Want to See If Modi Is Changing India? Watch Farmer Incomes

Modi Faces Dissent From Within on India Labor Laws Overhaul

A farmer uses cows to plough his field near Hajipur, Bihar.

Photographer: Prashanth Vishwanathan/Bloomberg
  • Goal to double farm income risks stoking inflation once again
  • Former PM Manmohan Singh calls it an ``impossible dream"

Shortly after Prime Minister Narendra Modi swept to power in 2014, his first economic plan promised modern cities, manufacturing corridors and bullet trains to aspirational Indians yearning to join a “neo middle class."

This week his latest budget struck a much different tone, listing a slew of moves to help villagers that make up about 70 percent of India’s population. Most ambitious was a goal to double the income of farmers by 2022.

The shift makes perfect political sense: Rural India is suffering after back-to-back droughts, and Modi is soon facing several key state elections. Whether he can raise farmer incomes quickly without stoking inflation, however, may determine if his economic vision is any different from the previous Congress-led governments that have ruled for most of India’s history.

Modi’s election win raised hopes that he would unshackle India’s private sector from excessive bureaucracy. His advocates -- encouraged by a slogan of “Minimum Government, Maximum Governance" -- saw him reducing the state’s role in the economy and spending less on unproductive subsidies.

Yet almost two years in, the jury is still out. Modi’s government looms large in more than 200 companies, from banks to power producers to a condom-maker. India’s ranking in global indexes for corruption and ease of doing business has only improved slightly. And Standard & Poor’s Ratings Services warned this week that India’s debt and subsidy burden still “significantly constrain" its fiscal options.

“No prime minister, no matter how powerful, can change how India operates within a span of two years," said Milan Vaishnav, associate in the South Asia Program at the Carnegie Endowment for International Peace. “The prime minister has claimed that it is not the business of government to be in business, but we are still waiting for that pledge to be fulfilled."

Reforms Stall

Some of that isn’t all his fault. The opposition Congress party has repeatedly blocked a goods-and-services tax aimed at creating a single market among India’s 1.3 billion people. Modi on Thursday again appealed for it to be passed in the current parliament session.

In other areas he could do more. He backed down from making it easier to acquire land, shelved proposals to make labor rules more flexible and kept in place a retroactive tax law that has spooked foreign investors.

From the central bank’s point of view, one of Modi’s biggest successes has been limiting the growth of guaranteed crop prices to keep inflation low. Governor Raghuram Rajan has called macroeconomic stability India’s “single most important strength" in a time of global market turmoil.

Collision Course

Even so, economics are often linked to politics, and outcomes can be hard to predict. The meager guaranteed prices led to slower wage growth in rural areas, and two straight bad monsoons prompted a backlash from farmers who once supported Modi.

His new goal to double farmer income has put those competing aims -- pleasing farmers and reining in inflation -- on a collision course.

Modi’s predecessor, former Prime Minister Manmohan Singh, faced the same dilemma. He bet that higher guaranteed crop prices and agricultural wage-growth that averaged 13 percent would be a win with voters.

But surging inflation, including frequent price spikes for staples like onions, ended up backfiring. Come election time, Singh’s argument that wages had increased more than inflation fell flat, and his Congress party suffered its worst defeat ever.

Modi initially took that lesson to heart. He agreed to an inflation-targeting regime with the central bank and limited crop-price increases. Since he took charge in May 2014, annual agricultural wage-growth has averaged 2.4 percent.

‘Impossible Dream’

Then came a crushing election defeat last November in Bihar, India’s third-most populous state, prompting Modi to shift his attention to rural areas.

In the budget, Finance Minister Arun Jaitley reeled off a list of proposals to boost the rural economy. The government plans to build rural roads, expand irrigation, better manage groundwater, promote organic farming, modernize wholesale markets, boost credit and revamp crop insurance.

Even so, his administration has given few specifics on how farmer incomes would double. Agriculture Minister Radha Mohan Singh declined to answer multiple questions on the target at a briefing this week.

Former PM Manmohan Singh was more scathing, telling NDTV it was an “impossible dream" because it would involve annual increases of about 15 percent.

‘Two Evils’

Modi has two options to double farmer income by 2022, according to D. Jayaraj, a professor with Madras Institute of Development Studies in Chennai. He can increase guaranteed crop prices or raise subsidies on inputs such as fertilizers, pesticides and seeds.

“You have to choose between the two evils," Jayaraj said.

Some don’t think Modi will follow in the previous government’s footsteps. Kilbinder Dosanjh, Asia director at Eurasia Group, said Jaitley is more likely to improve crop output than raise guaranteed prices.

“I can’t see how it will happen," Singh said of doubling the income of farmers. "I think it was just a campaign slogan."

The next test will come around June, when the government sets prices for the monsoon crop. For now, Modi is still winning praise for his efforts to overhaul India’s economy, even if he’s moving at a slower pace than many initially hoped.

“The government has a vision of how to structurally improve the economy and it seems to do what it can to achieve this," said Thomas Rookmaaker, a sovereign analyst at Fitch Ratings in Hong Kong. “It’s important to realize that you simply can’t change a country like India overnight."

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