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Wednesday, August 10, 2022

Geographical spread of virus poses new policy challenges

As private investment and consumption settle at far lower levels than earlier anticipated, the government’s role in the economy over the next two years or so would need to be much larger than it has been in the last three decades.

Written by Neelkanth Mishra |
Updated: July 29, 2020 8:58:37 am
Growth is the only way out of this vicious cycle, as it would provide more taxes and improve debt sustainability. (Illustration by C R Sasikumar)

With the lockdowns lifting from May onwards, most companies have reported a robust rebound in rural sales. Not only tractors, but rural sales of cement and soap are also doing better than urban sales, and are nearly back to pre-crisis levels. This has occurred even as activity indicators like rail freight, GST e-way bill generation, power demand and mobility trackers have pointed to a stagnation since the middle of June. Even from unacceptably low levels, several indicators show a dip in July.

If trends in sales booked by companies diverge from those shown by indicators, one must trust the former, as they reflect actual transactions. Further, most of the concurrent indicators being tracked have an urban bias, and likely do not capture rural trends accurately. Mobility indicators, for example, track movements of smartphones, which still have low rural penetration.

What explains the rural recovery? Understanding this is important to understand its sustainability.

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The shift of the population may have helped. Reverse migration has meant a nearly 5 per cent lower urban population (nearly 10 per cent in larger cities), hurting demand and activity in essential goods and services, and boosting them in rural areas by about 3 per cent. However, the drop in remittances this entails counters some of this impact.

Other commonly cited reasons are a strong rabi harvest and rural-focused government spending. But as we will see, the net impact is too small in magnitude to explain the revival.

Let us start with the rabi harvest. While agriculture is by definition rural, rural is no longer just about agriculture — a point we have been making for many years (‘Rethinking the rural’, IE, May 23, 2013). Agriculture is in our estimate now only 29 per cent of rural GDP, even though it employs 58 per cent of the rural workforce. Further, rabi crops account for only around a sixth of total agricultural output, and not all of it is marketable surplus as a large number of farmers only harvest enough to feed themselves. The rise in procurement of wheat and cotton helps rural cash flows but is small in the context of the nearly Rs 95 lakh crore of rural GDP.


On the other hand, weak demand in perishables could be draining up to Rs 10,000 crore a month from farmers’ cash flows. Milk is more than a fifth of all agricultural output by value and has seen weak demand due to roadside tea stalls, hotels and restaurants being shut. Subdued celebrations in the upcoming festive season could further pressure demand for milk-based sweets and ghee. Similarly, disruptions in distribution have hurt farmer incomes from fruits and vegetables (with a few exceptions like potatoes), meat and fish.

Now, let us consider the impact of government spending. The Centre has ramped up expenditure targeted at the poor, like free grains, direct cash transfers to women’s bank accounts, higher MGNREGA spending, and has also front-loaded PM-Kisan payments. Together with the higher crop procurement, these add up to an additional Rs 35,000 crore a month, so far. Annualised, this would be about 4.5 per cent of rural GDP — indeed a substantial sum. However, offsetting these cash inflows is a sharp drop in agricultural credit growth, weak domestic remittances (if we assume 25 million returned migrants, who on average sent Rs 6,000 every month, the drop is Rs 15,000 crore), and lower income from agricultural perishables. The net impact comes to just Rs 7,500 crore a month — 0.9 per cent of rural GDP.

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Thus, government spending has served to negate the stress from some of the known factors in agriculture and due to migration. But we have not yet accounted for the impact of activity restrictions in non-agricultural activities, which are 71 per cent of rural GDP. The scale of the income loss here would not be in decimal points of GDP but in multiples of 5 per cent. The rapid growth in MGNREGA person-days indicates a paucity of other jobs in the rural economy as it is, after all, a demand-driven scheme intended to prevent deprivation. At wages of Rs 200 per day, someone working all 30 days in a month would earn Rs 6,000 — enough only for sustenance.

States that have seen returning inter-state migrant workers have seen faster growth in person-days and states like Maharashtra, Punjab and Tamil Nadu have seen a drop, supporting this hypothesis, and serving the intended purpose behind the increase in MGNREGA budgets this year.

Thus, a bigger driver of the rapid rural revival post the lockdowns is the faster normalisation of non-agricultural activities in rural areas. Given that outside the worst 50 districts, which are all urban centres, reported cases per million population were less than 100 till June, compared to nearly 10,000 in the worst-affected metros, activities are likely to have rebounded faster in the former. Not only was the administrative imposition of lockdowns and containment zones less widespread, even the people were less afraid to move around. Anecdotally, market movement in smaller towns and rural areas had normalised rapidly.

However, this is changing now. As the virus spreads geographically, the number of districts reporting a large number of COVID-19 cases and deaths is growing. This means more administrative restrictions, as well as people becoming cautious as they become aware of infections and deaths around them.

This poses new policy challenges. Though cities like Mumbai are showing some signs of the curve flattening (given the lack of reliability of case and death numbers, we track the number of occupied oxygen-beds, which has been unchanged for two weeks), the level of activity curtailed to achieve this is unacceptably high. Local trains, schools, restaurants and malls are shut, and offices are permitted only a third of their workforce.


Given the low tax compliance, government spending in India as a share of GDP is low by global standards. Further, a large part of that expenditure is under committed heads of interest, salary, pension and subsidies. Growth is the only way out of this vicious cycle, as it would provide more taxes and improve debt sustainability. As private investment and consumption settle at far lower levels than earlier anticipated, the government’s role in the economy over the next two years or so would need to be much larger than it has been in the last three decades. While the financing and sustainability aspects of this issue have been discussed, it may also need a new institutional architecture to manage this temporary but significantly larger role.

This article first appeared in the print edition on July 29, 2020 under the title ‘After the rural recovery’. The writer is co-head of APAC Strategy and India Strategist for Credit Suisse


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First published on: 29-07-2020 at 03:00:35 am
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