Second wave dents rural economy leading to knock-on effect on recovery

With several state governments announcing local and state-wide lockdowns, economic impact would not only dent rural households' fragile financial health, but rural consumption is also decreasing

Ramesh Ram, 31, is listed as a textile industry staff worker in the administration's database of migrant workers in south west Bihar's Kaimur district. But for the last three years, Ram has worked as a contract labourer among the tens of thousands employed at the Alang ship-breaking and recycling yard in Gujarat, making enough to get by.

Today, Ram is back in his village, with no work, no capital to till his small parcel of land, and living in penury with his family of six, which includes three young daughters aged 6, 8 and 10.

Even before the second Covid-19 wave hit India this February, tens of millions of workers such as Ram had barely managed to recover from the adverse economic effects of the nationwide lockdown to control the spread of the Covid-19 pandemic in 2020.

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India's rural economy comprises both farm and non-farm sectors. Remittances sent by millions of migrant workers like Ram contribute to its non-farm economy, which is made up of formal and informal employment in sectors such as retail, construction, manufacturing, hospitality, education and transportation. Non-farm and remittance incomes have been found to exert a positive impact on food security and rural livelihoods. Consumption expenditure in rural India, where 70% of the population lives, in turn boosts the overall economy.

Though India's economy showed signs of recovery after the first wave peaked in September 2020, the recovery did not hold. Income, employment and nutrition levels were still below baseline pre-lockdown levels by the end of 2020, new research has found. Unemployment has been on the rise since March 2021, entering double digits in May. Besides loss of jobs, wages have also decreased, according to multiple household surveys, leaving many workers unable to properly feed their families.

As the second wave continues to spread through India, albeit at a slower pace--on June 1, India reported 127,510 new Covid-19 cases and 2,795 deaths--economists warn of the economic impact on families like Ram's in rural India. With several state governments announcing local and state-wide lockdowns, the economic impact would not only dent rural households' already fragile financial health, but also have a knock-on effect on India's economic recovery, they tell us, with rural consumption decreasing.

The warnings come as the government released data showing India's economy contracted in the past year, marking its worst performance in 40 years. The finance ministry also said that the economic impact of the second Covid-19 wave would be less than of the first. Economists disagree, pointing to growing poverty, rural unemployment, indebtedness and stagnant wages, and call for urgent government relief along the lines of cash assistance and free food grains given under the Atmanirbhar package in the first wave, to stave off an impending hunger crisis.

Rural households left with little cash and no savings

In Alang, Ram recalls earning Rs 500 a day. "We ran our house on this income. This was all we had. I divided my daily earnings and sent most of it to my family back home. However much it was, it was enough for us to survive," said Ram.

In March 2021, with India's Covid-19 second wave rising, rumours were spreading among Alang's migrant workers that another national lockdown would be announced. Fearing a repeat of last year's troubles when a nationwide lockdown was announced on March 24, 2020 and daily wage earners in urban India found themselves with no means of sustenance with just four hours notice, Ram left Alang for home, along with dozens of other migrant workers.

When he reached his village of Soukhara, he was relieved, said Ram. However, within days, his family's savings had dried up and they fell into poverty. "I have no money left. My bank account has nothing in it."

Ram thought of taking up work under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) in Soukhara, but there was no work available. "In our village there is only one kind of work to do [under MGNREGS]…which is to dig up earth, but the earth is hard," said Ram. "This work will only begin when the monsoon arrives and the earth softens."

Ram has no other assets except for an acre of agricultural land, which today lays idle. "I have no capital at all, so how could I even think of starting farming?" he told IndiaSpend. His family receives free grains under the Public Distribution Scheme (PDS), which entitles each member of India's poor households to 5 kg of grains per month. With no cash in hand, Ram decided to sell a portion of the grains received under PDS to buy essentials such as vegetables and oil.

"Hum sab majbooran bohot pareshan hain. (We feel very helpless)," Ram said.

Covid reaches villages

In the fiscal year from April 2020 to March 2021, the agricultural sector grew by 3.6% on the back of a good monsoon and rural areas having relatively fewer Covid-19 infections in the first wave. Analysts predicted a quick economic recovery for India, aided by an increase in rural demand. Then, towards the end of FY 2020-21, record new Covid-19 infections spread to India's smaller towns and villages, thereby putting pressure on an already fragile health infrastructure. In April, economists warned of a significant impact to India's rural economy as Covid-19 spread further in rural India. Unemployment, which had shown signs of recovery after the first wave peaked in September 2020, was continuing to rise.

