The second covid wave has brought back another round of lockdowns and its associated consequences. In fact, it has hit the country with such severity that both case load and fatality per day have reached a new high. Yet, COVID 2.0 has been less disruptive for carrying out economic activities than COVID 1.0. India Ratings and Research (Ind-Ra) believes its impact on the economy will be felt more through the loss of demand impulse than supply-side disruptions. Also, the loss of demand-side impulse is expected to be more pronounced in rural areas than in urban areas, notwithstanding Indian Meteorological Department’s forecast of a near normal monsoon in 2021.

COVID 1.0 was largely an urban phenomenon, despite the large-scale reverse labour migration. In fact, what saved the rural areas during COVID 1.0 was the timely arrangements the state governments had put up to quarantine migrant labours before letting them enter their homes and intermingle with the local population. This prevented the spread of COVID-19 in rural areas and the production activities and in turn rural consumption largely remained unimpacted. 

However, situation in COVID 2.0 is different as the highly infectious mutated strain of COVID-19 has already spread to rural India. Health ministry statistics show that the country’s 394 districts out of 718 had a case positivity rate of over 10% on 20 May 2021. Such a high rate of positivity rate is being recorded even when the level of testing is low in rural India. This means that the pandemic in many areas may be spreading and/or has already spread without getting adequately captured in official statistics. This may result in inadequate government intervention to contain the pandemic and higher fatality. 

Figure 1


In a situation like this, even if agricultural output/income remains intact, there is a strong likelihood that the expenditure behaviour/pattern of rural households will be different. With rising COVID infections, households in rural areas would be more concerned about the rising and/or an expected rise in health expenditure and would cut down on non-essentials. As such, the share of government in the current expenditure on health in India is only 27.1% and an overwhelmingly large share of 62.4% is borne by households. Also, if they are forced to take debt to meet out of pocket expenses on health, it can be more damaging than other types of household debt. As these expenses generally occur during illness, it limits one’s ability to work, leading to depletion of household savings and unanticipated economic shocks. According to an estimate over 60% of the rural households with hospitalised cases borrow, sell their assets (including gold) or rely on contributions from friends and relatives to pay for inpatient care. 

The second factor that will adversely impact the rural demand/expenditure during COVID 2.0 is the decline in non-agricultural activities, as most of these activities require high human contact, be it work of carpenter, blacksmith, auto/tractor/cycle repair, construction, transport, storage etc. Thus, even the employment offered under the Mahatma Gandhi National Rural Employment Guarantee Scheme in rural areas may be less effective, if family breadwinners fall to COVID-19 infection. The slowdown in non-agricultural activities and in turn on non-agricultural income will have a serious impact on rural demand, since non-agricultural income constitute nearly two-third of the rural income. 

The third factor that will impact rural demand/expenditure unfavourably in FY22 is rural wages. In fact, the largest chunk of rural population consists of daily wage earners and not farmers. Rural wage growth both for agricultural and non-agricultural activities has declined lately. Average agricultural wage growth during November 2020-March 2021 declined to 2.9% from 8.5% during April-August 2020 (November 2019-March 2020: 6.0%). Similarly, wage growth for non-agricultural activities during November 2020-March 2021 declined to 5.2% from 9.1% during April-August 2020 (November 2019-March 2020: 4.3%).

Figure 2


Under the aforementioned scenario, while demand for agricultural credit and agricultural inputs such as fertiliser/pesticides could remain strong in view of third consecutive year of near normal monsoon, the demand for FMCG products, automobiles especially tractors and two-wheelers is expected to suffer. 

Ind-Ra believes the answer to the current economic woes lies in the domain of medical sciences alone and the focus has to be on strengthening the ongoing vaccination drive. In the interim, providing free rations, income support, higher allocation under the Mahatma Gandhi National Rural Employment Guarantee Scheme would go a long way in reducing the injury inflicted by the pandemic in the rural area. 

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Analyst Names

  • Dr. Sunil Kumar Sinha

    Principal Economist and Director Public Finance
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    +91 124 6687255

    Dr Devendra Pant

    Chief Economist and Head Public Finance
    0124 6687251

    Amit Jain

    Analyst
    0124 6687264

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    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121