India’s rural economy poised to perform well, but concern persists

India’s rural economy, which has weathered a difficult few years due to low food prices and anemic wage growth, is expected to be the beacon of hope in an otherwise recessionary environment in 2020-21. . While higher production and improved food prices will help, the outlook for rural wages remains uncertain.

High frequency indicators available for the rural economy suggest stable conditions with good rainfall likely to boost production.

  • Cumulative rainfall between June 1 and July 9 was 13 percent above the long-term average, according to data from the Indian Meteorological Department.
  • The area sown to kharif crops increased by 88.2 percent to 432.97 lakh hectares as of July 3. Admittedly, last year’s plantings were delayed due to late rains.
  • Total live storage in 123 tanks was 32% of full tank level for the week ended July 2 compared to 17% at the same time last year and an average of 21% over the past 10 years.

All of these factors bode well for production. In addition, agricultural prices have improved compared to previous years. Food and drink inflation rose 7.4% in May, according to government data.

Based on estimates of nominal farm GDP and the dynamics of volume growth and inflation, farm income is expected to increase by around 10-11% in the fiscal year ending March 2021, according to a Spark Capital research report dated July 2.

Stronger employment, support for government spending

The rural economy should also benefit from increased employment support and increased public spending.

The flagship employment guarantee program provides jobs in rural areas even though this support is lacking in urban areas. Mahatma Gandhi National Rural Employment Guarantee Scheme’s budget has been increased to Rs 1 lakh crore due to disruption caused by the Covid-19 crisis.

The government has also made expenditures in other rural ministries. According to a Kotak Institutional Equities research note dated July 5, public spending by key rural-focused ministries increased 109% year-on-year for the first two months of the current fiscal year.

“We expect this trend to continue for most of FY21 as the government aims to provide support to marginal sections and is reaffirmed by its extension of Prime Minister Garib Kalyan Anna Yojana for another five months to a cost of Rs 90,000 crore,” Sanjeev Prasad said. , managing director and co-director of Kotak Institutional Equities, in the note.

Benefits Filter

Businesses that sell goods in rural areas are already seeing a shift in the environment.

Hindustan Unilever Ltd., in its post-quarter earnings commentary, said government cash transfers and a good harvest would bode well for rural consumers. Mahindra & Mahindra Ltd., the largest tractor maker, saw sales rise 17.5% from a year earlier in June. This is despite continued weakness in overall auto sales.

Radhika Rao, an economist at DBS Bank, said tractors performed better than others thanks to pent-up demand and better rural sentiments. Stronger rabi production, the likelihood of a normal monsoon and higher kharif production should support rural spending, Rao said in a research note dated July 7.

According to Rao, amending the Essential Commodities Law, forming a central law for the marketing of agricultural products to remove interstate restrictions could also be a game-changer for the sector.

However, the benefits of these reform measures can only be seen in the longer term, said DK Joshi, chief economist at Crisil. Agriculture’s share of the country’s gross value added, Joshi said, has also declined over time and is estimated at 15% in 2020-21.

So while stronger agricultural growth will help the overall economy, it will not prevent a recession.

Uncertain Rural Wage Growth

While a number of rural economic indicators have improved, uncertainty remains over rural wage growth, which has been depressed for some time.

According to a research note by Pranjul Bhandari, chief economist for India at HSBC, the outlook for rural wage growth could be bleaker than in the pre-pandemic world. Rural wage growth was already weak and an influx of migrants to rural areas could again lower wage growth.

Bhandari said 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.

“Rural wages may temporarily rise by a shadow. The current season’s plantings have been strong, requiring more hands in the field. But our further investigation above suggests that rural wages may not increase sustainably once the current agricultural season ends, meaning ‘aspiring’ laborers will want to return to their urban jobs,” Bhandari said.

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