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India’s economic revival from the damage caused by the Coronavirus pandemic appears to be underway. The economy contracted by 7.5% during the second quarter of the financial year, which actually beat expectations of a 10% contraction. Numerous reports peg India’s growth next year to be back in the positive, albeit to varying degrees.

Perhaps coming from an unlikely source, the rural sector has actually been able to help kickstart the recovery. The monsoons have been good this year and the government has offered support in the form of its stimulus packages. Many migrant workers have also moved back to their hometowns and a record number of jobs have been created as a result of the National Rural Employment Guarantee Act (which guarantees 100 days of work annually for informal labourers). This has led to an increase in spending in the rural economy.

Investors are taking note of this and making changes to their portfolios accordingly. Tractor sales have gone up and as such, the share prices of Mahindra & Mahindra and Escorts Limited are both up by 20% since the start of the third quarter. Fast-moving consumer goods (FMCG) firms like Hindustan Unilever and Britannia, along with Hero Motocorp, India’s largest maker of two-wheelers, have also reported an increase in rural demand.

The spending we are seeing from the rural areas is largely due to a short-term increase in income. The recovery at large can not rely on the rural economy to get the Indian economy back to where it needs to be. Observable data shows us that while rural incomes increased between May and August, they began to decline again in September, down 0.3% and 1.3% for agricultural and non-agricultural labour respectively from the year before. In fact, non-agricultural wages this year are lower than what they were even 5 years ago in real terms.

Another indicator that shows us the health of the rural economy is the inflation rate. Specifically, the inflation rate with respect to wholesale prices, which has declined by about 5.5%. Cereal inflation has also been on the decline, along with some of the major cash crops. The falling prices are a part of a larger trend of farmers receiving low prices for their produce. The new farm bills introduced this year are meant to address this, but whether their situation will improve remains to be seen. The agricultural market will be totally deregulated which is supposed to give farmers more freedom with respect to how and to whom they sell their crops. This will allow farmers to bypass the mandis which in many parts of the country are a detriment to their incomes.

The laws, however, have been met with fierce protests. Farmers, especially those from the North, seem to prefer the support that the Mandis offer against the potential of the free market. One thing that we can say with a relative degree of certainty is that structural reforms are needed. The kind of spending we are seeing in rural areas today does not involve the procurement of real wealth. It is merely the sign of a sudden but temporary increase in incomes.

The migrant workers who moved back home will in time make their way back to the urban areas because the kind of opportunities they are looking for is just not available where they are. Monsoons have always been unpredictable in this country and therefore a bad monsoon next year or for the next two years will see incomes dwindle sharply. The employment guarantee act is a positive move from the government, but it is not a long term solution. Reskilling the rural labour force would be a better way of ensuring that these individuals gain employment, and will likely be able to do so without government support.  

For feedback and views, write to pavan@bclindia.in 

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