GDP at -23.9%: Why Bharat may not be able to save the day

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September 7, 2020 8:00 AM

In his address at the launch of Garib Kalyan Rojgar Abhiyaan, PM Modi lauded the countrymen saying, “You have effectively prevented Coronavirus from spreading in rural India”. However, it is now spreading fast in rural areas.

With the lockdown having forced labour to migrate back to native villages, domestic remittances have taken a hit. Estimates peg the loss at Rs 15,000 crore a month.

The first-quarter GDP numbers for the current fiscal year show that the economy contracted by 23.9% year-on-year. Many commentators and analysts have compared this to the US economy contracting by almost 32% during the same period. That number, however, is the seasonally-adjusted annualised rate. The comparable number for India is -54%. Whatever the number, our economy is clearly on a weak footing.

In the current times, rural India, aided by agriculture, is being hailed as the saviour of India’s growth story. Rural India accounts for almost 47% of the GDP. The south-west monsoon has been good so far, with only the northwestern part of the country receiving below normal rainfall. Kharif sowing is up from last year. MSPs for the current marketing season, too, are up from last year.

The government has announced an increase in its procurement, thereby ensuring MSP for a larger share of agricultural produce. Labour is abundant in rural areas, owing to the reverse migration. Tractor and fertiliser sales have remained healthy. MGNREGA has seen an increased allocation of funds from the government. The Centre had announced support packages for rural folks which included free rations, expedited payment under PM-KISAN and Garib Kalyan Rojgar Abhiyaan. Many states topped it up with their own packages and policies to help the returning migrants in rural areas. All these factors seem to be in the right direction to enable rural India to be the superhero that saves the economy in the current crisis, but even superheroes have limitations.

MSP is available only to produce procured by government. The government is targetting ~40 million tons of wheat procurement this year—nearly 40% of India’s wheat production. So, the remaining 60% if the output is still vulnerable to market forces. Instances of mandi prices falling below the MSP are not unheard of. Moreover, government procurement is focussed on wheat and rice. While wheat and rice are grown by 59% and 39% of the farmers, those cultivating other crops have no such assured market. Other challenges related to making MSP available to small farmers have been highlighted by experts.

With increased kharif acreage and good monsoons, there are expectations of a bumper harvest. However, this can lead to the problem of poverty amidst plenty. Anecdotal evidence suggests that at the beginning of the lockdown, many farmers of ‘exotic’ vegetables faced this challenge. With restaurants and hotels shut, they were forced to sell their produce at rock-bottom prices or simply give it away. Dairy farmers, too, are seeing a drop in their realisations. A good output can hurt farmers’ realisations and might even push market prices below MSP.

However, rural is not just agriculture. Agriculture and allied activities make up around 18% of GDP, while rural is much more. According to NABARD All India Rural Financial Inclusion Survey, 52% of rural households are non-agricultural households. Cultivation makes up 35% of income of an agricultural household, while wage labour makes up 34% for agricultural household income and 43% for non-agricultural household income. This makes wage labour the dominant source of income. With the lockdown having forced labour to migrate back to native villages, domestic remittances have taken a hit. Estimates peg the loss at Rs 15,000 crore a month.

Chinmay Tumbe, in his 2011 research, estimated that domestic remittances financed over 30% of household consumption expenditure in remittance-receiving households that formed nearly 10% of rural India. These numbers are unlikely to have changed drastically. Tumbe’s research also talks of Bihar, Uttar Pradesh, Rajasthan and Odhisa as having a high dependency on domestic remittances. Estimates based on 2011 census data show that these four states still account for almost 50% of interstate migrants. International remittances which supported rural consumption too have suffered, with migrants returning to India and businesses taking a hit across the globe. Agri-allied activities and SMEs make up a big chunk of non-agricultural rural activities. These activities have a strong linkage with urban areas and urban spending. So, unless urban demand recovers, the rural economy will not be able to sustain by itself for long.

While MGNREGA has seen its budgetary allocation increase by `40,000 crore, it still guarantees employment for only 100 days to a rural household. A survey by Azim Premji Foundation suggests that, in the first 4 months of the fiscal, gram panchayats have already used up almost 50% of their MGNREGA funds and the project pipeline would have exhausted by August. Similarly, Garib Kalyan Rojgar Abhiyaan launched on June 20 in 116 districts is only a short-term quick-fix. What happens after 125 days elapse, or when MGNREGA funds run out?

In his address at the launch of Garib Kalyan Rojgar Abhiyaan, PM Modi lauded the countrymen saying, “You have effectively prevented Coronavirus from spreading in rural India”. However, it is now spreading fast in rural areas. According to a recent SBI research report, more than 50% of the new positive cases in July and August are from rural areas. Localised lockdowns and disruptions to economic activity can’t be ruled out in the days to come.

Despite high hopes, the agricultural sector posted a growth of 3.4% during the first quarter. While this was the only silver lining in the data release, 3.4% is not really an impressive number. Many analysts were expecting it to be close to 5%. The government has recently announced reforms to support the agricultural sector. These measures seek to enable broader market access to farmers, promote contract farming and development of supply chain infrastructure. While these have already been going on under the existing regime in one way or the other, the reforms will only facilitate better and faster change. For the rural economy to act as a buffer, much more will be needed. Rural India helped assuage some of the pain this time around, but it might not the next time.

The author is an economist.

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