India's economic recovery hurt by coronavirus's rural spread

Officials tell Reuters that signs of rebound in rural regions may not be as strong as originally thought.

    Adequate monsoon rains have resulted in more planting of crops in India and a rise in fertiliser use, giving the rural economy a boost, but the spread of the coronavirus beyond large cities may be a drag on this key driver of economic growth [File: Stringer/Reuters]
    Adequate monsoon rains have resulted in more planting of crops in India and a rise in fertiliser use, giving the rural economy a boost, but the spread of the coronavirus beyond large cities may be a drag on this key driver of economic growth [File: Stringer/Reuters]

    India is staring at a protracted slowdown as coronavirus cases reach its countryside, with signs that a recovery in the rural economy hailed by Prime Minister Narendra Modi may be weaker than originally thought, government officials and analysts say.

    The world's fifth-largest economy is due to report quarterly gross domestic product (GDP) figures on August 31 and, according to a Reuters poll, it is likely to have contracted by 20 percent in the April-June period. It is forecast to shrink by 5.1 percent in the year to March 2021, the weakest performance since 1979.

    Nearly half of India's 1.38 billion population rely on agriculture to survive, with the sector accounting for 15 percent of its economic output.

    Modi has been citing higher fertiliser demand and the sowing of monsoon crops, both key signs of rural activity, to show there are "green shoots" in the economy.

    But four government officials said the uptick in activity may not be as large as first 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 pointed to 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 India's budget plans said.

    Both declined to be named as they were not authorised to speak to media. A ministry spokesman declined to comment to the Reuters news agency.

    'At best, a mitigating factor'

    A slump in monthly demand for fuel, electricity, steel, consumer durables and cars between April and June further highlights the dire state of the economy.

    India has the world's third-highest number of coronavirus infections at more than 2.7 million, and new cases are increasingly emerging outside major cities, dashing hopes that 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. Bajoria expects India's GDP to have contracted by 22.2 percent in the April-June quarter.

    Farmers planted nearly 14 percent more land between June 1 and July 31 than last year, given good monsoon rains, while fertiliser production rose 4.2 percent 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.

    Rating agency ICRA believes pent-up demand contributed to some improvement in manufacturing in June and July, but that it may not continue in August due to virus-related lockdowns.

    A widening fiscal deficit may also limit India's ability to provide more stimulus, though Finance Minister Nirmala Sithamaran has promised to take steps to help industries like tourism and hospitality.

    India's fiscal deficit hit a record $88.5bn in the April-June quarter, already 83.2 percent of the target for the whole fiscal year, due to lower tax collections and extra spending.

    Central bank help

    India's central bank has cut interest rates, but many analysts say demand is likely to remain subdued until virus worries calm and the government pumps more money into the economy.

    "Flattening of India's virus curve is critical for a pick-up in production. Once the economy unlocks fully, we expect exports to lead to recovery and domestic demand to lag," said Kapil Gupta, chief economist, Edelweiss Research.

    Former central bank Governor Raghuram Rajan has called for greater focus on protecting India's economic capabilities for a meaningful revival.

    "As is the case with most countries in the region, there is bound to be some permanent damage to output, setting recovery back by a few years to return to pre-COVID trend," said Radhika Rao, a DBS economist.

    SOURCE: Reuters news agency