On May 14, the prime minister expressed concern that the second Covid-19 wave was spreading fast in rural districts. Health ministry data for the last two weeks of May found that as many as 66% of districts with a test positivity rate of 10% or more were rural.
 

 

Once the virus enters rural areas, it would definitely lead to an economic impact, warned Himanshu (who goes by only one name), an associate professor of economics at Jawaharlal Nehru University, New Delhi. "This distress won't be immediately captured by the aggregate GDP [gross domestic product] numbers; it will only show after some time. [But] there will be a much longer impact on [rural] incomes [which] will affect rural demand," he told IndiaSpend.

India's economy contracted by 7.3% in 2020-21, marking its worst performance in over four decades, the government announced on May 31, 2021. The economic impact of the second wave would be less than last year, India's Chief Economic Advisor Krishnamurthy Subramanian said on the same day. This follows a similar assessment by the finance ministry, which said that the second wave would have "muted economic impact". On May 6, a senior finance ministry official reportedly said that according to the ministry's internal assessment, the economic impact "may lead to around 1 percentage point loss of GDP compared to starting estimates". IndiaSpend has asked the finance ministry about the basis for this assessment, but they didn't respond even after we followed up. We will update the article if they reply.

"The finance ministry's diagnosis fits in the general pattern of official complacency that has characterised this crisis from the beginning," Jean Drèze, economist and visiting professor at the Department of Economics in Ranchi University, told IndiaSpend. "It is possible, of course, that the second wave of Covid-19 will cause less damage to the economy than the first. But the impact on people's livelihoods could be worse because their reserves are depleted. In any case, it is important to prepare for the worst."

Himanshu said that this assessment is nothing more than something that came out of a mathematical formula. "We will reach a situation where aggregate GDP numbers go up, there will be a recovery because of a low base [effect] from last year. But this is something that is more of a statistical artefact than the real change that will happen. So what we are basically going to see is a painful recovery of a prolonged period of distress and a situation where the recovery will be skewed sharply [so that] inequality will be felt in all dimensions."

Rising unemployment, shrinking wages

Even if agricultural production is robust this year, [the fear of the virus spreading in rural areas] could affect agricultural supply chains, which would have a bearing on the rural economy, Sridhar Kundu, a senior research analyst at the Indian School of Business (ISB) in Mohali, told IndiaSpend. Moreover, since April-August 2020, both farm and non-farm wage growth in rural India has plummeted, according to credit rating agency India Ratings and Research.

"About 70% of India's population lives in rural areas and if both farm and non-farm economy get affected, it will have a significant impact on rural demand and consumption because the marginal propensity to consume (MPC)--an economic metric that measures the proportion of extra income that is spent on consumption--is higher in rural areas. So if we don't have a higher MPC [in rural areas], it will affect our [economic] growth because higher MPC has a multiplier effect on the economy. Unless people have enough cash in hand, how are they going to consume?" said Kundu. "As rural demand will come down, so will [India's] scale of growth prospects."

India's rural non-farm economy contributed about 60% to total rural incomes, according to a NITI Aayog study in 2017.

In the week ended May 16, 2021, rural unemployment doubled to about 14% within a week, and remained closer to 14% a week later, according to the Centre for Monitoring Indian Economy (CMIE). By May 30, it moved closer to 10%.

In an earlier update in April, CMIE had noted that among salaried employees, there was a higher share of unemployment in rural areas, indicating significant impact to small and medium industries in rural India, which contribute to its non-farm economy.

Saturated agriculture, indebted farms unable to absorb surplus labour

"Whenever there is economic distress in India, agriculture ends up absorbing the excess labour force. This trend will happen even with the present wave of reverse migration. [But] the agriculture sector in India is overpopulated and cannot absorb any more surplus labour," Kundu told IndiaSpend.

