarding the persistence of demand, particularly in rural areas," said Bhattacharya. The central bank, which often advises the government on managing its finances, is also now talking aloud on issues in agriculture. "There is a need for improving the market structure for agricultural commodities, ensuring competitive pricing, enhancing warehouse facilities and improving rural roads for better connectivity with urban markets. Better water management, with an emphasis on water harvesting, would be important for enhancing farm productivity and output," said Chakrabarty last week.

The Economic Times, 26 September, 2012, http://economictimes.indiatimes.com/news/economy/agriculture/agriculture-back-in-focus-as-growth-estimate-gets-downgraded-by-banks-like-morgan-stanley-standard-


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