Rural demand to support economic recovery but cannot substitute for urban demand: Ind-Ra

As the share of agriculture in India's gross value added is about 17 per cent, rural demand at best can extend support to consumption demand but cannot be a substitute for urban demand, India Ratings and Research (Ind-Ra) said on Friday.

The COVID-19 led business disruptions during March-end to May have been so severe for the production, supply and trade channels, and the activities especially in sectors like aviation, tourism, hotels and hospitality that FY21 GDP growth is expected to contract for the first time since FY1979-80.

Although non-agricultural economic activities are slowly limping back, they are still much lower than pre-COVID-19 level. Ind-Ra expects Q1 FY21 GDP growth to come in at negative 17.03 per cent. The current account in Q1 FY21 is expected to record a surplus of around 18 billion dollars.

However, one sector that has largely been not impacted either during the lockdown or even thereafter is agriculture. Ind-Ra expects the agricultural sector to grow at 3.5 per cent year-on-year in FY21.

After several years, this sector has witnessed three consecutive good harvests -- rabi 2019, kharif 2019 and rabi 2020. Moreover, the adequate pre-monsoon rainfall followed by the timely arrival of monsoons in most part of the country has led to an increase in the total kharif sowing area in 2020 in comparison to the last year.

The rainfall and area sown so far indicate that the country is headed towards a good 2020 kharif harvest, notwithstanding the floods in several areas. Besides agricultural output, it is believed that many factory workers who returned to their rural hometowns in the wake of nationwide lockdown will add to the rural demand.

Any two or three consecutive good harvests generally translate into a robust rural demand. So, said Ind-Ra, the hope is that while the industrial and services sectors are still struggling to recover from the adverse impact of COVID-19, the agricultural sector could become an engine for economic recovery.

However, a large part of the rural demand, notwithstanding the encouraging sales number of motorcycles and tractors in June comes from consumer non-durables.

No wonder, among the use-based index of industrial production classification data, the first category to record positive growth in the post lockdown period is consumer non-durables, which grew 14 per cent year-on-year in June.

However, the flip side of high agricultural production levels could be lower prices of agricultural commodities impacting agricultural income itself, said Ind-Ra.

"The government thus needs to have a well-crafted strategy in place, both to continuously monitor the progress of kharif crop and prevent the distressed sale of kharif harvest."

( With inputs from ANI )