Bharat can’t shoulder the larger Indian economy3 min read . Updated: 27 Jul 2020, 06:11 AM IST
- Rural wages are much lower than urban, non-agri jobs, limiting the boost to demand
- An additional push in the form of rural infra could be a way to fast-track the rural momentum
MUMBAI : Investors are banking on Bharat more than on India. The rural economy’s initial lift after the covid-19 catastrophe is the new driver of growth. A good monsoon, bountiful rabi crop and the government’s Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) are propping up the economy and giving it the much-needed jump-start after the lockdown.
All this is good. But some economists caution that the demand-pull from the rural economy may not have enough momentum to shoulder the larger Indian economy. This is primarily because rural jobs are at much lower wages than urban and non-agricultural jobs. Further, labour migration from the cities have slowed rural remittances. As a result, rural incomes are not enough to pull the growth forward.
Then again, escalating covid-19 cases in rural areas may become a hindrance. Smaller towns and cities including rural areas are still vulnerable to the pandemic, particularly as medical facilities are limited. Analysts are worried that this could be a spoke in the rural growth wheel.
“Covid-19 is now spreading rapidly in Tier-3 and 4 cities, and possibly onwards to truly rural areas; this would stall the rural momentum," said analysts from Credit Suisse Securities (India) in a report.
Credit Suisse estimates the aggregate impact on rural cash flows as small due to the drags from weak non-agricultural activity, agri perishables, lower remittances and weak agricultural credit.
True, the initial phases of the fiscal and monetary support were vital in handholding the lockdown phase. They also gave the rural economy a nudge. But more initiatives are needed now.
“Government’s move to frontload expenditure into rural areas will help provide some respite to purchasing power, but for more sustainable support to demand, better price realization on crops and execution of the medium-term reforms announced as part of the fiscal support package will be crucial," said Radhika Rao, economist, DBS Bank.
Sure, some of the benefits of the rural push are encouraging. With the MGNREGS, direct benefit transfers, and food security programmes, several more families have received benefits. Data shows 38.9 million households were employed in June under the MGNREGS. The figure was 33 million in May and 11 million in April.
Besides, agriculture activity is also picking up. Sales of fertilisers, tractors and two-wheelers have shown healthy trends so far, point out analysts. Rural construction has been positive going by the trends in cement demand. To an extent, the showing of kharif crop has been better than normal, thanks to the above-normal monsoon.
This highlights rural growth is key for revival, particularly as urban centres are still reeling under partial lockdowns. But, note agriculture accounts for a smaller share of rural GDP.
Hence, government actions in the next 3-12 months indeed becomes crucial.
“In the near-term, government spending should be directed to more relief measures on top of any structural reforms as the country is still battling the pandemic," says Abhishek Upadhyay, senior economist, ICICI Securities Primary Dealership.
An additional push in the form of rural infrastructure could be another way to fast-track the rural momentum.
“We prefer infrastructure spending (also tapping into surplus labour in rural/semi-urban areas) over-consumption along with better financial sector governance, changes to land and labour laws and minimizing administrative hurdles to crowd in the private sector," point out Kotak Institutional Equities’ economists led by senior economist, Suvodeep Rakshit.
“A clear need has emerged for a fund/institution to finance infrastructure projects outside of the Union Budget," says the Kotak report.
Meanwhile, investors don’t seem perturbed by the potential risks to growth. The Nifty index is up about 47% from its March lows. But the Nifty 50’s performance and the economy have been detached for some time now.
“Rural consumption will hold up in the near term but if enough urban jobs are not created, the surplus rural labour will depress overall wages. Sustainable consumption growth will hinge on creating adequately paying jobs such as in construction and manufacturing," says the Kotak report.