Rural economy put to the test again

Lower government spending, abundance issues such as record harvest and free grain distribution, unfavorable terms of trade for farmers, etc., could threaten rural growth

By Sachchidanand Shukla

A new threat in the form of Omicron now hangs over the economic trajectory of India, which has already weathered two devastating waves. The rural economy has been hit hard by the pandemic.

At the height of the first wave, in August-September 2020, rural districts across the country had 2.28 million new cases. But, in April-May 2021, this figure rose to 7.61 million. However, rural India showed signs of “Fast-in, Fast-Out” and quickly recovered, despite the devastation to livelihoods and lives.

Indeed, the rural economy in general, and agriculture in particular, have become the “employer of last resort” of the informal economy. According to the PLFS 2019-20, almost 32 million people migrated to agriculture, which means that there was a net increase of 3% in the share of workers in agriculture. This is unprecedented in the history of this dataset.

But the key question is how resilient India’s rural economy will remain as the latest wave engulfs larger swaths of the hinterland?
India experienced the right mix of serendipity and political interventions as the two waves hit home. We have now had three consecutive normal monsoons and record foodgrain production for the fifth consecutive year, which has led to “problems of abundance”. Agricultural exports recorded an impressive $42 billion in FY21 and are expected to surpass $45 billion in FY22, driven by higher demand as well as higher food prices. high around the world in the post-pandemic world.

This year, prolonged rainfall activity has supported reservoir levels which, at the end of December 2021, stood at 73% of useful capacity, 20% above average. Plantings of rabi (winter) crops – consisting mainly of wheat, pulses, oilseeds and coarse grains – were slightly above the level recorded in 2021.
However, cash flow has been under pressure for some quarters lately.

Lower public spending
A critical factor particularly relevant to non-farm cash flow – government spending – has moderated sharply. Union government spending on rural areas, agriculture and food distribution also fell in the April-November period. In fact, rural spending fell by around 35% year-on-year as the focus shifted to free food distribution to the poorest segments of the population. Spending on agricultural programs fell 16% year-on-year.

Total spending on wage payments under MGNREGA fell 6% year-on-year from April to December, with huge variations across states. While states like Karnataka, Jharkhand and Tamil Nadu recorded double digit growth, some other states such as West Bengal, Chattisgarh, UP, Haryana and Bihar recorded negative growth of -22% on average over the period. Decreased spending on direct cash transfers, payment of salaries, etc., has reduced cash flow to the rural economy.

It is important to note that there are wide variations at the state and regional level, particularly with respect to non-farm payroll disbursement and development activities and sudden “start-up stops” due to Covid, these have manifested themselves in differential levels of agricultural and non-agricultural activity.

Other non-farm income drivers have also been lackluster; for example, the construction under the Pradhan Mantri Gram Sadak Yojana and the Pradhan Mantri Krishi Sinchayee Yojana has been weak.

The pace of commercial activities (e.g. sand mining, brick kiln, construction, etc.) varied.

Similarly, the creation of assets under the MNREGS has been delayed. Thus, rural incomes have been impacted.

Abundance issues
Food grain production, at 308.6 million tonnes, hit a record high in the 2020-2021 crop year which ended in June. Production could reach 310 million tonnes in the current crop year.

Mandi prices were lower than MSP, and major kharif crop revenues were the lowest in five years and growth was -15% year-on-year.

Record agricultural production and the free distribution of food grains to a large part of the population also seem to be weighing on prices. Moreover, purchases of paddy kharif this year are lagging behind last year’s level. At the end of December, the total quantity purchased was 10% lower year-on-year.

Terms of trade
Importantly, the terms of trade for farmers have been unfavorable, with agricultural input inflation of 30%, mainly due to higher diesel, fertilizer and feed prices. In contrast, production inflation stood at 4.9%.

Additionally, although plantings were largely consistent, there was some negative impact due to a prolonged excess of rains during the harvest period. The first forward estimate of agricultural production does not sufficiently take into account the evolution of yields and, therefore, the estimated growth of agricultural GVA at 4.5% year-on-year could probably be revised slightly to the decline. Some large states dependent on food crops will be impacted; thus, sentiment is down as only a few states have seen a shift to oilseeds.

While the above are short-term headwinds, there are several long-term positive undercurrents favoring the rural economy. There is a huge opportunity to diversify away from food grains. Per capita fruit and vegetable consumption in India is 4x and 2x lower, respectively, than China. Investments in the agricultural supply chain can help realize this potential faster.

It is important to note that there is an increase in funding for agricultural start-ups, which has increased from $619 million in the first half of 2020 to $2 billion in the first half of 2021. The potential of the Indian market for agritech is estimated to be worth $24 billion by 2025, of which barely 1% has been captured so far.

The pandemic has given agriculture start-ups wings, and a continued push for reform can give agriculture a new boost. Wider diffusion of technology, including new era infrastructure (cheaper data devices, drones, etc.), innovative start-up activities, and regulatory cleanup can spur the formalization of asset creation in the rural economy with land titles, property rights, etc. clearer, and transform the landscape over time.

The author is the Group’s Chief Economist, Mahindra & Mahindra Views are personal

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