HYDERABAD: The Indian economy is being stirred to life, but it’s not consumption of fancy cars or glitzy smartphones that’s driving growth. Instead, rural India is leading from the front with demand picking up faster than urban areas. With job and income losses expected to be intense in metros, discretionary spends will take a severe knock. A higher rural spend is then expected to neutralise the consumption shock, at least this fiscal.
This is a complete departure from the past which saw three recessions-all of which were caused by agricultural sector setbacks. Then, urban demand, private investment and consumption, and government expenditure collectively put the economy back on track. This time, however, that heavy lifting is being done by the rural economy, which accounts for a 49 per cent of the GDP.
“We believe rural demand will lead overall demand improvement in India in FY21,” noted Anubhuti Sahay, Head, South Asia Economic Research (India), Standard Chartered Bank. Evidence is visible from tractor sales that grew by 12 per cent in June y-o-y, having contracted 80 per cent in April. Similarly, area sown under summer crops in June was double that of the same period last year. So was fertiliser consumption that grew sharply at 71 per cent in April-June as against 20 per cent last year.
What gives? The front-loading of government expenditure, a favourable start to the monsoon, an early onset of summer sowing season and job creation (and wages) touching a record high under MGNREGA are some elements reviving demand. Notably, of the 40 million rural families that demanded work under the MGNREGA, 33 million received work in June quarter-7 times the average in FY20. In contrast, urban unemployment remains in double digits, with a lower labour force participation rate, according to CMIE data.
Interestingly, government spending on MGNREGA in April-May was more than double that of last year. “The central government has also scaled up spending on rural development programmes with spending in April and May up 2.3 times versus the same period last year,” noted Tanvee Gupta Jain, Economist, UBS Securities India.
Meanwhile, the worst isn’t behind us and analysts expect the current quarter to witness a deeper contraction. It’s only in Q3 that growth will likely normalise, but much depends on the government’s fiscal push. “We believe there is still some fiscal space available which could be used to boost domestic demand once uncertainty eases. We also expect the Monetary Policy Committee to ease policy rates by another 50 bps in FY21, taking repo rate to 3.5% along with other prudent macro measures to support the financial sector,” said Gupta.