‘Slowdown to extend as virus goes rural’

Sluggish consumer demand, slowdown in rural lending are cause for concern, says ministry official

India is staring at a protracted slowdown as coronavirus cases reach its countryside, with signs of recovery in the rural economy hailed by Prime Minister Narendra Modi “at best a mitigating factor”, government officials and analysts said.

The world’s No.5 economy reports first-quarter GDP data on Aug. 31 and, according to a Reuters poll, it is likely to have contracted 20% over April-June. It is forecast to shrink 5.1% in the year to March 2021, the weakest since 1979.

Almost half of India’s 1.38 billion population rely on agriculture, with the sector accounting for 15% of economic output.

Mr. Modi has been citing higher fertiliser demand and sowing of monsoon crops, both key signs of rural activity, as “green shoots”.

But four government officials said the uptick may not be as large as believed given a spike in virus cases in rural areas that were initially isolated from the pandemic.

“The economic situation has in fact worsened since April and May, and we are likely moving towards a longer economic slowdown than earlier expected,” a finance ministry official said.

The official cited sluggish consumer demand and a slowdown in rural lending as causes for concern.

“The situation on the economy front is very serious and the government’s hands are tied on the fiscal front,” a government adviser with direct knowledge of budget plans said.

Both declined to be named. A ministry spokesman declined to comment.

‘A mitigating factor’

A slump in monthly demand for fuel, electricity, steel, consumer durables and auto sales over April-June highlight the dire state of the economy.

India also has the third-highest number of virus infections at more than 2.7 million, and new cases are increasingly emerging outside major cities, dashing hopes the rural economy will be a buffer against shrinking exports and manufacturing.

“While a recovery in rural activity provides a glimmer of hope, it is at best a mitigating factor,” said Rahul Bajoria, a Barclays economist. He expects India’s GDP to have contracted 22.2% in the June quarter.

Farmers planted almost 14% more between June 1 and July 31 than last year given good rains, while fertiliser output rose 4.2% in June.

“Even as the momentum coming from the agriculture sector owing to a normal monsoon and robust sowing is a positive, we believe this may not sustain due to surplus labour concerns, along with an increasing proportion of active COVID-19 cases,” said Upasna Bhardwaj, economist at Kotak Mahindra Bank.

A widening fiscal deficit may also limit India’s ability to provide more stimulus.

The deficit had hit 83.2% of the fiscal year’s target.

Source: Read Full Article