Rural demand picking up but can’t substitute for urban demand; Q1 GDP likely to shrink 17%

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August 28, 2020 6:48 PM

Since the share of agriculture in India’s gross value added is about 17 per cent, rural demand at best can extend support to consumption demand, but cannot be a substitute for urban demand.

rural demand, urban demand, economic recoveryThe government needs to have a well-crafted strategy in place, both to continuously monitor the progress of kharif crop and prevent the distressed sale of kharif harvest.

Even as the rural demand slightly picks up and the agriculture sector is expected to become the growth engine of economic recovery, they cannot offset the fall in urban demand. Since the share of agriculture in India’s gross value added is about 17 per cent, rural demand at best can extend support to consumption demand, but cannot be a substitute for urban demand, said a report by India Ratings. After a massive migration towards rural areas, the supply of workers in the agriculture sector shot up, increasing productivity. However, the flip side of high agricultural production levels could be lower prices of agricultural commodities impacting agricultural income itself, India Ratings added.

The Ind-Ra report, therefore, suggested that the government needs to have a well-crafted strategy in place, both to continuously monitor the progress of kharif crop and prevent the distressed sale of kharif harvest. Nevertheless, the agriculture sector remained largely immune from the disruption caused by the coronavirus and is expected to grow at 3.5 per cent on-year in FY21. 

Also Read: Rural economy is not just agri, MGNREGA jobs; diversified policy needed to make economy resilient

Q1 GDP estimates

The severe impact of coronavirus on the production, supply, trade channels, and various sectors, is likely to shrink the Q1 GDP for the first time since FY80. The activities, especially in sectors such as aviation, tourism, hotels, and hospitality, almost came to a standstill during the lockdown. Though the non-agricultural economic activities are slowly improving, they are still much lower than pre-COVID-19 level. India Ratings has estimated that the economy in the first quarter will contract by 17.03 per cent. 

Meanwhile, the optimism may be overblown that the Indian farm sector’s resilience against coronavirus and government’s rural jobs support will cushion the country’s economy from a deep impact this year. The government spending on agriculture and rural economy, sale of tractors, and support through MGNREGA have all been positive, but it is probably still a case of over-optimism, Sreejith Balasubramanian, Economist — Fund Management, IDFC AMC, said in a report this week.

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