The rural economy can start a revival

Government must reverse its negligence and political missteps as key indicators show the sector is resilient

The second wave of the COVID-19 pandemic could slowly recede with a drop in official estimates of daily infections and deaths. The economy is also very gradually returning to normal, with many states starting to ease some of the restrictions placed on their lockdowns. However, the challenge of an economic recovery is far more serious than the health pandemic despite official claims that there is an economic recovery. Last month, the National Statistics Office (NSO) released India’s gross domestic product (GDP) growth estimates for the fiscal year 2020-2021. The decline in GDP, to 7.3%, was slightly higher than expected, although this is a gross underestimate of reality given the methodological problem of underestimating economic distress in the region. unorganized sector.

Make it worse

But what makes economic recovery difficult is that this drop followed three years of sharp decline in GDP even before the novel coronavirus pandemic hit the country. Economic growth had already slowed to 4% in 2019-2020, less than half of the peak of 8.3% in 2016-2017. Since then, the downturn in the economy has not only worsened the situation with regard to economic recovery, but has also taken a heavy toll on a majority of households who have lost their jobs and incomes. The pandemic has only worsened an already fragile economic situation. The sharp decline in GDP is partly the result of the downward trend in economic activity since 2016-17. But much of the economic performance of the first year of the pandemic is also the result of mismanagement of the economic situation.

While a strict national lockdown certainly hit economic activity last year, what made matters worse was the government’s less than adequate response by increasing budget support to revive demand in the economy. . Many of the big announcements have largely remained on the monetary side without the enabling policy framework to help small and medium-sized businesses as well as the large unorganized sector which has been hit hard by restrictions in economic activity.

Agriculture, a key driver

Despite the absence of budget support, the resilience of the rural economy, especially the agricultural sector, has largely contributed to the better than expected economic performance. While rural areas were the first point of refuge for a majority of migrants who returned on foot thousands of kilometers from metropolitan urban areas, agriculture was the only important sector (other than electricity, gas, food supplies). water and other utilities) which reported an increase in Gross Value Added (GVA) in 2020-2021. It not only provided jobs for returning migrants, but also supported the economy in rural areas.

Agriculture has not only been the greatest savior during the time of the pandemic, but has always been a major driver of the economy over the past five years, which has seen the economy slow sharply. The average growth rate of agricultural GVA over the past five years, at 4.8%, is significantly higher than the growth of the GVA of the economy as a whole, at 3.6%, over the past five years.

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But can the rural world once again play the role of savior? Unlikely, in the current context. And it will not be due to a natural calamity such as drought, but the result of the government’s negligence and political mistakes. Even though the lockdowns imposed by state governments at the start of the second wave were less severe compared to last year, they did have an impact on the non-farm economy, as high-frequency data from the latter two shows. month. Expectation of positive growth this fiscal year may suggest a recovery. However, given that the economy has already suffered last year, any recovery will largely be a statistical artifact pulled by last year’s weak base rather than a true recovery. The fact that a majority of households have already suffered job losses and declining incomes that have not yet returned to pre-pandemic levels calls for caution in any inference about an economic recovery.

However, even aggregate data is unlikely to capture the true extent of devastation in rural areas. While this is true even for basic estimates of deaths and the health catastrophe caused by the pandemic, it is even more serious in its economic impact. Similar to official statistics which underestimated deaths from the pandemic in most states – as recently highlighted in several newspapers – economic distress in rural areas is also largely unreported and underestimated.

The second wave affected rural areas disproportionately, in terms of health but also in terms of livelihoods. Many households have lost a salaried member, and an equally large number have spent a significant amount on private health care expenses to fight the infection. It will not be surprising that rural areas are now experiencing a sharp increase in indebtedness from non-institutional sources.

However, the government’s response has fallen short of the scale of the pandemic in rural areas. Unlike last year, the government did not increase the allocation for the National Rural Employment Guarantee Program (NREGS) this year. For the country as a whole, despite an increase in demand for employment in the NREGS, the person-days generated in May 2021 were only 65% ​​compared to May 2020. Although the free food grain regime was also been extended this year, it does not include legumes as provided last year. Likewise, there has been no transfer of money to vulnerable groups, unlike last year.

Decline in jobs, income

The impact of declining incomes and job losses on demand is now visible even in rural areas. While real wages have continued to decline with the latest estimates from April 2021 showing a decline in rural non-farm wages of 0.9 percent per year over the past two years, farm wages continue to stagnate. One indicator of falling demand is falling wholesale prices for most agricultural products. Cereals and vegetables, which together account for more than half of agricultural production, have seen their prices fall year-on-year for more than six months now. This is happening at a time when international agricultural prices are at an all time high.

This is in part reflected in rising inflation in the pulse and oilseed groups, both of which are largely imported. The net result is a special situation where the prices of dominant agricultural products in the domestic market are falling while the consumer prices of basic necessities such as edibles and pulses contribute to the rise in inflation.

Threat of inflation

Rising inflation still threatens to reduce the purchasing power of the rural economy struggling with declining income and job losses. This is further compounded by the change in the terms of trade against agriculture which has strained farm incomes. Rising input prices for diesel have already contributed to rising input costs, but the recent increase in fertilizer prices for most complex fertilizers has also added to the plight of farmers. Rising inflation in international commodity prices is also threatening the rural non-farm economy. A majority of the rural non-farm sector already struggling with weak demand has now seen its profit margins affected due to the rising cost of raw materials.

Despite these setbacks, the rural economy including the agricultural economy continues to remain crucial for any economic recovery strategy. But for that to happen, it will take a proactive government intervention to protect the rural population by speeding up vaccination. Unfortunately, so far, rural areas have lagged behind in the overall immunization rate. At the same time, rural areas will also need greater budget support, both in terms of direct income support to revive demand in the economy, but also through various subsidies and protection against rising demand. inflation of input prices. This urgent intervention is not only necessary to support economic recovery, but also to avert another humanitarian crisis, this time due to economic mismanagement.

Himanshu is Associate Professor, Center for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi

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