The macro numbers do not seem to bear out the anecdotal view that rural demand is buoying the Indian economy. Take, for instance, the gross domestic product (GDP) data. If rural demand is indeed offsetting weakness in other parts of the economy, then that should result in an increase in the share of agriculture in GDP.
One argument is that higher minimum support prices and the high prices of primary agricultural items have been an important factor in supporting rural demand. The GDP data at current prices should reflect that.
And at first glance, it does show some resilience. For example, in the December quarter, while GDP from agriculture, forestry and fishing contracted by 2.2%, at current prices, it increased by 7.8% year-on-year. But then GDP in manufacturing increased by 8.2% at current prices during the quarter. As a matter of fact, the share of agriculture, forestry and fishing in GDP at current prices has been coming down. It was 20.9% in the December quarter of FY09, against 22.2% in the same quarter of FY08. The manufacturing sector, on the other hand, accounted for 14.8% of GDP in the December quarter of FY09, down from 15.6% in the same quarter of the previous year. Now, if agricultural GDP was really buoying up the economy, then its share in GDP at current prices should have increased. Instead, the data shows the fall in its share is actually more than the fall in the share of manufacturing. That’s not all—agriculture’s share of GDP at current prices also fell during the June and September quarters of FY09, compared with the same periods of the previous year.
How do we square the macro numbers with the clear evidence coming from companies about the resilience of rural demand? One explanation could be that the December quarter’s agricultural growth rate will be revised substantially upwards. This is a distinct probability. Another explanation could be that the rural sector comprises not just agriculture, but also services and trade. But as Ashok Bhattacharjee, head, economic and sectoral analysis, ACC Ltd, points out, the growth of these services, too, will be correlated to agricultural growth. In any case, there is no reason why these services will grow faster than the rest of the economy.
But the macro numbers also point to another possibility. The share of community, social and personal services increased to 13.7% of GDP at current prices in the December quarter of FY09, against 12.1% in the same quarter of FY08. The share of government final consumption expenditure was at 10.7% of GDP at market prices in the December quarter of FY09, against 8.7% in the year-ago period. Much of this increase is not only on account of the Sixth Pay Commission, but also on account of the rise in social sector schemes, most of which have been in the rural areas. In other words, it’s the rise in government expenditure on social sector schemes and perhaps the loan waiver that is responsible for the rise in rural demand. As Citigroup economist Rohini Malkani writes about the national rural employment guarantee scheme, “We believe the scheme is encouraging from a longer-term perspective of improving employment, rural demand and infrastructure development, thus acting as a fiscal stimulus during times of slowing growth.”
And finally, there’s another explanation that accounts for the buoyancy seen in the cement sector and in two-wheeler sales. As Bhattacharjee underlines, much of the rural sector was in any case not funded by credit, which means that the credit squeeze hasn’t had much of a negative impact there.
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