Rural demand stimulus the key

IN PERSPECTIVE

Is India’s economic slowdown in sync with a global slowdown? It is hard to say definitely, but in a limited sense, yes. One argues this point because India is still relatively more domestic market-driven than export-driven. We do emphasize the significance of the external sector and its contribution to GDP and growth rate, but unlike the Chinese economy, exports don’t make an overriding contribution to our GDP. This is clear from looking at the last three quarters’ data, where they show a continuous decline in exports, falling to $26.13 billion in September, compared to over $30 billion in that month in earlier years.

So, the genesis of the problem possibly lies elsewhere. Surveys and ratings by most multilateral organizations such as IMF, World Bank, WTO and Moody’s tell us that the growth rate could be falling dramatically from above 7% to around 5% in 2020. Therefore, it is imperative to identify the real problem.

What looks apparent from India’s current slowdown is that there is deficient sectoral demand. First and foremost, it can be seen in the real estate sector. With the rise in NPAs, highhandedness and non-delivery by owner/builder at the right time, the lack of credit and incompetency of RERA, the sector witnessed a steady collapse of demand. With the fall of real estate sector demand, supportive or complementary sectors/industries also saw sharp and steady fall in demand. Steel, cement and other allied industries found production activities grinding to a halt and that led industries to experience losses and lay-offs. This structural fall in demand in metropolises and semi-urban areas created a ripple effect in workers’ incomes in these sectors, and these workers come from various regions of the country. The fall in income of these workers led to fall in demand across India, mostly in semi-urban areas.

What is worse is the situation in the construction sector. It employs a large amount of labour that is informal in nature. With the boom in construction, many labourers that had joined these activities in metropolises and semi-urban areas in the last two decades suddenly lost jobs as the sector slumped. Since the construction sector is in a bind now because of the serious problems in shadow banking, there is an unemployment glut in the economy. Most of these labourers belong to rural areas and had migrated to cities in search of employment. Now, they hardly find any other employment in the major cities as they are mostly unskilled. Unavailability of any other employment is forcing them to return home.

Their homecoming to the villages is adding fuel to the fire as there is already a serious rural distress, with agricultural production drying up. With firm distress looming larger, the demand for rural economic activities has fallen. There is thus oversupply of labour in the rural economy, which puts a downward pressure on rural wages, resulting in falling rural demand. The prime indicator of consumption demand in rural economy for quite some time has been sales of two-wheeler vehicles and consumption of non-durable items. These are witnessing decline in demand.

What needs to be done? A combination of strategies may be adopted to bail the economy out of this morass. First, it is essential to revive the rural economy. Agricultural activity needs priority. A substantial amount of agricultural investment needs to be made to make farmers capable of producing more and better. Rural connectivity in terms of physical infrastructure needs to be developed to allow rural agricultural production to be sold at relatively higher prices in semi-urban and urban areas to fetch more income for farmers. Micro-credit without collateral for these farmers may be ensured. Agricultural land reforms should be initiated in many states.

Secondly, it is important to revive the real estate sector, especially the construction sector. Most of the construction activities are in residential or commercial complexes, not so much in physical infrastructure. That is where the rural labour force can find reasonable employment.

With food prices fluctuating and unpredictable agricultural income, many agricultural labourers are migrating to cities leaving their families behind. Employment in cities will generate income for them, which will finally be sent to villages and that is how the rural economy can be revived.

The recent announcement by the government to provide a stimulus package to revive the sector may be a good initiative but not sufficient as consumers lack capital or access to credit. Also, the negative sentiment towards the real estate sector is still damaging.

This is quite true as many of the real estate developers are not enthusiastically looking at this market in spite of reduction in corporate tax. Revival of Non-Banking Financial Companies (NBFCs) may boost the sector and revive the economy as they are the ones who can provide easy capital credit to semi-urban consumers. The Indian economy can overcome this slowdown only through a huge rural demand stimulus.

(The writer is Professor, LBSIM, and former Senior Faculty, IIFT, Delhi)