While a few rural numbers may have looked up in June, it is too early to call this a broad-based demand uptick
Rewind back a quarter and there was little or no talk of rural India powering India’s growth story. In fact, its economy faced considerable headwinds. Prices for agricultural crops had increased only modestly since 2014 and as real estate prices fell, the wealth effect was noticeably missing. Construction employment had dried up and manufacturing jobs found it hard to fill the gap. The net effect was depressed wages.
As the virus enters its fifth month, the caseload from Uttar Pradesh, Bihar and West Bengal has been rising. The three states that accounted for a disproportionate share of migrants who had returned to their villages account for an average of 9,000 cases a day, prompting district administrations to impose local lockdowns. “While these lockdowns may not be strictly enforced, they do have an effect on manufacturing and supply chains,” says Neelkanth Mishra, co-head of equity strategy, Asia Pacific and India equity strategist at Credit Suisse. If activity is depressed, so are rural jobs and wages.
Fiscal Push and the Virus Spread
Chief among the reasons for the bullishness on rural India has been the fact that a large part of the government spending has been directed at rural India. While benefits for industry came in the form of a ₹500,000 crore fund for loan guarantees, money given to rural India has seen cash being transferred. The PM Anna Yojna, PM Jan Dhan, grain procurement, PM Kisan and MGNREGA are expected to add ₹350,000 crore to the economy.
A substantial part of this has been front-loaded. For instance, MGNREGA spends almost trebled to ₹12,500 crore in June when compared to April. PM Kisan payments were also advanced and in May, 81 million farmers received ₹16,300 crore as their first instalment, according to a government release. This year has also seen record procurement by the Food Corporation of India. Rice and wheat stocks moved up from 569 lakh metric tonnes in April to 832 lakh metric tonnes, pushing an estimated ₹100,000 crore to the rural economy. (Note: Figure includes procurement of jowar, bajra and other coarse millets.)
Some of these measures have resulted in a bump in everyday consumption items, but it is too early to call a trend. “The answer to whether this will sustain will be known around end-September or early October when the kharif crop is harvested,” says Sachchidanad Shukla, chief economist, Mahindra & Mahindra.
In its analyst call, Jyothy Laboratories, which has built a large rural network, said it saw a large part of its incremental demand for washing products and mosquito repellents coming from smaller cities and rural areas even as urban sales numbers stayed constant. The company saw profitability rise by 21 percent in the first quarter. But it was equally cautious of extrapolating this trend to the quarters ahead and refused to up its full year guidance.
Recent commentary on higher tractor sales and rising consumption of low-unit packs by rural consumers have resulted in optimists pointing out that the rural consumption engine is in fine fettle. They point to a plentiful rabi harvest with record procurement, low virus numbers and a disproportionate part of government relief measures directed at rural India. A key concern would be the fact that non-agricultural activities, which have been a bigger driver of rural growth coming unstuck. Mishra of Credit Suisse says the government’s spending as a percentage of GDP is among the lowest globally and the announcements so far do little to stimulate new demand. For now, the rural recovery or lack of it will be due to the virus. According to data compiled by Credit Suisse, the geographical spread of deaths is worsening and this could have a chilling effect on economic activity with agriculture and allied activities being hit. So far, the monsoon spread and sowing activity have not been affected, but increased caseloads during the harvest season could wreak havoc. Data shows that the number of districts with more than 500 cases as both a share of GDP and share of population has been rising steadily to over 60 percent. If one assumes that they follow the same time trajectory as their urban counterparts, their peaks could come around the time of the festive season. Expect a clearer answer then on growth prospects in India’s towns and villages.
(This story appears in the 28 August, 2020 issue of Forbes India. To visit our Archives, click here.)