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Wednesday, August 04, 2021

Post-pandemic rural economic recovery will depend on government’s ability to drive spending

Soumya Kanti Ghosh, Sachchidanand Shukla write: While the government went all out last year to shield the rural economy and households by way of free food, free gas, front-loading PM-Kisan payments, increasing MGNREGA allocation, moratoriums etc, it seems to have changed tack in the current fiscal.

Written by Soumya Kanti Ghosh , Sachchidanand Shukla |
Updated: July 5, 2021 8:27:13 am
In April-May this year, the reported number was up 198 per cent at 83,863. This loss of lives coupled with the loss of livelihood can make rural spending more cautious. Not surprisingly, the outlook for rural economic activity had turned subdued.

It is now clear that unlike in the first wave of the pandemic, rural India has been devastated by the vicious second wave. Infections spread like wildfire, and in states like Maharashtra, Uttar Pradesh, and Rajasthan, more than 60 per cent of the Covid cases were in rural areas. At its peak last year in August-September, rural districts accounted for 2.28 million new cases. In April and May this year, this rose to 7.61 million. During August-September 2020, approximately 28,101 Covid deaths occurred in rural districts. In April-May this year, the reported number was up 198 per cent at 83,863. This loss of lives coupled with the loss of livelihood can make rural spending more cautious. Not surprisingly, the outlook for rural economic activity had turned subdued.

But as Covid cases continue to subside, rural India has been displaying signs of a “Fast-in Fast-Out’’ phenomenon in the last few weeks. For example, the CMIE rural sentiment index is up 2 per cent in June from the trough in May, even as the urban index is down nearly 3 per cent. Similarly, average daily registrations of agricultural equipment like tractors, trailers, and harvesters are up 237 per cent in June as compared to May. Rural India, which was stuck in the fears of trepidation for most of May, now seems to be more optimistic as compared to urban India.

The key question now is: How sustainable are these trends?

The southwest monsoon has arrived a bit early this year, and IMD forecasts monsoon to be normal this year. June saw a cumulative surplus at 10 per cent of the Long Period Average, though the spatial distribution was uneven with half of the country getting excess rainfall. It is important that rainfall is well distributed spatially as well as temporally if the gains are to accrue to the rural economy. The other key factor is the terms of trade. Any sustained deterioration can have a dampening effect on rural demand. The wholesale price index (WPI) for primary food has averaged 2.3 per cent since the start of 2021, while WPI non-food manufacturing has averaged a high of 7.4 per cent. Separately, if we extend the terms of trade argument more liberally to CPI rural non-food/core inflation, the average of such core CPI rural since the beginning of 2021 is 6.4 per cent with the May figure, a staggering 8.2 per cent. The urban non-food core inflation is, however, at 5.5 per cent for the corresponding period. Clearly, any signs of a nascent rural recovery have to be supported by government intervention through aggressive supply-side and compassionate measures.

What could be these measures?

The government resisted cutting taxes on fuel and even edible oils (it has been cut recently) in the hope that prices will soon correct. However, it needs to take a more compassionate view as the outlook on government finances is much better owing to efforts to plug the tax loopholes. We believe some profit booking in commodities due to US Federal Reserve indicating rate hikes in 2023, as well as China indicating that it might sell metals from its reserves to control prices, has resulted in commodity cycle losing steam. But investment in commodities for enhancing supplies has lagged. Given the mismatch in supply and demand, the rally in commodities may not be over.

The concern is also regarding a sharp jump in food items of mass consumption that have been produced in abundant quantity like cereals and to some extent pulses. We believe that simple supply-side responses could solve much of the problem at least in the case of pulses. Pulses have always been a bugbear in terms of their impact on inflation. If the concern is about possible stocking up of pulses, all that the government has to do is to nudge NAFED to sell/release at least 15 per cent of the stock in 10 days. It will help cool the market. NAFED may be sitting on at least 20 per cent of rabi pulses. In this context, the “SUPPLYCO” model, as currently prevalent in Kerala, could be effectively remodelled for NAFED so as to transfer maximum benefits to consumers and farmers in the entire crop-to-cash cycle.

It must be acknowledged that a large part of the resilience of the rural economy last year stemmed from government support. While the government went all out last year to shield the rural economy and households by way of free food, free gas, front loading PM-Kisan payments, increasing MGNREGA allocation, moratoriums etc, it seems to have changed tack in the current fiscal, providing support in a targeted and calibrated manner. For example, free food rations have been extended till November. The government also increased the amount of subsidy on fertilisers unexpectedly.

The argument that the May inflation number is purely attributable to inadequate supply-side responses and spillovers from global commodity cycle prices is not entirely correct. A closer look at the inflation numbers, in fact, reveals that the rural inflation story is also a reflection of rural household distress with prices of items important to human life, and hitherto having a disproportionately small weightage, showing a jump. While we hope such a jump is temporary, going forward, the government’s ability to coordinate and drive rural spending and activities could make a huge difference to the pace of recovery of the rural economy.

This column first appeared in the print edition on July 5, 2021 under the title ‘A helping hand’. Ghosh is group chief economic advisor, State Bank of India and Shukla is group chief economist, Mahindra & Mahindra. They are thankful to S Adikesavan for his comments. Views are personal

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