Even before the pandemic, about 52% of all agricultural households in India were in debt, and most of them had taken loans equivalent to their annual incomes, a government report found in 2019. "Agricultural households at the bottom of the income pyramid mostly suffer from this debt burden because of their lesser shock-absorption capacity. [Owing to supply chain disruptions] farm produce has less access to market centres, which has a negative effect on farm incomes. [So] lower farm incomes create a debt cycle," Kundu said.

Though trading at Agricultural Produce Market Committee (APMC) markets has partially resumed in Gujarat, the [daily] sale of most agricultural produce at the market yard in Rajkot has crashed by about 40-50% in May, Atul Kamani, president of APMC Commission Agents' Association in Rajkot, in Gujarat, told IndiaSpend. In April, Gujarat suspended trading at APMCs as new infections spiked in the state.

"There is a shortage of labour. [Moreover], we have to shut the market at 8 p.m. because of curfew restrictions. Before, auctions went on till late into the night," said Kamani. "Farmers plead with us to buy all of their produce that has been lying with them in storage but it is difficult to do so now." Kamani warned that if all the farm produce for this season is not sold, most of it could get wasted during the coming monsoon season. "There is not a single APMC market yard in Saurashtra (a region in south west Gujarat which covers 11 districts) that can assure the safety of farmers' produce during the monsoon rains," he said.

Earnings still below 2020 lockdown levels

On a blazing day in May, Tapas Malo, 43, worked at a construction site on the outskirts of Parra village in north Goa, along with dozens of other workers. They had decided to stay back after the state government announced a statewide curfew on May 3 as new daily infections rose to record highs, a move that led to hundreds of migrant workers exiting Goa. Malo hails from Dakshin Dinajpur district in north West Bengal, and provides for a family of six, including four children. "There is no industry in my village, no other work either, so I couldn't afford to go back home."

Malo's daily earnings are yet to reach pre-pandemic levels. "I used to earn Rs 20,000 per month before and managed to send Rs 16,000 back home. I could barely [manage to] send Rs 10,000 home now," he told IndiaSpend. "If my earnings decline here, my family suffers there."

According to a recently published report by Azim Premji University, 90% of households surveyed reported reduced food intake during the national lockdown last year, and even six months later about 20% still reported a similar trend. A majority of workers reported a decline in incomes and about 15 million people remained unemployed by the end of 2020, the report said.

"[The shocks to households] in nutrition, indebtedness and education have the potential to cast a longish shadow on [India's economic recovery]. Over a few years, we might witness nutritional deficits, educational deficits…the gender gap could widen, young people who have come of age and come into the labour markets in the last two years could easily have a much longer term setback," Amit Basole, associate professor of economics at Azim Premji University, who led the team of researchers working on the report, told IndiaSpend.

Even after June 2020, as the Indian economy picked up, there was considerable hardship among households, according to a new research paper by Drèze and independent researcher Anmol Somanchi, which has been reviewed by IndiaSpend. "Income, employment and nutrition levels were still below baseline pre-lockdown levels by the end of the year," according to the paper, which noted that without government relief measures in 2021, there lurked a "serious danger of another wave of intense food deprivation."

Official statistics and macroeconomic aggregates failed to properly capture the livelihood crisis, Drèze and Somanchi noted. Their findings are based on analysis of a variety of independent household surveys conducted across multiple states since the pandemic began last year.

About 40% of young urban workers in Bihar, Jharkhand and Uttar Pradesh had no work or pay even 10 months after the national lockdown, and workers who were employed reported fewer working hours and lower wages, a survey conducted between February and March 2021 by Swati Dhingra, associate professor at the London School of Economics' Centre for Economic Performance, and her colleague Fjolla Kondirolli, found. The survey has not been publicly released yet; IndiaSpend has reviewed a copy.

"Our research indicates that even though we thought that the recovery was under way, from the perspective of these young urban workers who we surveyed, a 24% fall in GDP [in the first quarter of 2020] was not really 24%…it was more like 80% for them. Now when the second wave hits and we have a few months of coordinated lockdowns, what we will see is a huge proportion of people looking at long-term unemployment," Dhingra told IndiaSpend.

