India’s economic growth continues to be strong at a time the rest of the world, particularly the developed nations, faces an economic crisis. Economists attribute this, among other factors, to a robust rural economy as food production remains high with strong consumer demand.
This is also a throwback to the economic situation in 2008 when in the midst of a global economic meltdown India sailed through with a robust rural economy.
Emerging from a Covid pandemic-induced demand slump and faced with prospects of higher prices for its Kharif crop thanks to a copious southwest monsoon, a wider reopening of the economy, improved labour market conditions and terms of trade, India’s rural sector now looks forward to a rebound in its demand. Rural demand is expected to revive in the coming months on the back of higher agricultural output, elevated price expectations of a better monsoon and the government’s supportive policy for rural India.
“Kharif sowing supported by the southwest monsoon, coupled with a higher minimum support price for kharif crops, is likely to enhance rural demand,” the Union Finance Ministry said in its monthly economic report (MER) for July.
Rural demand in India, which was buffeted by the Covid-19 pandemic and then by high global inflation, is set to recover as global commodity prices come down and the southwest monsoon proves supportive to the sowing season, stated the report drafted by the Department of Economic Affairs (DEA).
Global investment firm Morgan Stanley said in a research report, released in October, high-frequency data suggest that overall economic activity has been normalising over the past three months after remaining sluggish in the trailing 12 months.
“Our consolidated rural activity tracker shows a pickup in YoY terms over the last three months,” the investment firm said in the report titled, ‘Rural India: Recovery mode on’, authored by economists Upasana Chachra and Bani Gambhir.
According to the high-frequency data, the improvement has been led by a lower unemployment rate in rural areas, recovering two wheeler sales, increasing growth of credit to the agriculture sector, and early signs of stabilisation in terms of trade, the report said.
"Furthermore, government spending directed towards rural areas continues to track at 3.3 per cent of GDP (gross domestic product) vs. the pre-pandemic trend of 2.2 per cent of GDP," Morgan Stanley said. According to the report, given the size of the Indian rural economy, a key area of focus for policymakers is accelerating rural incomes.
In its latest MER for September, the DEA expressed concern over a reduced crop output on account of patchy rainfall in the rice-producing states of UP, West Bengal and Jharkhand. However, the report said, anticipating a shortfall in rice production, the government banned the export of broken rice and imposed a 20 per cent levy on the export of non-basmati rice, with a view to keeping prices in check.
Additionally, a buffer of 244.64 LMT of rice stocks is also available with the government to counter any price volatility. These stocks will increase as the current procurement cycle progresses.
“The marginal uptick in headline retail inflation from 7 per cent in August 2022 to 7.4 per cent in September 2022 is on account of an increase in food inflation to 8.6 per cent. In the three months ending September 2022, domestic retail inflation averaged 7 per cent,” the latest MER noted.
“The average retail food inflation edged lower to 7.6 per cent, in this period, from 8.0 per cent in the previous quarter. The increase in food prices appears to be mainly seasonal as the prices of many commodities tend to rise before harvest. Therefore, in the absence of any further weather extremities, retail inflation is expected to trend lower in the rest of the fiscal year.”
The Reserve Bank of India’s (RBI) Annual Report, released on 27 May, 2022, however, said indicators of rural demand reveal a slackness, vis-a-vis urban demand despite resilience in agriculture and allied activities during the first half of the fiscal 2021-22.
“Furthermore, a bountiful monsoon, adequate soil moisture and replenished reservoir levels brightened its prospects for the rest of the year,” the report said.
“However, the last quarter reflected signs of demand slowdown as firms increasingly passed on cost pressures to end-use customers.”
The RBI report also said agriculture and allied activities posted a robust performance in 2021-22, even though the second wave of the pandemic affected rural areas on a larger scale than during the first wave. The sector registered a growth of 3.3 per cent in 2021-22, with record production in foodgrains. The strong growth was aided by a sharp catch-up in south-west monsoon (SWM) and kharif sowing in the month of September 2021. Except for rice and wheat, the prospects for Rabi production was good with robust sowing, coupled with adequate soil moisture and replenished reservoir levels. The buoyancy in the agriculture sector was mirrored in sales of tractors and fertilisers, which consistently outstripped pre-pandemic levels for the major part of 2021-22.
According to IMF estimates, India’s economic growth in terms of its Gross Domestic Product (GDP), is pegged at 6.8 per cent in fiscal 2021-22 and projected to be 6.1 per cent in fiscal 2022-23. Though this is lower than 8.7 per cent posted in 2020-21, India remains the fastest growing economy of the world.
In contrast, the US GDP dipped to 1.6 per cent in 2022 from 5.7 per cent a year ago and is projected at 1.0 per cent in 2023. The UK GDP also slumped from 7.4 per cent in 2021 to 3.6 per cent in 2022 and is projected to further slide to 0.3 per cent in 2023.
Much of India’s economic stability, despite the rupee depreciating to below 82 against a resurgent dollar, has been attributed to healthy rural economic growth. One of the main factors for India’s economic growth is the resilience shown by the rural sector with normal monsoon and higher production of foodgrains.
As per the Finance Ministry’s July MER, agriculture, which had not contracted during the pandemic, posted a robust positive growth of over 3 per cent in FY 2021-22. In FY 2022-23 as well, growth is evident with food grain production in the Rabi season estimated to grow at 1.2 per cent over the previous year. With wholesale prices of Rabi crops like wheat, jowar, maize and rapeseed also ruling well above their previous year levels, earnings of farmers are likely to be higher in FY 2022-23. Earnings will also get augmented under Kharif crops on the back of normal monsoons projected for FY 2022-23.
Agricultural exports now provide a strong channel for increasing the earnings of farmers as they touched a record high of USD 50 billion in FY 2021-22, posting a growth of almost 20 per cent over the previous year. However, unbridled agriculture exports may create domestic shortages as has been the case with wheat, whose ongoing procurement has significantly dropped in the current Rabi season following aggressive buying by private players for exports. The projection of a normal monsoon and prospects of earning higher income will likely increase area under Kharif 2022-23 crops as well.
Taken along similar lines, in 2008, India was at its peak of a dream run and tagged as the fastest growing economy in the world. With its annual growth rate touching 8-9 per cent between 2003 and 2008, India was hailed for its booming economy.
The Global Financial Crisis in 2008 upended the boom, though it affected India only modestly for two reasons ~ its stricter financial regulations and relatively large and closed domestic markets. However, after a brief dip in 2008-09, India’s economy quickly recovered to chart a V-shaped growth path.
A major factor attributed to India’s stability was a robust spending on consumer goods in the rural areas. This followed higher purchasing power among the people, thanks to a healthy agriculture growth and inroads made by the FMCG (fast-moving consumer goods) segment.
In the first decade of this millennium, India was able to lift a large proportion of its population above the poverty level. As per a seminar organised by FICCI (Federation of Indian Chamber of Commerce and Industry) in 2007, the “absolute level of poverty fell from 36 per cent in 1993-94 to 21 per cent in 2004-05). At the same time, government launched a slew of schemes, including improved agricultural practices, healthcare, education and rural banking.
This enabled the rural population, comprising around 65 per cent of India’s overall population to not just improve income from agriculture but also look at alternative livelihoods. This in turn increased spending power and stabilised India’s overall economy.
What we see today is a re-run of this resilient rural economy. In the fiscal ending March 2022 and continuing in 2022-23, as the economy opened up with number of COVID cases declining, economists are projecting a stronger growth. Rising GST collections and uptick in bank credit is aided by a resilient rural economy. Economists have reason to be upbeat.
Asha Ramachandran is a senior journalist. These are the writer's views.