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Rural demand has softened pandemic blow, but won’t revive economy: Experts


The positive story of the rural sector has softened the pandemic-induced blow to the economy so far, said economists, but the “only silver lining” in the ongoing fiscal year is unlikely to move the needle any further.

While improvements in rural demand will increase the sector’s share in quarterly figures of gross domestic product, those are insufficient to further cushion the impact of the pandemic and take the economy to ‘near zero’ growth this fiscal year, according to economists ET spoke to.

“The growth in the rural sector is the reason we are estimating not more than a 9-10% contraction in FY21,” said Arun Singh, the global chief economist at Dun and Bradstreet.

With other sectors of the economy still in the red, growth in rural demand implies it will have a larger impact on consumption, especially in the third quarter which captures both the festive and marriage seasons, said CARE Ratings chief economist Madan Sabnavis.

Agriculture’s share in gross value added (GVA) will increase to 17.3% this year from 14.6% in FY20, according to an India Ratings and Research (Ind-Ra) report. This augured well for states with a high share of agricultural output such as Punjab and West Bengal, it added.

Fiscal policy has also significantly impacted rural demand with much of the government expenditure on support schemes being front loaded, according to NR Bhanumurthy, vice-chancellor, Bengaluru Dr. BR Ambedkar School of Economics.

“The rural development ministry has spent all its funds within six months. That in itself should have an impact on not just rural demand but other sectors as well,” Bhanumurthy said.

A Crisil report has said rural demand was expected to restrict the slide in overall two-wheeler sales to 15-17% this fiscal year on the back of a greater preference for personal mobility.

However, such improvements are unlikely to result in a significant impact at the aggregate level, said Sunil Kumar Sinha, the principal economist at Ind-Ra.

“At the micro level you will see some of these figures turning out possibly better than expected. But indicators like tractor sales cannot even pull industrial growth out of the contraction,” Sinha said.

During a virtual conference in October, finance minister Nirmala Sitharaman had said that GDP growth would be in the negative zone or near zero despite signs of an economic revival, primarily due to a huge 23.9% contraction in the first quarter.

Soumya Kanti Ghosh, the group chief economist at State Bank of India, projected nominal agricultural GVA to grow 10.9% in FY21. Industry and services are expected to post a 14.8% and 1.9% contraction, respectively, in GVA.

Ghosh estimated the overall nominal GVA to shrink 3.2% along with a real GDP contraction of 10.9% for the year.

According to some estimates, the agriculture sector would have to grow at nearly 25-80%, depending on whether one assumes a contraction or marginal growth in the remaining sectors, to result in 0% GDP growth in FY21, with both scenarios being highly improbable.

On the other hand, economists said the absence of a strong performance in the rural sector would result in a deeper contraction.

“Positive growth in the rural sector forms a very critical part of our projections but if the improvements in rural demand do not hold out, these estimates will deteriorate further,” Sabnavis said.

Further, the reverse migration resulted in an abundance of labour in the rural economy contributing to its growth momentum, but the reversal of that trend implies such a momentum may not be sustainable, Singh of Dun and Bradstreet said.

“Q2 did not see a significant migration back to work whereas Q3 and Q4 will see this trend in a much larger way, which means the headcount in rural areas will go down. In those terms, one can expect the growth in rural demand to not be sustainable at such high levels,” he added.

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