Poverty rises despite aid and relief measures

On May 12 last year, Prime Minister Narendra Modi announced the Atmanirbhar Bharat relief package totalling about Rs 20 lakh crore--about 10% of India's GDP--in response to the economic damage caused by the first wave of Covid-19. However, the actual spending under Atmanirbhar Bharat amounted to just about 0.6% of GDP, according to the State Bank of India. In June 2020, the government extended the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) till November 2020. Under PMGKAY, about 800 million poor Indians received 5 kg of free grains every month, according to the government, which also said that it had transferred Rs 31,000 crore into Jan Dhan bank accounts of 200 million poor families and spent Rs 50,000 crore on rural employment opportunities.

Modi said that it was a historic day as a "massive campaign kickstarted [sic] for the welfare of the poor, for their employment". While releasing the Economic Survey of India 2020-21, Subramanian had said during the press conference that early, intense lockdowns not only save human lives but also "enables better, quicker economic recovery." The survey reported that India's mature policy response not only demonstrated the benefits of focussing on long-term gains, it also provided "important lessons for democracies to avoid myopic policy making".

However, a year after the country began easing out of the countrywide lockdown, there remains lasting economic pain among poorer households. About 75 million Indians fell into poverty since last year, according to the Pew Research Center, accounting for a 60% rise in global poverty; and 32 million Indians could no longer be classified as part of the middle class, Pew found, a concerning trend for an economy such as India's where social and income mobility is low. The report by Azim Premji University found that unemployment and reduced earnings were a driving factor behind rising poverty.

Economic relief measures, especially the PDS, played a critical role in sustaining the poor during and after the national lockdown, Drèze and Somanchi found. But other measures failed to provide a significant buffer during the crisis. Nearly 40% of poor households were excluded from cash transfers to women's Jan Dhan accounts, and these transfers suffered from "account dormancy, transaction failures and vulnerability to fraud".

Moreover, excluding the role played by PDS and MGNREGA, cash transfers from central and state governments covered less than 10% of the income losses suffered by poor households, the paper noted; and for low-income households, cash transfers made up for only 23% of income losses. This led to a surge in indebtedness and distress sale of household assets, according to the paper.

Economists call for relief

Economists say that, as in the first wave, the government should immediately ramp up spending and announce an economic relief package. Unlike last year when the central government announced relief measures after the Covid-19 lockdown, the government is reluctant to do so during the second wave, Reetika Khera, economist and associate professor at Indian Institute of Technology, Delhi, told IndiaSpend. "This year [the] centre is not feeling any responsibility towards easing the situation arising from state lockdowns, many of which are quite stringent in terms of affecting livelihoods of the poor. Some states (such as Kerala and Tamil Nadu) have announced relief measures but others have not done much and are not in a position to do much because of their financial situation," said Khera.

Khera called for an increase in cash assistance to households and the need to double the amount of free grains provided under PDS to 10 kg. On top of it, the scheme should be expanded to include 100 million more Indians, she said. "The Centre needs to step up."

"There should be a recognition that this is a unique event and a strong signal should go [from the government] that it is prepared to do whatever it takes to ensure that citizens don't come out of this deeply scarred. And this signal has not yet [gone] out. Being fiscally conservative at this point is, I think, very counterproductive," Basole told IndiaSpend.

In a country with a large young workforce such as India, another round of the pandemic's economic impact could lead to a trend of long-term unemployment, Dhingra warned. "The effects of this scarring are going to stay for a long time," Dhingra said. "Unless the minimum wages are increased, job allocations by governments are increased, it doesn't seem like the economy itself could recover and get these people back into work. At the moment, India looks really weak [in terms of spending] compared to the rest of the world, including both the developed and the developing economies."

India's debt-to-GDP ratio has shot to a high of about 90%, the International Monetary Fund (IMF) said in April, thereby putting pressure on the government's fiscal position. Finance minister Nirmala Sitharaman recently said that the government has "not taken a final call" on whether it would announce another round of economic relief measures.

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"How are these [unemployed] people going to find new jobs again? The economy might recover at the top end--and we have seen that already with the stock markets--[but if we don't spend enough] we are perpetuating the deeply entrenched inequality that already exists," said Dhingra. She added that "the really dramatic thing about this pandemic, especially in India", is it is pushing new people into poverty in urban areas where incomes are comparatively higher than rural areas.

"This is not the time to think about fiscal deficits," Dhingra said.

Rohit Inani is a journalist based in New Delhi. His work has appeared in HuffPost India, Newlines magazine, TIME and Al Jazeera, among other publications.