Unlock BFSI 2.0: Rural India revival difficult to sustain, say economists

Experts who participated for the panel discussion, titled - Will Rural India Be the New Driver of Growth?
Some of the top economists of the country have cautioned against euphoria over Bharat sustaining India, and said it may not last as structural problems still afflict rural areas. 

They were speaking at the first of a series of webinars being organised by Business Standard under “Unlock BFSI 2.0”. 

The discussions were moderated by Tamal Bandopadhyay, consulting editor, Business Standard. 

At the panel discussion titled “Will Rural India Be the New Driver of Growth?”, Pronab Sen, country director of the International Growth Centre and former chief statistician, said it was a misconception that the entire rural India was doing well amid the outbreak of Covid-19.

Pegging remittance loss to rural India at Rs 60,000 crore in four months, Sen said, “Part of the villages dependent on remittances will not do as well as those six states where the bulk of the procurement takes place. We tend to club all of rural India in one basket.”

Pranjul Bhandari, chief India economist at HSBC, said, “Once the kharif season is over after October-November, the sheen of rural demand will be over, and rural wage growth may not sustain.” 

She said as long as urban India did not pick up, rural India would also suffer. A weak financial sector, she added, would also impact growth in rural India.

Sonal Varma, managing director and chief economist (India and and Asia ex-Japan) at Nomura, warned that the rural revival theme should not be overplayed.

"Unless construction activities bounce, it remains hard to see a pick-up in rural activity. Till now, there hasn’t been any acceleration in rural wages, and land prices have also remained lacklustre,” she said.

Rathin Roy, outgoing director of the National Institute of Public Finance and Policy, said while manufacturing and services sectors had tanked, agriculture had not, because of which agriculture would form a much larger part of gross domestic product (GDP) in 2020-21. “I would hope that even if Covid affects rural India, it will not diminish output. This is partly due to high unemployment in rural India. Even if 20 per cent of the workforce cannot go to work, they can be replaced by those seeking work,” he said.
Sajjid Chinoy, chief economist at JP Morgan, said agriculture might not be the solution to rural woes as it constituted less than 40 per cent of rural consumption.

”A lot of consumption that has been celebrated in the last five years has happened on the back of debt, as households accrued debt and ran down their savings. If you believe the current economic shock is going to be quasi-permanent, then that behaviour should reverse as households become more cautious and savings go up," Chinoy said. As a result, he said, consumption would be hit harder.

He, however, said the terms of trade were slowly moving in favour of the farm sector. "For the last four years, agriculture has grown at 4.8 per cent on average. This was less than a per cent in the previous four years. The reason why the rural economy was depressed was that despite goods production, food inflation was zero per cent. Now, for the past 12 months, it has been more than 7 per cent," he said. 

Soumya Kanti Ghosh, group chief economic advisor at State Bank of India, said allied activities were the cornerstone of rural parts and unless that was revived, rural economy won't revive on a sustained basis. 

Pointing out that urban income was 1.8 times of rural income, he said unless urban areas recovered, it would not help the economy much.

On Rs 1 trillion agri infrastructure fund announced by Prime Minister Narendra Modi, Sen said areas such as warehouses required human capital and not much would change unless that came around.

Ghosh said 24 per cent of the fund was for the power sector but there was still no proper policy for the sector and discoms were bleeding dry. 

Roy said that committing finances to the rural sector was not enough unless there was a strategy on how to spend the money. He spoke about the need to eliminate middlemen in farm markets and reduce the cost of input for farmers.

Sen said it was a misnomer that India was a food surplus economy as there was a deficit in the rural economy. 

He said though bigger companies were also relocating to rural India, there was a dearth of governance structure to understand the non-farm sector there. 

Varma listed food processing and the targeted exploitation of the export market as possible policy measures, apart from comprehensive end-to-end reforms in agriculture, to boost rural India in the medium term.

To a query on farm debt waiver, Ghosh said it should be legally banned in the Indian context. 

When asked about their estimates of GDP contraction for FY21, Sen pegged it at 11-13 per cent, Ghosh at 6.8 per cent, Bhandari at 7.2 per cent, Chinoy at 6-7 per cent, and Varma at over 6 per cent. Roy refrained from projecting the number at constant prices, but pegged the contraction of GDP at current prices at 13-17 per cent. The experts put riders on their projections.

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