Rural economy set to be tested again

Lower govt spending, problems of plenty such as record harvest and free distribution of grains, adverse terms of trade for farmers, etc, could threaten rural growth

By Sachchidanand Shukla

A new threat in the form of Omicron now hangs over India’s economic trajectory, which has already weathered two devastating waves. The rural economy was hit hard by the pandemic.

At the peak of the first wave, in August-September 2020, the country’s rural districts accounted for 2.28 million new cases. But, during April-May 2021, this rose to 7.61 million. However, rural India displayed signs of “Fast-in, Fast-Out” and recovered rapidly, despite the devastation wrought on livelihood and lives.

In fact, the rural economy in general, and agriculture in particular, became the ‘employer of the last resort’ for the informal economy. As per the PLFS 2019-20, close to 32 million people reverse-migrated to agriculture, meaning that there was a 3% net rise in the share of workers in agriculture. This is unprecedented in the history of this data-set.

But the key question is to what extent will India’s rural economy remain resilient as the latest wave engulfs broader swathes of the hinterland?
India has experienced the right mix of serendipity and policy interventions when the two waves hit home. We have now had three consecutive normal monsoons and a record food grain output for the fifth year in a row, leading to ‘problems of plenty’. Agri-exports clocked an impressive $42 billion in FY21 and are expected to top $45 billion in FY22, thanks to higher demand as well as higher prices for food globally in the post-pandemic world.

This year, the extended rainfall activity supported reservoir levels that, by the end of December 2021 stood at 73% of the live capacity, higher than average by 20%. Sowing of rabi (winter) crops—mostly consisting of wheat, pulses, oilseeds and coarse cereals—has been marginally higher than the level recorded in 2021.
However, cash-flows have been under pressure from some quarters lately.

Lower government expenditure
A critical factor especially relevant for non-farm cash-flows—government expenditure—has moderated sharply. The Union government’s spending on rural, agriculture and food distribution also weakened in the April-November period. In fact, rural spending was lower by ~35% year-on-year, as the focus has been on free food distribution to the lower-income strata of the population. Spending on agri-schemes dropped by 16% year-on-year.

Total expenditure for wage disbursement under MGNREGA decreased by 6% year-on-year during April-December, with huge variation across states. While states like Karnataka, Jharkhand, and Tamil Nadu saw double-digit growth, some other states such as West Bengal, Chattisgarh, UP, Haryana, and Bihar saw a negative growth of -22% on average during the period. Lower spending on direct cash transfers, wage payments, etc, lowered the cash flow to the rural economy.

Importantly, there are sharp state-level and regional variations, especially relating to non-farm wage disbursement and development activities and sudden ‘start-stops’ owing to Covid, these have manifested in differential levels of both farm and non-farm activity.

Other drivers of non-agri incomes have also been lacklustre; for instance, construction under the Pradhan Mantri Gram Sadak Yojana and the Pradhan Mantri Krishi Sinchayee Yojana have been low.

The pace of commercial activities (for instance, sand mining, brick kiln, construction, etc) varied.

Similarly, asset creation under MNREGS has lagged. Thus, rural incomes have been impacted.

Problems of plenty
Food grain production, at 308.6 million tonnes, hit an all-time high in the 2020-2021 crop year that ended in June. The production could reach 310 million tonnes in the current crop year.

Mandi prices have been lower versus MSP, and revenue from key kharif crops has been the lowest vis-a-vis the last five years and growth has been -15% year-on-year.

Record agri-output and free food grain distribution to a large chunk of population also seem to be weighing on prices. Moreover, kharif paddy procurement this year is trailing last year’s level. By the end of December, the total quantity procured was lower by 10% year-on-year.

Terms of trade
Importantly, the terms of trade for farmers have been adverse—with farm input inflation at 30%, largely due to higher prices of diesel, fertilisers and animal feed. In contrast, output inflation stands at 4.9%.

Moreover, while the sowing has been largely in line, there has been some adverse impact due to a prolonged excess of rains during the harvesting period. The first advance estimate of agriculture production does not adequately factor in the change in yields, and thus, the estimated growth of agri-GVA at 4.5% year-on-year may likely be revised downward a tad. Some large states depending on food crops will be impacted; so, the sentiment is down as only a few states have seen a shift to oilseeds.

While the above are near-term headwinds, there are several positive long-term undercurrents favouring the rural economy. There exists a huge opportunity in diversification away from food grains. India’s per capita consumption of fruit and vegetables is lower by 4x and 2x, respectively, as compared to China. Investments in the agri-supply chain can help realise this potential faster.

Importantly, there is a spurt in agri start-up funding, which has risen from $619 million in H12020 to $2 billion in H12021. The Indian agritech market potential is estimated at $24 billion by 2025, of which barely 1% has been captured so far.

The pandemic has provided wings to agri start-ups, and a continued reform push can give agriculture a further boost. Wider technology dissemination, including new-age infra (cheaper data devices, drones, etc), innovative start-up activities and regulatory clean-up can spur formalisation of asset creation in the rural economy with clearer land titles, property rights, etc, and transform the landscape over time.

The author is Group chief economist, Mahindra & Mahindra Views are personal

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