Agriculture today is the lone bright spot in an otherwise gloomy environment. To be sure, it can’t pull the economy out of the trough, given it accounts for just about 14% of the GDP and only 30% of the rural economy. But, with 60% of workers in the hinterland engaged in agriculture, rising farm incomes can support consumption. However, unless the rural economy as a whole gets going, consumption can’t really get a big boost. Right now, though, there are few signs of this; while welfare schemes and the like will help, trade, manufacturing and construction activity are all sluggish. And, rural wages are unlikely to rise, which means demand too will stay subdued. Moreover, with migrants not having worked for several months, remittances would be small, offsetting some of the benefits from the social schemes and the good rabi harvest.
As of now, agriculture is expected to grow at a real rate of 3-3.5% on the back of a 4% growth in FY20 and 2.4% in FY19; some economists estimate the growth may be closer to 2.5%. That, then, would result in a nominal agri-GVA of about 7-7.5%, lower than the five-year average. These estimates assume the rains don’t suddenly play spoilsport, and farmers are able to get the sowing, transplanting and harvesting done without a hitch. So far, the sowing season has been an excellent one, up about 20-25% over last year’s levels, thanks to an early and good monsoon as also more hands in the fields. The good news is that the farmers seem to have sown much more of crops such as oilseeds and pulses, but it is early days yet.
While it is encouraging that tractor sales have bounced back in June, it must be remembered that sales in April and May were subdued—understandable because of the lockdown. If one compares April-June sales, these—lower by 14%—are at a four-year low, and therefore, it would be wise to wait till August or September to see if the trend sustains.
The high expectations, especially in the stock market circles, are therefore premature. While farm output could hit 300 million tonnes or more, farmers need to get a good price for the crops; in recent years, the terms of trade haven’t often been in their favour. Horticulture, whose production has exceeded that of foodgrains since the crop year 2012-13, especially, is prone to price fluctuations. In early April, farmers lost out on perishables—fruit and vegetables—in the local markets because demand was lower and in the export markets because they couldn’t send the goods in the midst of the lockdown. There was also a delay in harvesting foodgrains, and a shortage of both labour and transport also posed problems. While both farmers and traders were reported to have hoarded grains, which they sold once the mandis reopened, the lack of linkages and marketing support is an issue. Although the APMC may have been dismantled in states such as Maharashtra, farmers are unable to sell to wholesalers or retailers, nor is the eNAM platform the efficient trading mechanism it was meant to be. The government’s agri-reforms—a Rs 1 lakh crore infrastructure fund to strengthen the value chain and a Rs 10,000 crore scheme to assist unorganised micro-food enterprises among others—will help only a couple of years down the line.
It is not clear whether farm wages will rise meaningfully this season. Typically, when bigger farmers—those who own large tracts of land—have earned, they are able to pay workers. The rabi crop was reasonably good, but with many migrants still in the villages, it is possible that wage increases would be subdued. Between Q12016 and Q32019, the increase in rural agri wages—based on the three-month moving average—ranged between 2.4% and 7.9%; in Q32019, the increase was about 4%.
If consumption is to get a boost, however, rural wages need to rise. As Pranjul Bhandari, chief economist at HSBC India, wrote in a paper in August 2019, rural income depends on construction, which in turn depends on shadow banks, ‘by more than meets the eye’. Bhandari observed that while most of the analysis relating to rural stress was limited to low food prices, agriculture explained only a part of the story. Rural folk, she pointed out, have diversified into other activities, particularly construction, where the share in rural employment is up sharply since the early 2000s. With construction wages having fallen in recent times, rural stress has been amplified. Construction has been hit by the near absence of funds from the NBFC sector. Over the years , real estate developers had become increasingly dependent on NBFCs, sourcing as much as 60% of their borrowings from shadow banks in FY19 (up from 35% in FY12). A year since then, and post the pandemic, the environment has become extremely challenging; so, it is highly unlikely that too many NBFCs are going to fund rural construction activity.
Data from CMIE shows rural India has recovered faster from the unemployment lows; in the week to June 28, the rural unemployment rate, at 7.6%, was close to pre-pandemic levels. The higher allocation for MGNREGA no doubt helped; the programme registered 565 million person-days of employment in May compared with an average of 250 million in Jan-Feb. However, this also suggests there were not too many other work opportunities. Until we see a sustainable pick-up in trade, commercial activity, construction and manufacturing, it would be hard to call a rebound for rural India.