Thursday, January 17, 2019

The rural economy conundrum

The farm sector challenge is arguably the biggest political issue in India. And given the sheer proportion of people involved, it is only right that the problem get the sort of attention. But I am not sure whether the solutions being proposed are likely to lead us afar. 

All kinds of things are being proposed, though among those on the table, I am inclined to believe that the direct cash transfer is perhaps the best option. Nice comparison here of the different cash transfer options - loan waiver, MSP, and direct cash transfer - by Ashok Gulati. 

But I am not sure whether even this would be enough, given the exclusion of tenants and the near impossibility of bringing them too into the fold. Telangana government managed to some extent mitigate this, thanks to high level political commitment and bureaucratic resolve. But to expect weak state capacity and socially more polarised states in North India to be able to do anything close is perhaps unrealistic.

The importance of some form of universal social safety nets assume significance here. India is still, for the major part in rural areas, a very poor country. Whatever the causes, it is perhaps the case that the dynamics of liberalisation, globalisation, and progressive politics (all of which accelerated in the noughties) has disrupted rural economies - internal (mostly informal) stabilisers have been unsettled and external forces have been disruptive. One can identify several ways in which the land, labour, and capital markets in rural areas have been disrupted by these forces. 

It is for this reason that I am inclined to be cautious with policies like deregulation of agriculture land markets. Such policies are all great as part of a package of policies. But when implemented in silos, as is most certain given that this is just a simple statutory change and others in the package are mostly longer-drawn measures whose effective implementation will be constrained by weak state capacity, such deregulation on rural livelihoods can be, especially in the medium-run potentially more damaging and socially destabilising. Merely increasing value of land and providing the farmer with a booster shot of land sale windfall without any complementary increase in access to opportunities to sustainable livelihoods can be of limited value. A very distortionary real estate speculation induced equilibrium can be long-lasting. The strong connections of real estate market with black money and corruption only makes this more likely. The asymmetric nature of the impact of these measures is under-appreciated.

This paper has cross-country regressions on growth accelerations and growth maintenances and finds that only the latter led to inclusive growth, and the former without proactive engagement to promote inclusive institutions can be detrimental,
Once growth has accelerated, it is important to facilitate the emergence of inclusive institutions as the greater the inclusivity of institutions, the more likely that economic growth will be inclusive.
Just like trade, economic growth too has distributional consequences. While being beneficial in the aggregate, they leave us with winners and losers. A mix of both redistributive programs and inclusive growth promoting institutions are required. Like with trade, the losers are likely to be concentrated in pockets of geographies, population categories, or sectors. And like with trade, contrary to theoretical wisdom, adjustments rarely happen on their own. Discontent and social instability is never far away.

A program like the NREGS, even with its flaws, was a stabilising force given its universal social safety net nature. It was an inclusive policy measure. We need something like that, maybe one which is more efficient and less distortionary. 

All the above is just a hypothesis. Unfortunate that there have been no serious macro-level studies of India's rural economy that examine such dynamics. 

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