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Saturday, September 19, 2020

Tailwind from villages: Rural economy may do the heavy lifting in 2020

The next phase of policy support can be more targeted towards the urban population, which has borne the brunt of the economic and the health crisis.

Written by Rahul Bajoria | Updated: August 21, 2020 9:12:07 am
Indian economy, economic package, Rs 20 lakh crore economic package, rural India employment rate, Express Opinion, Indian ExpressA stronger rural sector will only be able to mitigate, not fully offset, the economic damage. (Express Photo/File)

As the COVID-19 pandemic courses on, India has now become the third country to have more than a million confirmed cases, together with the US and Brazil. While outbreaks are being brought only slightly under control in some initial hotspots like Delhi, Chennai and Mumbai, a wave of renewed lockdowns is being imposed in cities like Bengaluru, Thiruvananthapuram, Pune and Guwahati.

Even as the geographical dispersion increases, COVID-19 remains largely an urban pandemic with large parts of rural India still mostly unscathed. The naturally distanced and less mobile rural India seems to show a stark divergence to the densely-packed, most urbanised parts of the country, which have seen the worst outbreaks. While the cities wrestle with the health crisis, a number of factors are combining to boost rural India’s contribution to the revival of the overall economy.

The government’s Rs 20-trillion economic package announced in May to mitigate the downside impact of the COVID-19 crisis has largely focused on providing relief for the rural population and economy. In addition to passing long-pending reforms such as easing norms with regard to the Essential Commodities Act, the government also announced a 10 per cent hike in minimum wages for MGNREGA, a 65 per cent rise in spending on public work schemes, and a six-month programme that will distribute free rations to around half of the households in the country. Further, a strong start to the monsoon, along with high availability of water in reservoirs and large fiscal transfers, is helping improve rural growth prospects.

This confluence of factors shows up in the sowing activity at the beginning of the kharif planting cycle. As of July 17, the area sown had already crossed 66 per cent of overall arable area. While the area under sowing is eventually likely to come closer to more realistic numbers, an early sowing cycle should ultimately boost income perceptions for the farming sector, which should eventually support rural consumer confidence. Taken together, the organic farm growth and government measures are likely to raise the disposable income levels of rural households.

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The combination of good production, better prices and large fiscal transfers may provide a material tailwind for the rural economy. With basic costs like spending on foodgrains being partly covered through fiscal transfers, rural savings have still risen, as evident from trends in Jan Dhan bank accounts. Further, government-support programmes may lead to the movement of workers from urban to rural areas and provide for a cheaper alternative to farm labour during the peak season.

We estimate that the agriculture sector could register double-digit nominal GDP growth in FY20-21. That compares with a 2 per cent contraction we estimate for the overall economy. This twin-speed recovery track is also well reflected in high-frequency indicators — sales of tractors, fertilisers, and two-wheelers are improving, while the typical urban signposts of demand, like automobile sales, aviation traffic and fuel consumption are lagging. More importantly, this growth comes on the back of a third consecutive surplus monsoon, and amid relatively high food inflation.

However, a stronger rural sector will only be able to mitigate, not fully offset, the economic damage. The localised lockdowns continue to weigh on activity in the urban areas. Ultimately, health care management and disease resolution will dictate the pace of the economy’s return to normal.

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A more robust recovery cycle in the farm sector to a certain extent actually increases the degree of policy freedom for the government and the RBI. As rural incomes remain supportive on their own, the next phase of policy support can be more targeted towards the urban population, which has borne the brunt of the economic and the health crisis. Supporting discretionary spending and incomes in urban areas will not lead to a faster economic recovery, but will help in improving fiscal finances, which in turn should further boost the government’s ability to spend in a pro-cyclical manner, thus improving the chances of the Indian economy going back to levels seen before the COVID-19 outbreak.

This article first appeared in the print edition on August 21, 2020 under the title ‘Tailwind from villages’. The writer is Chief India Economist, Barclays.

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