Steeply fallen wages, widespread infections to hit rural demand despite record foodgrain output: India Ratings

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May 27, 2021 9:49 PM

A slowdown in non-agricultural activities and in turn on non-agricultural income will have a serious impact on rural demand, since non-agricultural income constitutes nearly two-thirds of the rural income.

Rural demandWhile demand for agricultural credit and agricultural inputs such as fertilisers/pesticides may remain strong in view of the third consecutive year of near-normal monsoon, the demand for FMCG products, automobiles especially tractors and two-wheelers is expected to suffer, India Ratings economists say.

Notwithstanding the record agricultural produce, rural demand is likely to remain muted in FY22 due to the second wave of the pandemic which comes on the back of the massive spread of the virus in the hinterland, and the steeply plunging rural wages, warns a report.

On Tuesday, the agriculture ministry said the foodgrain production is estimated to rise 2.66 per cent to a new record of 305.43 million tonnes in the current crop year 2020-21, on better output of rice, wheat and pulses amid good monsoon last year. In the 2019-20 crop year (July-June), the foodgrain output comprising wheat, rice, pulses and coarse cereals stood at a record 297.5 million tonnes.

India Ratings chief economist Devendra Pant and principal economist Sunil Kumar Sinha attributed their projection despite the fact that the second wave of the pandemic has hit the country with such severity that both caseloads and fatality per day have reached a new high, yet it has been less disruptive for carrying out economic activities than the first wave, and its economic impact will be felt more through the loss of demand impulse than supply-side disruptions.

More importantly, they say the loss of demand-side impulse is expected to be more pronounced in rural areas this time, notwithstanding the Met Department forecasting near-normal monsoon.

“Given this, even if agricultural output/income remains intact, there is a strong likelihood that the expenditure behaviour/pattern of the rural households will be different. With rising infections, rural households will be more concerned about the rising/or an expected rise in health expenditure, forcing them to cut down on non-essentials.

They present three reasons for their projection. As government share in health expenditure is only 27.1 per cent, an overwhelmingly large share (62.4 per cent) is borne by households. If they are forced to take debt to meet health expenses, it can be more damaging than other types of household debt, limiting one’s ability to work, leading to depletion of household savings and unanticipated economic shocks.

Secondly, the adverse impact on rural demand/expenditure is because of the decline in non-agricultural activities, as most of these activities require high human contact, be it work of carpenter, blacksmith, auto/tractor/ bicycle repair, construction, transport, storage etc.

Thus, even the jobs under the national rural employment guarantee scheme may be less effective, because the breadwinners get infected.

A slowdown in non-agricultural activities and in turn on non-agricultural income will have a serious impact on rural demand, since non-agricultural income constitutes nearly two-thirds of the rural income.

The third factor that will hit rural demand/expenditure is the low rural wages. In fact, the largest chunk of the rural population consists of daily wage earners and not farmers. Rural wage growth both for agricultural and non-agricultural activities has declined lately.

Average agricultural wage growth during November 2020-March 2021 plunged to 2.9 per cent from 8.5 per cent during April-August 2020, and in November 2019-March 2020, it was 6 per cent. Similarly, wage growth for non-agricultural activities during November 2020-March 2021 declined to 5.2 per cent from 9.1 per cent during April-August 2020 and in November 2019-March 2020, it was 4.3 per cent.

Given these scenarios, while demand for agricultural credit and agricultural inputs such as fertilisers/pesticides may remain strong in view of the third consecutive year of near-normal monsoon, the demand for FMCG products, automobiles especially tractors and two-wheelers is expected to suffer, they say.

They conclude that only the wayout to drive vaccination and in the interim, providing free rations, income support, higher allocation under the rural jobs scheme would go a long way in reducing the injury inflicted by the pandemic in the rural area.

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