Thread by @SahilKapoor

New Report on Agri & Rural Economy- Curb Your Enthusiasm

edelweiss.in/research/marke…

Amid continued increase in Covid cases and with most activity indicators now losing momentum or stagnating at current low utilization levels after sharp rebounds, a large segment of market is still pinning hopes that rural economy will continue to play the mitigator card.

We reckon there are indeed some green shoots in the rural and agriculture sector, but they come with enough riders:

Watch out for caveats in the high frequency rural activity data: (1) while sowing patterns are stronger YTD, land yields on an average are growing at mere 3%, (2) Despite bumper Jun-July, tracker sales FYTD are down 4%, and less than 1/3rd of farming community purchases tractor)

(3) consumer non-durable goods growth (proxy of rural spending) is still below trend, (4) higher MGNREGA wages and food inflation historically have not implied higher rural wages.

Demand driven policy support to rural labor comes at the cost of segmented labor market and weaker labor productivity. The wage and productivity of the urban migrant labor is much higher, which when switched to rural will only weaken rural wages.

The overall job addition since February appears skewed towards farm sector as against non-farm sector. Again, given the farm sector is marred with disguised unemployment and underemployment, the aggregate labor productivity falls further and does not augur well for medium term.

Interestingly, rural employment gains are fading as peak agri season is about to get over.
Demand shift to rural sector still a net loss to effective aggregate demand: Demand substitution to rural may be a loss to net demand given urban PCE is 1.8x of rural PCE

Besides, amid large reverse-migration one can expect excess labor, reduced productivity and downward wage pressures in the rural economy, placed alongside with labor shortages and higher artificial wages in the urban economy.

Watch out for swiftly slowing rural policy spending momentum in rest of FY21: Higher rural policy thrust post Covid in the form of direct cash transfers, NREGA etc. implied overall rural sector expenditure will be higher than budgeted in FY21

Centre’s agriculture and rural spending has seen a massive surge of 124% in 1QFY21 led by frontloading of budgeted expenditure and enhanced scheme allocations. However the rural spending momentum could slow swiftly for rest of FY21, unless fresh stimulus is added for the sector.

Mind it, agriculture can’t be pinned as growth downtick mitigator: Despite growing in the positive territory and being a positive contributor in FY21, agri will unlikely be able to break the low normal growth trap that it is stuck in for years and is likely to be sub 3% in FY21

We note agri share in GDP has been falling and stands at <14% now. Thus, a stronger rural sector is likely to act as a mitigator to the current downturn, albeit won’t be able to offset the downturn by any meaningful terms.

Low hanging fruits worked upon in rural and agri sector but long way to go: Inefficient agriculture value chain continues to be a binding constraint. The terms of trade (ToT) remain unfavourable for farmers even when the sector enjoys cycles of positive net ToTs.

Besides, sustainable high wages in rural sector and higher labor productivity in rural sector will require genuine pick up in non-farm activities, given construction and manufacturing share in rural employment is growing.

There have been baby steps to improve farm and non-farm sector productivity but we have a long way to go before self-sustainability is achieved in the sector.