The state of the rural economy
India’s rural economy is much more than the farm sector. There exist both headwinds and tailwinds to the rural economy at the moment.
In 2020-21, when the Indian economy suffered its largest ever contraction of 7.3%, agriculture was the silver lining. The sector grew at 3.63%, which although lower than the 4.31% growth in 2019-20, was still a significant cushion for the overall economy. What are the prospects of the rural sector, both farm and non-farm, this year? An HT analysis published on July 17 looked at the progress of the monsoon and kharif sowing and found that both the rainfall and sowing activity were lower than normal. To be sure, the situation is expected to improve with rainfall expected to pick up after a dry patch. India’s rural economy is much more than the farm sector. There exist both headwinds and tailwinds to the rural economy at the moment. Here is a brief summary of the state of affairs.
Fuel, food prices keep inflation high at 6.26%
Inflation is eating into real rural wages and farm incomes
Nominal rural wages have increased from ₹349.61 per day in May 2020 to ₹360.54 in April 2021, the latest period for which data is available. However, rising prices have more than offset these nominal gains. When adjusted with the rural Consumer Price Index (CPI), real rural wages have fallen from ₹231.2 to ₹228.8 during this period. The situation is likely to have become worse, given CPI staying above the 6% mark in both May and June 2021. Rise in the prices of agricultural inputs such as diesel – diesel prices increased to ₹89.87 per litre on July 19, 2021 compared to ₹81.52 per litre on July 19, 2020 – is bound to eat into farm income margins. Diesel prices have increased significantly compared to when the government announced minimum support prices (MSP) recently. The MSP calculations were based on cost projections made in March 2021. This means that even the MSP cushion to farm income will be muted this time.
But a strong global market in food items has also helped export earnings
While inflation hurts poor people’s incomes — and most Indian farmers are quite poor — it can also generate some headwinds for farm incomes. One such route is a rise in price of agricultural export commodities. International food prices, as measured by the Food and Agricultural Organisation’s (FAO) food price index, are highest in the last 10 years. While this has put pressure on price of commodities such as edible oils and pulses in India, it also has the potential to push up export earnings. A long-term comparison of India’s agricultural export earnings and the FAO food price index supports this theory, with the former moving up along with the latter. It is important to underline the fact that the gains from export earnings could be quite limited, especially when domestic inflation is also high. At least two private sector economists, Samiran Chakraborty from Citibank and Pranjul Bhandari from HSBC, have hinted towards the possibility of a weakness in terms of trade for agricultural commodities in the economy last week.
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The larger economic environment matters for rural economy’s larger prospects
It is difficult for the rural economy to fire on all cylinders when the larger macroeconomy is struggling to make a sustained recovery. There are various reasons for it, but the most important among them are the importance of non-farm activities in rural India and the role of urban remittances in supporting rural consumption. Thanks to the economic disruption of the second wave of Covid-19 on the back of what was already a profit-led organised sector recovery, the rural economy is certain to have received yet another economic shock. This is best seen in a comparison of tractor and two-wheeler sales data. The former is an essential investment good in rural areas both for farmers and non-farmers. The latter is often an indicator of state of mass incomes in rural areas. While tractor sales have not been adversely affected in the post-pandemic phase, two-wheeler sales seem to have suffered a big dent. “Two-wheeler demand remains sluggish due to the severity of the 2nd wave of Covid-19 and sharp price hikes in 1HCY21. Discounts have reduced even as OEMs have taken price hikes in July (Exhibit 1-6). Rural demand, which was largely unscathed last year and drove the recovery, also remains muted,” said a report by Systemix Institutional Equities.
Rural India is home to more than 60% of India’s informal workers
A research note dated July 15 by Pranjul Bhandari and others as HSBC Securities and Capital Markets notes more than half of India’s unorganised sector workers, who account for more than 80% of the total workforce, reside in rural areas. The rural unorganised workforce includes all of the 42% employed in agriculture and 19% workers in non-farm activities.
Talking about the rural non-farm unorganised sector workers, the report notes that they are not doing well. “These labourers, making up 20% of labour force are mostly involved in construction, followed by trade and transport and manufacturing. Alas, non agricultural wages have not been as buoyant as agricultural wages. The sharp rise in the demand for NREGA works may also be an indicator of this,” it says. “What is perhaps needed now is to protect the informal sector workers via social welfare schemes so that the disruption they are facing does not lead to a permanent fall in demand. There is a case of remaining generous with programmes such as the rural NREGA scheme for longer,” Bhandari adds in her note.
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