Covid-19: Daily cases fall, but meaningful rebound still some distance away

With the daily case count falling to below 1 lakh, the pace of vaccinations picking up to about three million a day, and local lockdowns being lifted, recovery trackers are showing a small uptick. Encouraging trends can be seen in e-way bills and toll collections suggesting more goods are now being ferried across the country. The brightest spot right now is probably exports, which are cashing in on the global recovery. Also, while the pandemic has hit rural India badly, the agri sector should fare well. The Centre has done well to buy up large quantities of rice and wheat—so far in the 2020-21 marketing year, over 10% and 12% more, respectively, than in the last season. That, the agriculture minister tells us, will put as much as Rs 1.53 lakh crore and Rs 82,347 crore into farmers’ pockets for rice and wheat, respectively. So, while the increase in MSPs—in the benchmark prices for about dozen kharif crops—may appear modest at 1-7%, the MSPs are estimated to be least 50% higher than the fully paid-out costs. Indeed, the returns for growers of pulses like urad and tur—over their costs—should be a very attractive 62-65%. With the rains arriving more or less on time and expected to stay on till September, it looks like a promising year for agriculture.

It is the non-farm part of the rural economy that is worrying. There are already indications that things are not going too well. In nominal terms, rural agricultural wages increased 7.2 percentage points on the back of a rise of 3.8pp in FY20. In contrast, rural non-agricultural wages rose by 5.4pp compared to a 3.9pp build-up in FY20. As Sonal Varma, Nomura India chief economist observes, while higher rural wages are usually good for rural demand, this time around, it may not be so. Varma points out real rural wage growth averaged near zero last year, and while opportunities under MGNREGA may have increased, the workers earn only subsistence wages. The reason rural wages are holding up is probably because the labour participation rate is relatively low. Indeed, rural demand this time around could be much more muted than in was last year. One reason is that, in 2020, around 10-15 million workers were back in the villages adding to demand. Also, during the first lockdown, the government had spent much more on rural welfare and employment schemes. Nonetheless, since the terms of trade are expected to remain favourable for agriculture, it bodes well for farm incomes and consumption demand.

Unfortunately, agriculture cannot pull the economy out of the trough. For that to happen, the services sector needs to recover; but from the looks of it, that is some time away. Although not wholly unexpected, PMI for the services sector—the biggest part of the economy—contracted in May while the manufacturing sector, at a PMI of 50.8, just about made it to positive territory. Given capacity utilisation is just around 65%, the private sector is unlikely to make chunky investments for at least a couple of years and that could mean high joblessness. CMIE data shows that the employment rate, which had fallen to 35.3% in May, dropped to 34.6% in early June; the labour participation rate, slipped to below 40% on June 6. While sectors such as IT and banking will continue to hire in big numbers, fresh employment opportunities will remain limited as hiring slows. An analysis by CARE showed the headcount for a set of 2,723 companies went up by a compounded growth rate of only 2.2% between FY17 and FY20, with the workforce increasing by just 0.48 million to 7.54 million. A meaningful rebound in growth is two or three years away, but the second half should see the economy bottoming out. Unless there’s a third wave.