India's rural economy is in danger of witnessing another disruption should coronavirus cases continue to rise. Even as other sectors have suffered a hit due to the economical impact of the pandemic, the agricultural sector has continued to grow.
The COVID-19-induced lockdown disrupted the agricultural supply lines even though the rural economy was performing well, according to DK Joshi, Chief Economist at CRISIL Ratings. Speaking to BOOM's Govindraj Ethiraj, Joshi said that the disruption in rural economy occured not due to the COVID-19 pandemic, but rather due to a disruption in supply distribution because of the lockdown.
"If the virus does spread to rural India at a faster clip, and I think in the harvesting season we see the cases increase, we could again see another sort of disruption coming in. There is a risk that if by the harvesting season, which is in October, if you don't have control over it (pandemic), it could be somewhat restrictive. Even if the crop production is good, I think it may not translate into lower inflation if that plays out," Joshi said.
CRISIL has revised its real GDP forecast for the year 2021 from -5% projected in May this year to -9%. A hit to the rural economy is likely to worsen India's overall GDP forecast for 2021.
Joshi also said that even though the rural economy has grown, it might not be strong enough to protect jobs and livelihoods. "It is helping in agriculture and the government's focus on the rural economy is also helping create jobs. That's true and similar things are not available for urban areas. But what is also true is that the construction sector for particular in the first quarter got hit by 50% and 70% of the employment in construction is in rural areas," Joshi said.
Watch the whole interview here.
The edited excerpts from the interview can be found below.
Govindraj Ethiraj: Rating agency CRISIL has now revised its real GDP forecast for the year 2021 from -5% projected in May this year to -9% now. The reasons are, of course, the continuing pandemic and the economic impact it has had on economic activity as well as the government not providing adequate support fiscally. Now, the permanent loss to GDP is 13% or 30 lakh crore rupees. Now, this is in contrast to other Asia Pacific economies, which will only see a 3% GDP hit, that is 3% will disappear permanently because all of the factories were shut or businesses were shut and economic output could not be created, or for that matter, delivered. We already slumped 23.9% or 24% in the first quarter of this year. CRISIL, by the way, had predicted a 25% slump. Now the only good news here is that agriculture has grown and will continue to grow and is likely to grow by about 2.5%. The question, again is whether agriculture will compensate and to what extent will it compensate not just for the economy and whether it will make up for some of those jobs that have been lost in the formal economy, or for that matter, even the informal economy. So to address this question, and get a better sense, I'm now joined by DK Joshi, the Chief Economist of CRISIL. Mr. Joshi, thank you very much for joining us. Before I ask you other questions, are numbers now more in alignment between what the government is releasing and between what you are putting together or projecting?
DK Joshi: Yeah, I think we are working with limited data. I mean, even the government data for April and May for industry and inflation was not released with full confidence and then because it had a low response rate. But the other indicators, I mean, which are, let's say your Google (inaudible) mobility or your power consumption, or what you hear from the auto sector, I think all of them were pointing towards a deep hit. And what we estimated was around 25% and I think it is quite aligned to what the government came out with.
Govindraj Ethiraj: Now let's try and understand, as you've revised from a -5% to -9%, what does that difference really mean? Or even the aggregate of a -9%? drop? What does that really mean in terms of what could be visible to us, maybe either is visible to us right now or will be visible to us.
DK Joshi: Well I think one hit of course, GDP is an overall measure of impact on the economy and not all sectors are aligned to the decline in GDP. Some might do better. As you pointed out, agriculture was one of them. But I think for an overall perspective, I think it would mean some pressure on the corporate sector. It would also mean generation of employment will become difficult compared to the base case scenario. So all the problems that were associated with the -5% get amplified as you move to a higher growth decline.
Govindraj Ethiraj: You had pointed out earlier that as we have more months of lockdown, it's actually a multiplier effect. One month plus another month of lockdown is not two months of lockdown, but effectively, it creates a cascading impact because. What's your sense in terms of the impact that we are seeing because of a continued lockdown?
DK Joshi: Lockdown is continuing but it is also becoming less and less stringent. So we are not comparing apples to apples. But what is true is that the more the virus load continues, and the more restrictions continue to be implemented, I think we will see the buffers in the system will keep getting eroded as you as the time passes by. So the ability of the system to cope up with the crisis in terms of providing income support, even in terms of fiscal support, all of them do come down. When you say -5% to -9%, it means the government's ability to raise tax revenue also reduces because GDP is the base on which you collect taxes. I think it means more hardships I would say so.
