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Don’t take rural demand for granted as a growth driver

Rising covid cases in the hinterland are a worry and could worsen our growth-inflation dynamics

Rising covid afflictions in the hinterland are indeed worrying—not just because of the relatively poor health infrastructure there, but also the wider disruption to economic activity it portends.

Our analysis of district-level covid cases suggests that the proportion of rural districts with 1,000-plus cases more than doubled from 20% on 30 June to 53% on 30 September. To be sure, the pace of afflictions has slowed marginally in September, but it is still too early to call a decisive change in trend.

The gross domestic product (GDP) data for the first-quarter of 2020-21 showed the enormous damage wreaked by India’s lockdown. It is also evident from high-frequency indicators that the sharp improvement in economic activity seen after Unlock 1.0 was a chimera because the sporadic lockdowns imposed thereafter have impeded a full restart of economy activity.

Yet, rural demand could lend the economy a silver lining. Sales of tractors (about 85% rural share) and motorcycles (about 60%) have done well after April, the first month of a nationwide lockdown that was the world’s most stringent. Fertiliser sales have been healthy, as have been the hinterland’s share of fast-moving consumer goods.

There are two reasons for this. One, healthy agricultural activity (supported by a favourable southwest monsoon and resultant increase in kharif sowing, and substantial government procurement of the rabi harvest). Two, India’s rural-focused measures such as higher spending under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), extension of concessional credit to farmers, and front-loading of payments to farmers under the Pradhan Mantri Kisan Samman Nidhi scheme.

While policy support has had a rural bias, most of the expenditure has been front-loaded. For instance, while the government increased MGNREGS allocation for this fiscal, more than half of it had already been utilized in the first four months.

In addition, there are administrative issues, including instances of wages not being paid on time. Yet, demand for MGNREGS work outpaces supply and many states have been asking for further allocation of funds. With risks to economic growth tilted to the downside until a vaccine for covid becomes available, MGNREGS will need to be the bedrock of rural employment.

It is important to note that agriculture comprises only about a third of the rural economy. Niti Aayog data (see Changing Structure of Rural Economy of India Implications for Employment and Growth, 2017) shows that the share of agriculture in India’s rural economy was 39.2% in fiscal 2011-12, and would have come down further, with farm growth trailing non-farm growth.

Many key sectors of the economy have a large rural footprint. Therefore, what happens there influences rural demand. For instance, the shares of rural areas in mining and quarrying, manufacturing, and construction stand 53.4%, 51.3% and 48.7%, respectively. Manufacturing and construction also contribute 47.4% and 74.6%, respectively, to rural employment.

First-quarter GDP data showed output having halved in the construction sector, while in manufacturing and mining it was down 39.3% and 23.3%, respectively.

These are not just because of the pandemic. Manufacturing growth has been negative since the second quarter of fiscal 2019-20, and construction activity has been declining since the third quarter. That means a return to pre-pandemic activity levels won’t suffice. But the way things are stacking up, anything better looks unlikely this fiscal year.

For instance, under the Pradhan Mantri Gram Sadak Yojana, a good proxy for rural construction activity, only 2,198km of roads were constructed until June 2020, down a massive 40% year-on-year (construction of national highways, by contrast, was down only 13%). Spending on rural road construction has been falling since last fiscal year. Crisil Research expects a decline of about 9% this year as well because funds may be diverted to meet healthcare priorities.

The price data too tells a sombre story of the hinterland. While retail food prices have been rising, wholesale prices have stayed subdued, implying farmers have not made commensurate gains. That would restrain rural demand despite a healthy harvest.

Even at the retail level, the rural-urban split of consumer inflation has not been very encouraging as rural food inflation has been running higher than urban. Higher food inflation impairs the purchasing power of those not engaged in agriculture. This begs the question: Does rural demand still have the heft to lift India’s economic boat, given dawdling urban demand—especially since large-scale remittances that typically take place from urban to rural areas have been affected? Many migrants have found work in their native places, but rural wages are lower and won’t fully compensate the income loss.

Some workers have also started returning to urban areas due to insufficient employment opportunities and rising covid cases in the hinterland. Data on money transfers from urban to rural areas reported by payment banks such as Fino also bears this out. It remains to be seen if this trend continues.

Net-net, it’s important to keep an eagle’s eye on covid in rural areas. A sharp rise in cases could hard-brake rural demand, disrupt post-harvest supplies of farm produce, and worsen India’s growth-inflation mix.

That would be a fretful denouement.

Dharmakirti Joshi and Adhish Verma are, respectively, chief economist and senior economist at Crisil Ltd

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