In 1918, a young Indian economist named B.R. Ambedkar wrote a perceptive paper on solutions to the agrarian problem. His main insight anticipated some of the principal models of economic change that made their mark during the high noon of development economics a few decades later. What Ambedkar said then continues to be relevant as India enters what could be another cycle of rural distress.

“A large agricultural population with the lowest proportion of land in actual cultivation means that a large part of the agricultural population is superfluous and idle…this labour when productively employed will cease to live by predation as it does today, and will not only earn its keep but will give us surplus; and more surplus means more capital. In short, strange as it may seem, industrialization of India is the soundest remedy for the agricultural problems of India." (italics added)

These words are worth remembering at a time when the spectre of agrarian agony is once again haunting India. Farm incomes are under pressure following the end of the global boom in agricultural prices. Rural wages have been growing at the slowest rate in a decade. There has been a cyclical pattern. India went through a cycle of agrarian distress between 1998 and 2004 followed by a rural boom over the next decade.

One easy measure of such cycles is the internal terms of trade: food inflation has been far higher than inflation in manufactured goods since 2004. The Indian Express reported in February that a committee of economists appointed by the agriculture ministry has showed the terms of trade shifted in favour of farmers over the past decade. The economists constructed two price indices—one based on 79 commodities that farmers sold and the other based on 74 commodities that they bought. The question to ask is whether this structural change in the terms of trade is at an end, or indeed reversing. Is India entering a new cycle of rural distress?

This is an issue that has political resonance.

Some political analysts even believe the surprise loss of the first National Democratic Alliance government led by Atal Bihari Vajpayee can be explained by the rural distress in those years. India then saw an upturn in the rural economy between 2005 and 2012. A very interesting chart by my colleague Dipti Jain showed that the Congress victory in 2009 was at a time when rural wages were booming while the steep decline in rural wage growth after 2013 was one possible reason for the loss of the rural vote in the 2014 elections.

It is perhaps no surprise that finance minister Arun Jaitley said in the course of his recent budget speech that he would be increasing spending on the rural jobs guarantee programme to prevent the decline in rural wages. His assurance came just a day after Prime Minister Narendra Modi launched a sharp attack on the scheme as an epitome of the failed policies of the United Progressive Alliance. The budget documents also show the current government has decided to keep funding the rural jobs scheme despite a clear signal from the 14th Finance Commission that such spending decisions should be pushed down to the states.

There is another paradox as well. The Economic Survey written by chief economic adviser Arvind Subramanian and his team has quite rightly noted that there are structural shifts in the inflation trajectory thanks to lower global crude oil prices as well as the deceleration in agricultural prices and rural wages. Similar sentiments have been expressed by Reserve Bank of India governor Raghuram Rajan in his recent statements about the easing of inflationary pressures. There is some complicated political economy here. What is attractive data from the point of view of inflation may not be as pretty when it comes to the politically resonant issue of rural distress.

It is to be seen if the Modi government does what the Manmohan Singh government did to win the rural vote: engineer a shift in the terms of trade by offering steep increases in support prices for farm products as well as use the rural jobs scheme to push up rural wages. There was also the massive farm-loan waiver of 2008. Of course, the fact that such measures were delinked from productivity growth put Indian on an inflationary treadmill.

It is here that what Ambedkar said really matters. The sustainable solution to rural distress over the long run is higher job creation in manufacturing and services. This is the key insight of the famous development model that got the West Indian economist W. Arthur Lewis the Nobel Prize in 1979. That is what actually happened in East Asia: the countries grew prosperous as people left farm for factory. And that is also what the original promise of the 1991 economic reforms was.

India could be entering another phase of rural distress. Ambedkar pointed out nearly a century ago that the solution is to create jobs outside agriculture. In that sense, India’s historic failure to get into the global manufacturing game has actually been a blow to its farmers.

Niranjan Rajadhyaksha is executive editor of Mint.



Comments are welcome at cafeeconomics@livemint.com. To read Niranjan Rajadhyaksha’s previous columns, go to www.livemint.com/cafeeconomics



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