India’s recently released Economic Survey 2016-2017 covers economic developments over the past 12 months and provides near-term economic outlooks for multiple sectors. Many of the themes covered in the survey (including agricultural production, food prices, demonetization, and social protection programs) are relevant to the agricultural, food security, and food system sectors. Overall, the economic survey provides a positive representation of the Indian economy which, despite a number of challenges, is expected to grow significantly in the medium term.
The Indian government estimates that growth in the agricultural and associated sectors for 2016-2017 is expected to increase by 4.1 percent; in particular, kharif food grain production is estimated to increase from 124.1 million tons in 2015 to 135 million tons in 2016. These growth rates are higher than the growth rates seen in the previous two years and being are driven by a number of factors, including a normal monsoon (compared to below average rainfall during the previous two monsoons) and larger sowing areas for both the rabi (up 5.9 percent) and the kharif (up 3.5 percent) seasons.
Government Minimum Support Prices (MSPs) and procurement levels for food grains were in line with historical trends over the past 12 months, showing only slight increases over previous years. The main exceptions were the MSPs for pulses, which were raised significantly in an attempt to increase pulse production. The MSP price for Gram (one of the main pulses cultivated in India) increased by 18 percent over the past year. The increase in MSPs, coupled with high market prices for pulses, has led to large increases in pulse production - estimated at 8.7 million tons for the 2016 kharif season, up from 5.6 million tons during the 2015 kharif season.
Food price inflation averaged around 5 percent in 2016. Pulses, sugar, and vegetable prices were the strongest contributors to food price inflation, mainly due to production and international price concerns. However, food price inflation rates decreased significantly toward the end of the year, and the survey suggests that food price inflation rates will remain low in the coming months thanks to high agricultural production estimates, both domestically and internationally.
In terms of policy, the survey focuses on the implementation of the Goods and Services Tax (GST) and the demonetization of Rs 500 and Rs 1000 notes. In the long run, the survey argues that both policies will be beneficial across all sectors of the Indian economy. These policies will create a common Indian market, improve tax compliance and governance, and boost investment and growth. However, the survey also argues that insufficient time has passed to accurately measure the short-term impacts of these policies on the country’s agricultural and food sectors. In particular, the survey states that demonetization is expected to have a negative impact on the agricultural sector in the short term, as the agricultural sector is cash-intensive. The survey describes the implementation of demonetization as an ‘aggregate supply shock’, to the extent that cash is a necessary input for economic activity. Seen in this light, demonetization may lead to decreases in agricultural productivity in the short term because it makes it harder for farmers to access inputs (seeds, fertilizer, and labor).
The survey also highlights that, despite ambitious dates set for implementation, it will likely take a number of years to fully implement the GST. The creation of one single agricultural market across the entire country faces a number of challenges. For instance, existing agricultural produce market committees make it more difficult to sell agricultural produce across states. Similarly, producers in many states are required by the Agricultural Produce Marketing Act to sell only to specified middlemen in authorized markets (mandis).
The survey also discusses social protection programs, particularly the PDS and MGNREGS. Significant efficiency and targeting improvements have been achieved in these programs in recent years. For instance, a referenced paper on food transfers estimates that leakages in the PDS fell from 54 percent to 34.6 percent between 2006 and 2013; the states that have experienced the largest improvements are Chhattisgarh and Bihar. However, there is still considerable evidence of targeting errors and leakages in the programs. For instance, it is estimated that the districts accounting for the poorest 40 percent of India’s population only receive 29 percent of the total funding of social protection programs. In these instances, the survey suggests that reforms to tackle leakages need to be scaled up across India. Some of these challenges could be overcome by replacing the programs with a Direct Benefit Transfer (DBT) system, whereby money is transferred directly into a recipient’s bank account. This would create transparency and allow the program to bypass multiple bureaucratic layers, thereby reducing the potential for leakages at various stages, which is a feature in current social protection programs (especially the PDS).
By: Bas Paris