State of the rural economy

In 2020-2021, when the Indian economy suffered its largest ever contraction of 7.3%, agriculture was the silver lining. The sector grew by 3.63%, which, although lower than the growth of 4.31% in 2019-2020, was still an important cushion for the overall economy. What are the prospects for the rural, agricultural and non-agricultural sector this year? An HT analysis released on July 17 looked at the progress of monsoon and kharif planting and found that rainfall and planting activity were below normal. Certainly, the situation should improve with a resumption of rainfall after a period of drought. India’s rural economy is much more than the agricultural sector. There are currently headwinds and headwinds for the rural economy. Here is a brief summary of the state of play.

Fuel and food prices keep inflation high at 6.26%

Inflation eats away at real rural wages and farm incomes

Nominal rural wages have increased from ??349.61 per day in May 2020 at ??360.54 in April 2021, the latest period for which data are available. However, higher prices more than offset these nominal gains. After adjustment with the rural consumer price index (CPI), real rural wages increased from ??231.2 to ??228.8 during this period. The situation has probably worsened, as the CPI remained above the 6% mark in May and June 2021. Rising prices of agricultural inputs such as diesel – diesel prices have risen to ??89.87 per liter as of July 19, 2021 compared to ??81.52 per liter on July 19, 2020 – is meant to eat into farm income margins. Diesel prices have increased significantly from the government’s recent announcement of Minimum Support Prices (MSP). The MSP’s calculations were based on cost projections made in March 2021. This means that even the MSP’s cushion against farm income will be reduced this time around.

After adjustment with the rural consumer price index (CPI), real rural wages fell from 231.2 to 228.8 during this period.

But a strong global food market has also contributed to export earnings.

While inflation hurts the incomes of the poor – and most Indian farmers are quite poor – it can also create headwinds for farm incomes. One of these routes is the rise in the prices of agricultural export products. International food prices, as measured by the Food and Agriculture Organization (FAO) Food Price Index, are the highest in the past 10 years. While this has put pressure on the prices of commodities such as edible oils and pulses in India, it also has the potential to increase export earnings. A long-term comparison of India’s agricultural export earnings and the FAO Food Price Index supports this theory, with the former progressing with the latter. It is important to stress that the gains from export earnings could be quite limited, especially when domestic inflation is also high. At least two private sector economists, Samiran Chakraborty of Citibank and Pranjul Bhandari of HSBC, hinted at the possibility of a weak terms of trade for agricultural commodities in the economy last week.

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Thanks to the economic disruption of the second wave of Covid-19 following what was already a profit-driven organized sector recovery, the rural economy has certainly suffered yet another economic shock. This is best seen in a comparison of tractor and two-wheeler sales data.

The wider economic environment is important for the broader outlook of the rural economy

It is difficult for the rural economy to pull all cylinders when the macroeconomy as a whole struggles to achieve a sustainable recovery. There are several reasons for this, but the most important of them are the importance of off-farm activities in rural India and the role of urban remittances in supporting rural consumption. Thanks to the economic disruption of the second wave of Covid-19 following what was already a profit-driven organized sector recovery, the rural economy has certainly suffered yet another economic shock. This is best seen in a comparison of tractor and two-wheeler sales data. The former is an essential investment good in rural areas for both farmers and non-farmers. The latter is often an indicator of the state of mass incomes in rural areas. While tractor sales were not negatively affected in the post-pandemic phase, two-wheeler sales appear to have suffered a sharp decline. “The demand for two-wheelers remains sluggish due to the severity of the 2nd wave of Covid-19 and the sharp price increases in 1HCY21. Discounts declined even as OEMs increased their prices in July (Exhibit 1-6). Rural demand, which was largely unscathed last year and drove the recovery, also remains muted, ”a report from Systemix Institutional Equities said.

While tractor sales were not negatively affected in the post-pandemic phase, two-wheeler sales appear to have suffered a sharp decline.

Rural India is home to over 60% of India’s informal workers

A July 15 research note by Pranjul Bhandari and others under the name HSBC Securities and Capital Markets notes that more than half of workers in India’s unorganized sector, who make up over 80% of the workforce total work, reside in rural areas. The rural unorganized labor force includes all 42% employed in agriculture and 19% of workers in non-agricultural activities.

Speaking of unorganized rural workers in the agricultural sector, the report notes that they are not doing well.

Speaking of unorganized rural workers in the agricultural sector, the report notes that they are not doing well. “These workers, who represent 20% of the working population, are mainly involved in construction, followed by trade, transport and manufacturing. Sadly, non-farm wages have not been as dynamic as farm wages. The sharp increase in demand for NREGA works can also be an indicator, ”he says. “What may be needed now is to protect workers in the informal sector through social protection schemes so that the disruptions they face do not result in a permanent decline in demand. It is possible to remain generous with programs like the NREGA rural program for longer, ”Bhandari adds in his note.

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  • ABOUT THE AUTHOR

    Roshan Kishore is a reporter for the Hindustan Times in New Delhi. It focuses on political economy issues with a data-driven approach.
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