Rural growth lifting economy is just a WhatsApp tale

READ THE DATA CORRECTLY

If you are the kind who regularly follows the business press, you would have come to believe by now that the economy is well on its way to recovering. If we haven’t got there as yet, we will get there soon and happy days will be here again. That’s the message being driven down.

A standard way of offering this argument is to compare data for the month of June with data for the pre-Covid month of February and say that “green shoots” can be seen. Let’s take the example of two-wheeler sales here. Two-wheeler sales in June stood at 10.13 lakh units. This was just 21.7% lower than the 12.95 lakh units of two-wheelers which were sold in February. Hence, June sales were around four-fifths of February. This implies green shoots in the economy. The economy is recovering. QED.

There are multiple problems with this argument. The Indian economy had started to slow down even before Covid-19 struck. This could be seen in a variety of economic indicators, including two-wheeler sales. In fact, two-wheeler sales in February were already down 19.8% in comparison to a year earlier. In February 2019, two-wheeler sales had stood at 16.15 lakh units. Hence, two-wheeler sales in June 2020 at 10.13 lakh units were 37.2% lower than that in February 2019. If we compare June 2020 two-wheeler sales with June 2019 two-wheeler sales, sales were down 38.6%. This is the right metric to look at.

Any two-wheeler dealer has many fixed costs, from paying rental for the showroom to paying salaries to his employees to repaying loans. With falling sales, for him to stay viable, he needs to cut costs. This can only happen if he renegotiates his rent, fires employees or cuts their salaries, and so on. This leads to the purchasing power of the people associated with him coming down. Now, imagine this happening all over the country with two-wheeler dealers, car dealers, commercial vehicle dealers, and so on.

Also, it needs to be pointed out here that no two-wheelers were sold in April and only 2.8 lakh units were sold in May. Hence, June would have seen a lot of pent-up buying as well.

Further, two-wheelers can be divided into motorcycles, scooters, and mopeds. While motorcycle sales in June fell by 35.2%, the scooter sales crashed by 47.4%.

What explains this? While motorcycles are sold both in rural and urban markets, scooters are more of an urban product. This clearly tells you that Covid-19 has clearly impacted urban India more as of now.

The negative impact of Covid-19 on rural India has not been as bad as it has been on urban India primarily because the agriculture sector continues to remain robust. This robustness can be seen in motorcycle sales falling by only a third, whereas scooter sales have fallen by nearly half. It can also be seen in tractor sales in June 2020 jumping 22.5% to 92,888 units. In June 2019, 75,858 tractors were sold.

The jump in tractor sales is another point being used to tell us that green shoots are sprouting in the economy and rural India is doing well. While the jump in tractor sales is good news, there are several reasons for it. The period between April and June is the traditional season for tractor sales.

So, looking at sales just for the month of June isn’t the right way to interpret what the sales mean for the economy. We need to look at sales between April and June 2020. Tractor sales for the period have fallen by 13.7% to a little over 1.65 lakh units. This is the lowest in four years. Also, much buying in June must have been pent up demand given that barely any tractors were sold in April and May due to the lockdown. Also, tractors are bought by the rural rich and in no way can be an indication of the entire rural economy doing well.

There is a tendency to equate the agricultural economy with the rural economy. This is incorrect. Agriculture forms around a third of the rural economy. And this part of the rural economy is doing well. The trouble is, while it forms around a third of the rural economy, it employs nearly three-fifths – or 60% -- of its labour force. This basically means that there is huge disguised unemployment in agriculture and it employs many more people than is economically feasible. Hence, agriculture growing by a few percentage points doesn’t really help the overall economy much.

Moreover, agriculture (along with forestry and fishing) forms around 13.4% of the overall economy. Hence, the ability of the sector to lift the entire economy is extremely limited.

The non-agricultural part of the rural economy isn’t doing well. This can be gauged from the fact that in July, up until now, nearly 2.85 crore households have demanded work under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and only around 1.44 crore households, or a little over half of them, have got work. The fact that the scheme pays around Rs 200 per day on an average across the country tells us that there is a shortage of work in the non-agricultural part of the rural economy and people are willing to take on even lowly paid manual work under MGNREGS. Hence, the argument about the rural economy lifting the entire Indian economy doesn’t really hold.

Let’s look at a few other indicators. The sales of commercial vehicles, which is a great indicator of the state of investment in the country, have crashed. Banks’ outstanding loans shrunk by Rs 79,250 crore between March 27 and July 3, meaning that people and companies are not in the mood to borrow but have rather been repaying loans. Over and above this, there is a great fear of banks ending up with lakhs of crores of rupees in bad loans once the moratorium on loan repayments ends and the defaults start.

When we take all these factors into account, it is too early to be calling out green shoots in the Indian economy, unless the idea is to promote a narrative that works well amongst WhatsApp groups. For that, the time is absolutely right.

(The writer is an economist and the author, most recently, of Bad Money: Inside the NPA Mess and How it Threatens the Indian Banking System)