9/9/2015

CanModiChangeTheDynamicsOfWealthCreationInRuralIndia?|Swarajya

Can Modi Change The

Dynamics Of Wealth
Creation In Rural India?
The effects of the economic policies of the Modi government on rural India will take
time to show up. But once they do, it is likely that they would generate a more
equitable demand from the rural areas.
So the monsoon has starting withdrawing from Northwest India on schedule, according
to reports, dashing all hopes of some late showers that could mitigate the effects of
deficient rainfall this season. This means two years of weak rainfall.
At 1.9 per cent, growth in gross value added (GVA) segment in the agriculture, forestry
and fishing sector in the first quarter (Q1) of 2015-16 was almost half of what it was in
2014-15 . The Q1 figures are based on Rabi crop output. The weak monsoon will mean
that even the Kharif output will get affected.
What, then, does this mean for rural demand, which is supposed to account for almost
half of total demand? This is a crucial question, since the revival of demand is
happening very slowly.
Rural demand was anyway under pressure. In February, a report by Ambit Capital, Rural
India: At the Crossroads, had noted that after seven years of frenetic growth, the rural
and semi-urban India story now faces serious challenge.
The report had pointed out that the growth in rural demand had been fueled by massive
flow of subsidies during the United Progressive Alliance (UPA) regime. Given the
massive leakage of subsidies, the report argues, the subsidy flood really buoyed the
income of the top few income groups in rural areas.
But the combined effect of the subdued hike in minimum support prices (MSP) by the
Narendra Modi government, poor monsoons (in 2014) and global moderation in food
prices, the Ambit report says, weakened rural demand.

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9/9/2015

CanModiChangeTheDynamicsOfWealthCreationInRuralIndia?|Swarajya

There is, however, a silver lining in the form of this governments approach on subsidy
reform and infrastructure focus. This, the report says, could see a change in the
dynamics of wealth creation in rural India.
The report argues that the Jan Dhan accounts and gradual move towards direct benefit
transfer (DBT) into these accounts will plug subsidy leakages which were benefiting
the rural elite. As leakages in the subsidy mechanism are reduced and as the DBT
mechanism becomes more ubiquitous, there is likely to be a redistribution of wealth in
favour of the poorest deciles of society (which, ironically, will hit aspirational
consumption, and help small ticket consumption).
The report also expects the governments infrastructure push roads, low-cost
housing to kick off from the second half of this fiscal. This, it says, could give a
boost to the construction sector, generating demand for labour and having a positive
effect on rural wage growth. Rural wage growth may not recover to the 15-21 per cent
levels seen over 2009-12, it says, but a mean reversion from the 4 per cent wage
growth seen in 2014 seems likely.
But this structural shift in rural consumer demand is not expected to come overnight.
The report expects that these sources of demand will take at least two to three
quarters to kick in, Hence, it appears that the traditional drivers of rural Indias
prosperity (generous subsidies which partly were stolen by the rural elite and then were
channeled into land, g

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