Rural demand may not prop up economy – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/rural-demand-may-not-prop-up-economy/article34589203.ece?homepage=true

Covid 2.0, unlike the first, has hit rural areas too. This could affect farm output and hence rural income and consumption

Last year, the rural demand story was played through the year as the pandemic did not affect rural India significantly. Except for supporting the migrants’ reverse migration, there was nothing serious due to the lockdowns or infections. In fact, the government was quick to up the MGNREGS allocations to provide more employment to those who required a job and the extra hands at work was interpreted as being a blessing to the farm economy.

Agriculture is normally associated with the rural economy, though the latter is much larger. It is important to recognise the distinction as the two are not synonymous. Broadly, the rural economy has a 45-50 per cent share in total NDP. Within the rural economy, the share of agriculture is just one-third while that of industry is around 26 per cent and services, 40 per cent. Therefore, when speaking of rural demand, only a part comes from agriculture. Further, within agriculture, 55-58 per cent is from crops and the balance from allied activities such as livestock and forestry.

Given this distribution of GDP and the importance of agriculture to the rural economy, one must be cautious when interpreting the news of a good monsoon as 55-60 per cent of the share of 15 per cent in GDP for agriculture and allied activity is likely to be affected positively, assuming the monsoon is well spread across crops. Here too the distribution between kharif and rabi crops is even at around 50 per cent and we are hence talking of not more than 4.5 per cent of GDP being driven by a very good monsoon and resulting crop.

Cause for concern

The problem with the second wave is that it has spread to the rural areas which is a concern for a variety of reasons.

First, the possibility of farmers getting infected is real which can affect both the current harvest that is going on, especially in Punjab, as well as the sowing of the kharif crop which starts in June. Therefore, while the infection spread is more rampant in the urban and semi-urban regions the percolation to the rural centres can be disturbing. Here, with limited access to medical facilities, the situation can become even more serious.

Second, the local governments at the panchayat level will have to act in advance to ensure that labour is available at the farm level because the benefits of a good monsoon would be eroded in case of the spread of the virus.

Third, the Central Government had lowered the allocation for the NREGA programme this year ostensibly because in February it was felt that a support of over ₹1 lakh crore would not be required. This will have to be reconsidered in case there is further spread of the virus.

Fourth, the possible dip in agricultural production for both the harvests can also mean lower purchasing power during the festival-cum-harvest season. This is an important message for corporate India which has been banking on rural demand once again this year. Given some traction seen last year, there was always a doubt of a repetition of such spending this year. The current spread of infection can affect such plans further.

The non-farm component of the rural economy that is employed in industry and services would typically be in the SME category which gets linked to the mainline industry in non-rural areas. While some part of the output would be catering to localised demand such as tractor repair services or sale of parts for agriculture, there would be a fair share of around 30 per cent of industry which is linked to non-rural industry. Here there can be a dip in demand. Even within the rural centres, the ability to maintain the growth rate would depend on how the allied segments do and this is where the infection spread is critical.

Therefore, the points which emerge here are that first, the role of rural economy in sustaining the rest of the economy should not be overstated against the background of news of a good monsoon. The growth contribution of crops to overall growth as well as generation of income that can be spent on industrial products is limited.

The second is that the spread of the virus in these regions has the potential to push the rural economy down not just in terms of output coming from industry and services but also for spending on the consumption side.

The spread of the pandemic and the subsequent lockdowns announced last year started at the same time as this year but there was a difference. Last year, the pandemic was urban-centric in terms of the regions that were affected, and the farming community was literally divorced from the urban developments — a literal case of being far from the madding crowd.

This time it is different as the rural areas seem to get enmeshed in this spread and what started off as a metro phenomenon has moved rapidly to the urban and semi-urban areas and appears to be touching the periphery of rural India. While thankfully it is not universal and currently confined to Punjab, Maharashtra, Haryana and UP, the potential devastation that can be caused by Covid on the rural economy is even stronger than the El Nino, which is held with trepidation by the farming community.

Quite clearly, the States need to have a disaster relief plan in place and not be caught on the wrong foot as has been seen with the second wave in urban areas in March and April.

The writer is Chief Economist,  CARE Ratings. Views are personal

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