At a time when the country is in the throes of a prolonged Covid-19 crisis, rural India seems averting another distress period. Mandi prices of key rabi crops are not only above the respective MSPs, but are significantly higher than the year-ago level. Higher market prices, coupled with robust production, are boosting farmer’s income and profitability.
India’s hinterland is witnessing a consumption revival, which at first glance looks like good news for Asia’s third-largest economy. Sales of motorcycles and tractors are near or above pre-pandemic levels. Part of this recovery is due to increased cash flows in rural areas thanks to good rainfall, robust crop output, and government handouts to workers and farmers to offset the coronavirus crisis.
But even with rural areas home to 70% of the nation’s 1.3-billion people and contributing roughly half of India’s gross domestic product, the $2.7 trillion economy is still expected to contract for the first time in more than four decades. That’s because rising farm incomes don’t appear widespread and non-farm workers worried about job losses aren’t spending.
Preliminary calculations suggest that farmers’ earnings per hectare of wheat — one of India’s two main crops — will increase by about 9% to 16,017.96 rupees ($214) this year. That’s based on an estimated crop area of 33.4 million hectares and total output of 107 million tonnes, and assuming that cost of production stays unchanged from a year ago.
After accounting for inflation, those gains will be meager at best in a country where 93 million hectares of the total 140 million-hectare agriculture land come in sizes of less than one hectare, leaving farmers with little to invest in mechanization or spend to revive demand in the economy.
Mahindra’s June tractor sales jumped 47% month-on-month to 35,844 units, but the growth was a modest 8% from a year ago, when sales were already dampened by a protracted economic slowdown. It’s similar with Hero Honda: sales of 450,744 units represent a more than four-fold growth from a month ago, but are 27% lower than a year ago.
To ease the pain in farm areas, Prime Minister Narendra Modi’s government increased this year’s allocation for a rural jobs program. But those jobs pay just Rs. 202 a day, lower than the officially prescribed minimum wage of Rs. 347 a day for unskilled farm labor. This is unlikely to drive demand in India’s consumption-led economy. Rural growth, at best, will only keep the overall growth from slipping further.