The rural sector may have held out the only sliver of hope amid the broader collapse in the first-quarter GDP numbers but there are fresh pointers to a brewing crisis in the hinterland that could stall growth in the coming quarters.
There are at least three key stress points. While the over 3% agriculture growth in the first quarter factored in strong Rabi procurement, with high-price realisations getting reflected in the output numbers, fresh data from mandis indicate a slide in the prices of the intercrop produce — horticulture, milk and poultry etc.
With most migrants having returned home, another important source of rural demand, remittances from urban India — money migrants sent home — is little more than a trickle. This, for states such as Bihar, is critical given that it makes up nearly 35 per cent of the state GDP and is a significant income support for a bulk of the non-farm families.
On top of this double blow, comes Covid itself. With the disease burden rapidly moving from urban centres to the hinterland as the harsh lockdown unwinds, its social and public health implications — most of rural India is ill-equipped for critical care — will be felt in economic activity.
All this translates to depressing demand for local products. Rural demand has largely been a running theme in the months post lockdown in the uptick seen across segments such as cars, motorcycles, tractors and consumer non-durables.
“There are two concerns: The bumper crop is all over the country but the price support is half of it. One part of the country has benefited hugely from the bumper crop, which is where you see the tractor demand, the other half of the country hasn’t benefited that much because they did not get the price support,” said Pronab Sen, former Chief Statistician of India who heads the standing committee on economic statistics constituted last year.
“Number two, those are precisely parts of the country where remittances are bad… The second concern is that if rural demand is hit because remittances have slowed down, then that would feed into the problem of the farmers…the prices they get. Bulk of price support comes from local demand itself. Only about 40-45 per cent of the production goes to urban areas, rest is for local consumption,” Sen told The Indian Express.
The latest quarterly GDP growth data, which showed that India’s economy shrank by 23.9 per cent in the three months to June 2020 — the biggest slide in output among the G20 nations — reflected an over 16 per cent surge in government consumption expenditure during the quarter.
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Experts attribute this to many states front-loading their Covid spending — disease management, control, humanitarian assistance – but this could begin to taper off in the coming quarters.
More so when there are fresh uncertainties envisaged in GST transfers from the Centre and states stare at a financial squeeze in the second half of the year, which, most certainly, could mean less capital expenditure, thereby deepening the contractionary effect.
An analysis by Motilal Oswal Institutional Equities shows that receipts of 14 major states declined 18.2 per cent during the first quarter of 2020-21 on a yearly basis even as spending grew just 2.7 per cent. “A lot of states are going to cut their expenditure and if they do so, that adds to the demand contraction, it just makes it worse. My sense is that investment activity may have to be curtailed seriously,” Sen said.
The fall in migrant remittances affects several lower-income states. The total number of internal migrants is estimated at 139 million, according to the Economic Survey 2017, and industry estimates peg the remittances within India at about Rs 2 lakh crore a year. Bihar and Uttar Pradesh together received 60 per cent of the money sent by migrants, while Odisha, Jharkhand, Tamil Nadu, and Andhra Pradesh are among the other major remittance-recipient states.
During the first two months of the lockdown, official records show that of the 64 lakh migrant workers across 116 districts in six states — Bihar, Uttar Pradesh, Rajasthan, Madhya Pradesh, Jharkhand and Odisha (covered under the Garib Kalyan Rojgar Abhiyaan), — a quarter returned to just 17 districts across these states.
The slide in prices in the intercrop produce — essentially horticulture — is largely because of lower overall demand for staples such as potato and onions from the restaurant segment and banquet halls staying closed. Then there are supply issues. Said Soumya Kanti Ghosh, Group Chief Economic Adviser with State Bank of India: “While the Government has spent a lot of money for the sector so the situation should not deteriorate sharply, the problem is that logistics and supply-related issues are being seen in mandis. Farmers are unable to come to markets fully. So there are supply constraints.”
“It’s been a good year with respect to rainfall and also, the reservoirs are full,” said Ashok Gulati, Infosys Chair Professor for Agriculture at ICRIER. “So, agricultural growth won’t go down much but it can only provide a cushion to the overall GDP growth limited to its capacity. But the potential for long-term agricultural growth is only 3-3.5 per cent… Rural demand was not impacted much even during lockdown with fertiliser, urea and tractor demand rising sharply. An effect of the shutdown may, however, be seen with a lag in the agricultural sector”.
Lower inflation, generally, is indicative of falling realisation by farmers on their produce. As per the Wholesale Price Index (WPI) data released by the Commerce Ministry, price inflation has been sliding for vegetables, from a 3.1 per cent year-on-year inflation in April to (-)12.3 per cent in May; (-)9.2 per cent in June and then rising to 8.2 per cent in July, primarily due to base effect.
The year-on-year inflation for onions has continued a downward trend, falling from 72.3 per cent in April to 5.8 per cent in May, contracting by 15.3 per cent in June and further by a 25.6 per cent in July. Inflation has been sliding for fruits, which declined by (-)3 per cent in July from 2.3 per cent in June.
“While in recent months, potato prices had shot up nearly five times to Rs 20-30 per kg, much of this rise was due to production loss in recent months, comparatively less production, and lower stock in storage,” said Ram Baran, potato commission agent at Azadpur Agriculture Produce Marketing Committee.
Potato prices are expected to cool off slightly from the second week of November as new produce from Punjab hits the market, he said. Demand for potato and onions, as also other products, have also not risen as much due to marriage halls being closed and restaurants also not functioning fully.
The CPI-AL was at 1,167 points in November 2022, while CPI-RL was at 1,178 points in the previous month.(Representational Image) 
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