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Insights into Editorial: The rural economy can jump-start a revival

 

 

Context:

The second wave of the COVID-19 pandemic could be slowly receding with a decline in the official estimates of daily infections and deaths.

The economy is also very gradually getting back to normal, with many States beginning to ease some of the restrictions imposed in their lockdowns.

However, the challenge of an economic recovery is far more serious than the health pandemic despite official claims of there being an economic recovery.

 

Decline in GDP in health Pandemic time:

Last month, the National Statistical Office (NSO) released the estimates of the Indian Gross Domestic Product (GDP) growth for the fiscal year 2020-21.

The decline in GDP, at 7.3%, was slightly better than expectation, even though this is a gross underestimate of the reality given the methodological issue of underestimation of the economic distress in the unorganised sector.

 

Making things worse due to fragile economic situation:

  1. What makes economic recovery challenging is that this decline followed three years of sharp decline in GDP even before the novel coronavirus pandemic hit the country.
  2. Economic growth had already decelerated to 4% in 2019-20, less than half from the high of 8.3% in 2016-17.
  3. Since then, the slowdown in the economy has not only made things worse as far as economic recovery is concerned but also come at a huge cost for a majority of households which have lost jobs and incomes.
  4. The pandemic has only worsened an already fragile economic situation. The sharp decline in GDP was partly a result of the trend of a slowdown in economic activity since 2016-17.
  5. But a large part of the economic outcome in the first year of the pandemic is also a result of a mishandling of the economic situation.
  6. While a strict national lockdown certainly hit economic activity last year, what made matters worse was the less than adequate response from the Government in increasing fiscal support to revive demand in the economy.
  7. Many of the grand announcements remained largely on the monetary side without the enabling policy framework to help small and medium enterprises as well as the large unorganised sector which bore the brunt of the restrictions in economic activity.

 

Hunger and distress:

  1. A few months ago, the Right to Food campaign and the Centre for Equity Studies published a ‘Hunger Watch’ report which compared the pre-lockdown situation last year to the situation in October 2020 to assess the impact of the nationwide lockdown.
  2. In October 2020, 27% of the respondents said that they had no income; 40% respondents said that the nutritional quality of food had become “much worse”; and 46% of the respondents said they had to skip one meal at least once in the day in October 2020.
  3. The migrants have again become vulnerable due to the lockdown in different cities.
  4. While many have once again headed to their villages, a large population has got stranded in different parts of the country without work.
  5. The Stranded Workers Action Network, a group of individuals helping distressed migrant workers since last year, has been reaching out to workers for providing essential help.
  6. According to them, 81% of the people whom they reached out to said that work had mostly stopped since April 15, 2021 and 76% of the workers said they are short of food and cash and require immediate support.
  7. A large population is facing hunger and a cash crunch. The situation is only becoming more dire as the pandemic continues to rage on.
  8. Therefore, the central and state government should prioritise food and work for all and start making policy reforms right away.

 

Decline in jobs, income:

  1. The impact of declining incomes and job losses on demand is now visible even in rural areas.
  2. While real wages have continued to decline with the latest estimates of April 2021 showing a decline in rural non-agricultural wages by 0.9% per annum in the last two years, agricultural wages continue to stagnate.
  3. One indicator of declining demand is the decline in wholesale prices of most of the agricultural commodities.
  4. Cereals and vegetables, which together account for more than half of crop output, have seen prices decline on a year-on-year basis for more than six months now.
  5. This is happening at a time when international agricultural prices are at an all-time high.
  6. Some of this is reflected in the rise in inflation in pulses and oilseeds groups, both of which are largely imported.
  7. The net result is a peculiar situation where output prices for dominant agricultural commodities in the domestic market are declining while consumer prices of essentials such as edible and pulses are contributing to rising inflation.

 

Inflation threat put agricultural incomes under strain:

  1. Rising inflation further threatens to reduce the purchasing power of the rural economy struggling with declining incomes and job losses.
  2. This is further compounded by the shift in terms of trade against agriculture which has put agricultural incomes under strain.
  3. The rise in input prices for diesel has already contributed to rising input costs but the recent increase in fertilizer prices for most of the complex fertilizers have also added to the misery of farmers.
  4. Rising inflation in international commodity prices also threatens the rural non-farm economy.
  5. A majority of the rural non-farm sector already struggling from low demand has now seen its profit margins getting impacted due to the increase in the cost of raw material.

 

In rural Areas, Agriculture, a key driver:

  1. Despite the lack of fiscal support, an important contributor to the better-than-expected economic performance was the resilience of the rural economy, particularly the agricultural sector.
  2. While rural areas were the first point of refuge for a majority of migrants who walked back thousands of kilometres from urban metropolitan areas, agriculture was the only major sector (other than electricity, gas, water supply and other utility services) which reported an increase in Gross Value Added (GVA) in 2020-21.
  3. It not only provided jobs to returning migrants but also sustained the economy in the rural areas.
  4. Agriculture has not only been the biggest saviour during the period of the pandemic but has consistently been an important driver of the economy throughout the last five years which has seen the economy slow down sharply.
  5. The average growth rate in agriculture GVA in the last five years, at 4.8%, is significantly higher than the GVA growth of the economy as a whole, at 3.6%, in the last five years.
  6. However, given that the economy has already suffered last year, any recovery will largely be a statistical artefact driven by the low base of last year rather than a real recovery.
  7. The fact that a majority of households have already suffered job losses and income decline which are yet to regain their pre-pandemic levels suggests caution in making any inference on an economic recovery.

 

Conclusion:

Unfortunately, so far, the rural areas have been lagging behind in the overall rate of vaccination.

Despite the setbacks, the rural economy including the agricultural economy continues to remain crucial for any strategy of economic revival.

But for that, it will require proactive intervention from the Government to protect the rural population by speeding up vaccination.

At the same time, rural areas will also need greater fiscal support, both in terms of direct income support to revive demand in the economy but also through various subsidies and protection from the rising inflation in input prices.

This urgent intervention is not just necessary to support economic revival but also prevent another humanitarian crisis, this time as a result of economic mismanagement.