India’s rural distress puzzle:Latest op-ed published by Mint

The state of India’s rural economy is puzzling. There is enough evidence to support two opposingstatements: one, that the rural economy has improved; and, two, that the rural economy is in thedoldrums.

    On the one hand, some indicators are positive. The unemployment rate has been falling while ruralwages have been rising. On the other hand, instances of rural distress are rife and rural consumersentiment has weakened. There has been a surge of demands for farm loan waivers. Four stateshave already announced waivers worth about 0.5% of national gross domestic product (GDP).

    Four more are threatening to do the same and, if they do, waivers could rise to 0.75% of GDP,endangering a hard-won reduction in debt and deficit ratios.

    Some of this distress was likely triggered by the large fall in food prices and the resulting shift inthe terms of trade (the cost of producing food versus the income derived) to the detriment of ruralIndia. Even if some of the causes of falling food prices are one-time (for example, a bumper crop)or short lived (such as demonetization and goods and services tax related uncertainties), otherfactors may keep food prices low for longer (such as structural improvements in food distribution).

    Which of the two opposing claims is true, and how long will the confusion in data last?It helps to solve the puzzle if we note that the rural economy consists of two distinct parts,“landless” and “landed”. We define landless as those owning less than a hectare of land, andlanded as those owning more than a hectare. The landless, by our definition, make up about 70%of rural households and the landed the rest.

    This distinction illuminates three other things. One, we find that the landless rural population has anegative income-consumption gap, which basically means that its income is hardly enough tocover its consumption requirements. On the other hand, the landed have a positive incomeconsumptiongap. Two, it is the landed who are more indebted as a group than the landless. Theyalso use more formal sector sources of credit than the landless. Finally, we find that a majority ofthe income for the landless comes from wages while that of the landed from cultivation.

    Putting all this together, we can build a compelling narrative. After a two-year drought, the goodmonsoon rains in 2016 increased the demand for labour. As a result, real wages have risengradually and the unemployment rate has fallen in tandem. This has largely benefited the landless,given that the majority of their income is from wages.