India’s Rural Economy Set For A Good Run But Key Concern Lingers
India’s rural economy, which went through a few tough years brought on by low food prices and anemic wage growth, is set to be the bright spot in an otherwise recessionary environment in 2020-21. While higher output and improved prices of food commodities will help, the outlook for rural wages remains uncertain.
High frequency indicators available for the rural economy are suggesting stable conditions with good rainfall likely to boost output.
- Cumulative rainfall between June 1 and July 9 was 13% higher than the long period average, according to data by the Indian Meteorological Department.
- Area sown under kharif crops rose by 88.2% to 432.97 lakh hectares as on July 3. To be sure, last year sowing was delayed due to late rains.
- Total live storage in 123 reservoirs was at 32% of the full reservoir level for the week ended July 2 against 17% at the same time last year and an average of 21% in the last 10 years.
All these factors bode well for output. In addition, farm prices have improved compared to previous years. Food and beverage inflation rose by 7.4% in May, according to government data.
Based on estimates of nominal agricultural GDP and the momentum of volume growth and inflation, farm income is estimated to grow by about 10-11% in the financial year ending March 2021, said a research report by Spark Capital dated July 2.
Incremental agricultural GDP is estimated to increase by over Rs 3.4 lakh crore in FY21 and by Rs 3.3 lakh crore in FY20 compared to an increase of Rs 1.3 lakh crore in FY19.Gautam Singh & Vijayaraghavan Swaminathan, Research Analysts, Spark Capital
Stronger Employment, Government Spending Support
The rural economy is also likely to benefit from stronger support to employment and increased government spending.
The flagship employment guarantee scheme is providing employment in rural areas even as this support is missing in urban areas. The budget for the Mahatma Gandhi National Rural Employment Guarantee Scheme has been raised to Rs 1 lakh crore due to the disruptions caused by the Covid-19 crisis.
The government has front-loaded spending across other rural ministries too. According to a research note by Kotak Institutional Equities dated July 5, the government expenditure for major rural-focused ministries rose by 109% year-on-year for the first two months of the ongoing financial year.
“We expect this trend to continue for most of FY21 as the government aims at providing support to marginal sections and is reaffirmed through its extension of the PM Garib Kalyan Anna Yojana for another five months at a cost of Rs 90,000 crore,” said Sanjeev Prasad, managing director and co-head of Kotak Institutional Equities, in the note.
The Benefits Are Filtering Through
The companies that sell goods in rural areas are already seeing a turn in environment.
Hindustan Unilever Ltd. in its post-quarterly earnings commentary said the government’s cash transfers and a good harvest will augur well for rural consumers. Mahindra & Mahindra Ltd., the largest tractor maker, saw sales rise by 17.5% over the year ago in June. That's despite the continued weakness in overall automobile sales.
Radhika Rao, economist at DBS Bank, said tractors have fared better than the rest on pent-up demand and better rural sentiments. A stronger rabi output, likelihood of a normal monsoon and higher kharif output is expected to underpin rural spending, Rao said in a research note dated July 7.
According to Rao, amending the Essential Commodities Act, formation of a central law for agricultural produce marketing to remove inter-state restrictions could also prove to be game-changers for the sector.
The pay-off of these reform measures, however, may be visible only over the longer term, said DK Joshi, chief economist at Crisil. The share of agriculture in the country’s gross value added, Joshi said, has also reduced over time and is estimated at 15% in 2020-21.
As such, while stronger agriculture growth will help the broader economy, it will not prevent a recession.
Rural Wage Growth Uncertain
While a number of rural economic indicators have improved, uncertainty remains about rural wage growth, which has been depressed for some time.
According to a research note by Pranjul Bhandari, chief India economist at HSBC, the outlook for rural wage growth could be dimmer than in the pre-pandemic world. Rural wage growth was already feeble and an influx of migrants back to rural areas could push down wage growth once again.
Our model suggests that notwithstanding a temporary uptick, rural wages may not rise sustainably – increased MGNREGA outlays don’t seem enough, construction-led employment may remain weak, and rising rural indebtedness could hurt.Pranjul Bhandari, Chief India Economist, HSBC
Bhandari said both rural and urban wages are driven by economic growth. HSBC expects India's post-pandemic potential growth to fall by 1 percentage point to 5%. This does not bode well for wage growth.
“It is possible that rural wages could tick up a shade temporarily. Sowing in the current season has been strong, requiring more hands on the ground. But our deeper investigation above suggests that rural wages may not rise sustainably once the current agricultural season is over, meaning 'aspirational' labourers will want to return to their urban jobs,” Bhandari said.