Govindraj Ethiraj: Why is India faring badly compared to other countries. For instance, you've drawn a comparison with other Southeast Asian economies?
DK Joshi: One of the reasons is that your initial conditions were much weaker. We were on a declining growth trajectory. There was stress in the financial sector already pre existing. GDP growth was at a 10 year low. The inflation was still quite high I mean compared to what RBI tolerates in terms of its inflation targeting. All this was pointing towards and I think the latest GDP print that came out for 2019-20 showed that the investments had contracted in the last quarter and consumption had slowed substantially. I also want to point out that the manufacturing sector was continuously in a negative growth trajectory for four quarters, which essentially means it was in a technical recession for four quarters. With this if you have weak initial conditions, then you get hurt even more. I mean, just as you have low immunity, I think you're under higher risk. So similarly, in the same vein, I think the stress on the economy rises and because of weaker initial conditions, stringent lockdown and the inability to provide adequate stimulus, I would say I think all of these have come together to spiral the economy down at a faster pace than what we expected earlier.
Govindraj Ethiraj: What is your outlook for manufacturing? But more importantly, our strength as a country has always been that we had, in some ways, leapfrogged, and we had the largest services economy. So what does that mean or how is that translating in an environment like this?
DK Joshi: Services is not a uniform sector in the context of the pandemic. Some services are still doing, I would say reasonably well. Let's say IT, exports, and few services like healthcare, etc. But apart from that, the ones with physical contacts are in very bad shape. So it's not a uniform basket, so to say. But in terms of manufacturing, I think what we have seen last year was a weakening manufacturing sector. We've seen a deeper hit to manufacturing than to the overall services in the first quarter. Now what we believe is that services will be slow to rebound because restrictions on some of the services will continue. But manufacturing will rebound much faster. This is what we saw in economies like China for instance. This is what the PMI data shows that manufacturing PMI is moving. So you will rebound quickly in manufacturing. Services will remain in more restricted mode going ahead. I think India is leapfrogging on the services front. I think some of the services which were growing faster of late, I think some of which have slowed down. But the others are still reasonably in better shape compared to what's happening to others.
Govindraj Ethiraj: 54% of confirmed cases today are in states like Maharashtra, Tamil Nadu, Karnataka and Andhra Pradesh. These are states which represent 36% of GDP. So, a lot of the areas which are obviously affected are also the most productive from an economic output point of view. So how do you see this evolving?
DK Joshi: Well, that's very true. As you rightly pointed out, they have a larger share in GDP. But I think what's also happening is that we're seeing resurgence in some of the metropolitan cities. So the virus which was flattening out is trying to resurface again. But now the problem is shifting more towards rural areas, smaller towns where the growth rates in the number of cases are much higher than these big cities. In the first half of the fiscal year, we've seen the rural economy do well, agriculture do well. Disruption was due to a lockdown in the month of April, particularly for agriculture supplies. This time if the virus does spread to rural India at a faster clip, and I think in the harvesting season we see the cases increase, we could again see another sort of disruption coming in. So the first disruption did not originate in the pandemic in the rural areas as much as it originated in the supply disruption because of lockdown. But there is a risk that I think the rural economy, if by the harvesting season, which is in October, if you don't have control over it, it could be somewhat restrictive. Even if the crop production is good, I think it may not translate into lower inflation if that plays out.
Govindraj Ethiraj: If the rural economy has grown, to what extent has that protected or is protecting jobs and livelihoods?
DK Joshi: I won't say to a great extent. I mean, it is helping in agriculture and the government's focus on the rural economy is also helping create jobs. That's true and similar things are not available for urban areas. But what is also true is that the construction sector for particular in the first quarter got hit by 50% and 70% of the employment in construction is in rural areas. I think the rural economy, construction also got hit as a result of COVID-19. It's in a somewhat better shape than the urban areas. It's not that it is vibrant. That's in a way a good news, particularly agriculture because it punches more than its weight in GDP. It has a lower share, but the employment contribution is higher. It is providing nutrition, which is very, very critical at this juncture. So from a food security perspective, India is, in terms of supplier food rent, reasonably well placed. I mean, compared to many other economies, even though it may be sinking faster in terms of GDP.