India’s Rural Economy Can Resist The Tide, But Can’t Steer The Boat

There is a desperate hope that the farm sector will be the engine to drag along a faltering economy this year. This stems from the belief that agriculture is probably the only sector that has not been directly affected by barriers that were erected on the movement of goods in the Covid-19-triggered lockdown. With the India Meteorological Department predicting a good monsoon, and Kharif sowing being more than steady across almost all crops, there is reason to be sanguine about this sector. That’s the rationale for the attention the rural economy currently finds itself getting.

While the storyline is on point more or less in terms of progress and logic, there are some gaps in the reasoning.

Production Growth ≠ Higher Income

There is a distinction between growth in production and income in this sector. A good Kharif crop—which accounts for around 50% of agricultural production—will mean higher GDP growth for sure. But will income increase? Some caution should be exercised here, for two reasons.

The first is that higher production numbers will augment supplies, which can lead to prices moving down. Agriculture is still one of the few sectors where market forces of demand and supply determine prices. This will be accentuated by the fact that supply-logistics have still not been cemented and there could be distress-sale at the farmyard. Such was the case with the 2020 Rabi harvest where farmers sold low while consumers paid a higher price as the intermediation costs soared.

Further, the minimum support prices, to the extent that they are effective, have not increased by more than 4-5% this time – that is not adequate to counter the downward market pressures. So, a higher price realisation, and hence more income for farmers, is not a done deal. Last year too, soybean and coarse cereals producers did not get higher prices even as production was higher.

Demand Drop For Rural MSMEs

When we refer to the ‘rural economy’ in its current mix, only around 35-40% of the economic activity would be directly from agriculture. The balance comes from the manufacturing and services sectors which would largely be SME segments.

These rural MSMEs are however linked with the urban economy, and lower levels of activity there affect their business prospects. So, while urban MSMEs were affected perceptibly by the large-scale forced migration following the coronavirus outbreak, their rural counterparts were not insulated on the demand side, and their production levels have come down. Typically, goods that get produced by rural MSMEs include parts for indigenous machinery, some auto components, chemicals like dyestuff which get into handicrafts, etc. All of these remain dependent on the overall macroeconomic demand prospects.

The narrative of the rural growth story is predicated by the logic that a good harvest leads to higher rural spending as incomes increase and the money is spent on manufactured goods In particular, the rural consumer spends on durables, gold-related ornaments, and automobiles including tractors, besides FMCG. Financial institutions like asset-based NBFC lenders have been aggressive in this segment. Companies are likely to make a big push to leverage this demand potential. The big question is whether it will play out.

Labour Supply Glut To Depress Effective Income?

Migration from urban to rural areas has been a significant fallout of the lockdown. With a larger population returning to land there has been a tendency for more people to work on farms which, in turn, has helped in increasing the sowing area. It will also help during the harvest time when more labour will be available. However, imagine a scenario where you have a greater number of people working on the land and income generated—as explained earlier—does not increase substantially. Even in the best-case scenario, the payout would have to be spread over more people – which may have increased by 10-20 million as per some conjectures on the migration numbers.

Possible Shift In Spending Habits

With a larger quantum of income being spent on food items and other essentials, the scope for discretionary consumption may be restricted. This is a factor that must be kept in mind when estimating demand from the rural economy. Besides in these uncertain times, there could also be a tendency for people to save rather than spend as the fear of the pandemic will make households more circumspect.

Meanwhile, corporate India is betting on higher consumption coming from the rural sector and investor interactions with FMCG and consumer durable companies have indicated a bullish outlook on the revival of rural demand. Plans are already in place to stimulate demand through customized FMCG products, discounts on consumer durable goods), and easy access to finance for automobiles.

Seen At A Macro Level

On paper, the corporates’ logic is quite firm. Higher NREGA payments have been taken to be indicative of the spending capacity of rural India. The progress here has been good. For the four months of this fiscal so far, the average number of days of NREGA work provided is around 30. This is in contrast with a full-year average of around 48-50 days in the past. NREGA wages have been increased as well this year – from Rs 182 to Rs 202 a day. That adds Rs 2,000 to a household’s purchasing power if work is provided for 100 days. Is this really a large amount? Nonetheless, a good Kharif crop and higher NREGA outlays have been taken to be a sign of more spending.

The outcome is uncertain. All the scenarios that have been painted are real and keep pulling the brush on the canvas in different directions, based on the intensity. The festival season has just-about begun and the ability of rural India to pull ‘Big India’ along will be tested. It does appear that the pull-along power will be limited to certain pockets and is unlikely to bring any large-scale change to the otherwise dismal picture for the economy this year. GDP contraction cannot be eschewed for sure. Some of the more consumer-centric industries can, however, hope to stay afloat on the rural boat.

Madan Sabnavis is Chief Economist at CARE Ratings. Views are personal.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.