Towards better days?

November 4, 2020 6:45 AM

Financial constraints could continue to bite, and if the availability of credit remains weak for longer, it could weigh on India’s potential growth

However, we think financial constraints could continue to bite, and if the availability of credit remains weak for longer, it could weigh on India’s potential growth.However, we think financial constraints could continue to bite, and if the availability of credit remains weak for longer, it could weigh on India’s potential growth.

By Pranjul Bhandari, Aayushi Chaudhary & Priya Mehrishi

Recently released wage data shows that in nominal terms, rural wages rose by a buoyant 8.7% y-o-y in June (versus 8.6% in May, and well above the 3.9% average growth in FY20).

However, rural wages also showed early signs of moderation in real terms (1.3% y-o-y in June, lower than 1.9% in May). The uptick in recent months has been across the board, though more stark for non-agricultural activity, particularly sectors associated with tobacco, handicraft, weaving and construction. The rise in rural wages over the last few months was expected. As argued in a previous report, rural India witnessed a perfect storm over the lockdown period.

It did not face as stringent a lockdown as urban India did, government spending remained strong, and monsoons were normal during the summer crop season, raising the demand for labour.

But trends in rural labour employment have fallen since. From July onwards, the monthly rise in rural employment has softened, and over the next few months, rural wages could soften too. Indeed, demand for rural-centric products has begun to ease.

This moderation in rural demand was expected. In an earlier report, we had argued that notwithstanding a temporary uptick during the summer crop season, rural wages may not rise sustainably—increased MGNREGA outlays don’t seem enough, real estate led employment in construction sites may remain weak for longer, and rising rural indebtedness could hurt. In fact, we had argued that as rural opportunities wane post the harvest season, migrant labour will want to return to their urban jobs.

Recall that about 30m migrant workers went back to their rural homes during the pandemic lockdown. This created labour shortage in urban areas. But anecdotal evidence over the last few weeks suggests that workers are returning to their urban jobs. (For instance, there are media reports that around 70% of migrant workers employed in the Gurugram-Manesar region, which accounts for nearly 50% of India’s vehicle production, have returned).

We have been pointing out three major supply-side constraints through this pandemic—logistics, availability of labour and access to finance. Logistics and transportation constraints have shown signs of easing. In this report, we have highlighted that labour constraints may ease too, as rural activity moderates and labourers return to their urban jobs.

However, we think financial constraints could continue to bite, and if the availability of credit remains weak for longer, it could weigh on India’s potential growth.

 

Bhandari is chief India economist, Chaudhary is an economist and Mehrishi, economics associate, HSBC Global Research. Views are personal

(Edited excerpts from HSBC Global Research’s India Economics Comment
dated October 30)

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