Agricultural activity needs a priority. Rural connectivity in terms of physical infrastructure has to be developed
Is India’s economic slowdown in sync with the global synchronised slowdown? It is hard to find a definite answer, but in a limited sense it could be ‘yes’. Why one argues this is because India is still relatively more domestic-driven than external-driven; we do emphasise the significance of the external sector and its contribution to GDP and growth rate, but such overriding contribution of exports to India’s economic growth is yet to be felt, unlike China. This is clear by looking at the last three quarters’ data that show mostly continuous decline in exports—6.1% decline by registering $26.13 billion in September-end 2019 from $30-plus billion in earlier years.
So, the genesis of the problem possibly lies somewhere else. Surveys and ratings by the IMF, World Bank, WTO and Moody’s scare us to the extent that the growth rate could be falling dramatically from above 7% to around 5% in 2020.
What is apparent from India’s current slowdown is that there is a deficient sectoral demand, as seen in real estate. With the rise in NPAs, high-handedness and non-delivery by owners/builders, lack of credit, incompetency of the RERA, the sector witnessed a steady collapse of demand. With the fall of real estate demand, supportive sectors also took a hit. Steel, cement and other allied industries found production activities coming to a significant halt—this resulted in lay-offs. This structural fall in demand in metropolis and semi-urban areas created a ripple effect on workers’ incomes. The fall in incomes led to a fall in demand across India.
The situation in the construction sector is worse, which employs a large number of informal labour. Those who joined construction activities in metros and semi-urban areas in the last two decades went out of employment because the sector witnessed a slump. Most labour belongs to rural areas migrating to cities. Now they hardly find other employment in cities as they are mostly unskilled. This is forcing them to return home. Their homecoming is adding fuel to the fire, as there is already a serious rural distress with the agricultural production drying up. This additional labour force returning home finds it difficult to be absorbed. The oversupply of labour in the rural economy will put a downward pressure on rural wages, and this will result in a fall in rural demand. The prime indicators of consumption demand in the rural economy for some time have been sales of two-wheelers and consumption of non-durables, and these are witnessing a decline in demand.
So, what can be done? A combination of strategies may be adopted to bail the economy out of this morass. First, it is essential to revive the rural economy.
Agricultural activity needs a priority. A substantial amount of agricultural investment needs to be done to help farmers produce more and better. Rural connectivity in terms of physical infrastructure needs to be developed to allow rural agricultural production to be sold relatively at a higher price in semi-urban and urban areas to fetch more incomes for farmers. Micro-credit without collateral for these farmers may be ensured. Agricultural land reforms should be initiated in many states.
Second, it is important to revive real estate, especially construction. Most construction activities are in residential or commercial complexes, not so much in physical infrastructure. This is where rural workforce can find reasonable employment. Employment in cities will generate income for them, which will finally be sent to villages, and that is how the rural economy can be revived.
The announcement by the government to provide a stimulus package to revive the sector may be a good initiative, but not a sufficient condition as consumers lack capital or access to credit. More so, the negative sentiment towards real estate is damaging—many real estate developers are not enthusiastically looking at this market in spite of the reduction in corporate tax. The revival of NBFCs may boost the sector and revive the economy. The Indian economy can perhaps overcome the slowdown through a huge rural demand stimulus.
The author is professor, LBSIM, and former senior faculty, IIFT Delhi