Budget 2018: Agriculture will not be number 1 priority

Some of my recent analysis as a follow up to the Gujarat election as well as past analysis around the 2014 election suggests that the NDA will be much more careful about the rural vote rather than the urban vote. This is particularly true because its vote share gap in most urban constituencies is quite formidable, not so in rural seats. As a consequence, many of us wonder if the budget 2018 will be extremely rural friendly. This is a good hypothesis. However, in order that there is no confusion, I want to finetune my hypothesis as follows

Budget 2018 will be rural friendly but not necessarily agriculture friendly

The distinction between rural and agriculture is extremely important, read on.

The Context

In the Top 10 Rural States (Excl smaller NE and Island States) NDA-won 198 Seats, in 2014, Opposition won 44 seats. Amongst the rest of the States, NDA won 138 Seats, Opposition won 163 Seats. However, if you look at it seat wise, number of Large Rural Population Seats won by BJP was 211 out of 430. BJP won 70 out the rest 113 Urban seats. The vote share with the Congress in rural seats is less than 10%, it is nearly 20% in urban seats. The cushion, therefore, is larger for the BJP in urban seats.

So one thing is clear, BJP will not overspend on Urban voters during this budget. The big question is where does it spend more on rural? Upping agriculture spending or ensuring rural folks have more incomes?

In my view, the emphasis will be on rural incomes and quality of life more than just focussing on agriculture

Congress party's agriculture focussed strategy did not work in 2014: In spite of a doubling of wealth (bank deposit surrogate) in rural India(rural heavy seats) between 2009 and 2014, the Congress party's won just 36 of the rural heavy seats, down from 157. The strong rural growth came on the back of the Congress party's emphasis on MSPs and NREGA with a large emphasis on Agriculture. This did not seem to have worked. One must note that even in the 2009 election, bulk of the gains came for the Congress from the urban constituencies. It is fairly clear that income and wealth growth are just one set of metrics that matter to the rural voter. Quality of life, caste politics, leadership also matter. This is something that the BJP has emphasized a lot during the last 4 elections. It is only in employment that the BJP continues to struggle and there isn't much it can do in the budget to spur rural employment beyond increasing allocations significantly on NREGA

Agriculture may not be doing brilliantly but rural wealth continues to grow. While rural wealth grew 100% (bank deposit surrogate) between 2009 and 2014, my estimate is that current rural wealth continues to grow at the same pace (even after correcting for demonetisation).

While agri GSDP growth (16% per annum) and rural wealth (15%) were highly correlated in the period 2009 to 2014. It is not so between 2014 and 2018. Agri GVA grew 6.5% per annum between 2014 and 2018 (could be corrected upwards, rural deposits may have grown at close to 15%

This is incredible and needs more study. Rural wealth growth is outperforming agriculture GVA growth by a large number. This could be a function of the changed metrics (GVA versus GSDP). This could be also a function of reducing share of agriculture in rural incomes (an ongoing trend). This gets impacted even more quickly if agriculture growth slows down (like the two failed monsoons of 2014 and 2015). It could also be due to lower consumer inflation between 2014 and 2018 which may be helping rural consumers save more than ever before. It is also possible that due to two poor monsoons, rural folks left more money in the bank instead of spending them (something that we saw in consumption data).

Whatever the reason, with consumption returning in the last quarter and likely to sustain all the way to 2019, rural voters are feeling good about their lives (Consumption, more roads, electricity, access to finance, LPG, Sanition, Housing etc) as well as their wealth (momentum-wise, not absolute values)

The opposition is yet to get its game right- Lastly, while the opposition has put the BJP on the defensive on agriculture, they still haven't gotten their game right on alliances and leadership. In the 10 key rural heavy States where NDA won 198 seats in 2014, NDA is likely to gain in Assam, Odisha and Bihar. It is likely to lose an equal number or marginally more in Rajasthan, MP and Chhattisgarh. However, it is UP that the BJP is most comfortable at this moment with a high probability that the opposition alliance is unlikely to be in place for the 2019 election. Further, no leader within the Opposition comes anywhere close to matching Narendra Modi's popularity. In these circumstances, there is unlikely to be a sense of panic in the BJP for the 2019 election.

Monsoon predictions look alright - Current forecasts for the Monsoon look alright (though not very reliable) and don't seem to suggest a poor monsoon. However, given the Government's ability to have weathered two poor monsoons in the first year itself, an average monsoon may be less of a bother.

The Government is likely to announce a rural (very friendly) and agriculture (somewhat) friendly budget but those expecting the Government to announce an inflation supporting MSP driven agriculture oriented budget will be disappointed. The Government knows that inflation will hurt it the most and will continue to follow a path of conservativism as far as inflation is concerned. The Government is likely to spend more money on rural skilling, roads, electricity, LPG, drip irrigation and similar low-cost items that deliver high value from a perception angle. The Government may make a few announcements on enhancing agriculture incomes through better market access and input support. However, these will not expensive heads in the budget.

In sum, the 2019 election will be fought in rural India given that Urban India is almost a walkover for the BJP. Within rural India, the BJP will emphasize on quality of life (roads, electricity, jan dhan, swachh bharat etc), income growth, leadership and caste instead of talking too much about agriculture. In case of opposition, the emphasis will be on agriculture incomes (in the worst affect constituencies) and unemployment. If they get their leadership game right, they can give a decent fight to the BJP. Winning though will be a much bigger challenge!