The surge in share of rural districts in new covid cases from 23% in April to 54% in rural areas could put a spanner in the works of India Inc., which was banking on rural recovery for an economic revival at the national level, says SBI chief economic adviser Soumya Kanti Ghosh
Demand recovery in rural India should not be seen as the harbinger of economic revival, especially with the number of covid-19 cases rising in villages, said State Bank of India’s group chief economic adviser Soumya Kanti Ghosh.
The surge in share of rural districts in new covid cases from 23% in April to 54% in rural areas could put a spanner in the works of India Inc., which was banking on rural recovery for an economic revival at the national level, according to his latest report.
“Any amount of recovery will be contingent on the recovery of the urban sector. The rural sector will not be able to sustain the recovery. We have seen that the total number of covid-19 cases is now at 54%. It was 23% in April. It had declined to 24% in June. After the economy opened up, this number has increased in states such as Maharashtra, Karnataka, Uttar Pradesh, Bihar, and Orissa. Andhra Pradesh and Maharashtra have seen a significant surge in cases in rural areas. Everywhere else, there is a surge in cases in rural areas," he said.
The unplanned lockdowns across states could also affect rural recovery, Ghosh noted. This has resulted in higher food prices and supply disruptions. He, therefore, suggested a planned exit from the lockdowns that would not affect the rural economy gravely.
“While we are talking about a bumper crop, the arrival at the mandis has been lower than last year, indicating supply disruptions. Farmers will also not get the desired prices. This is exactly what will happen if covid-19 cases continue to surge for another one or two months," Ghosh noted.
“I think that while we got into the covid-led lockdowns, we have not been able to exit it in a staggered manner. There have been too many restrictions and circulars, which have not helped. My sense is that we have become hostage to the lockdowns. Unless we come out of this mentality, things are unlikely to change dramatically," he added.
The surge in infections is likely to affect rural collections, which had seen an increase in June, said Ghosh. Banks and non-banking financial companies (NBFCs) have been pinning their hopes on rural demand and expected quick recovery in these areas even as coronavirus continues to affect demand in the urban centres.
NBFCs such as Mahindra Finance had seen an increase in collections from farmers given the good harvest and improved cash flow.
The country’s gross domestic product (GDP) is expected to contract by 16.5% in the first quarter of the current fiscal year, according to Ghosh. Earlier, he had estimated Q1FY21 GDP to contract by more than 20%.
“The first quarter results (Q1 FY21) of some of the listed companies show that their margins have stayed stable because they have drastically reduced costs. However, if revenues are not commensurate, costs will have to be rationalized and that will have an impact. We have already seen how there has been a series of layoffs in several sectors and if this cost rationalization continues, it will only postpone the consumption recovery," Ghosh said.