COVID-19 exposes the impact of the dichotomy in urban-rural economy

The onset of the COVID-19 pandemic has brought about a deep structural change in the Indian economy. During its first wave, India’s rural economy displayed an extraordinary resilience to the effects of the pandemic, an absolute contrast to the situation faced by its urban counterpart; and it soon became obvious that a two-speed economy existed during the first wave, with one sector flourishing as the other struggled to keep up.

With agricultural activities being exempted from COVID-19 restrictions, farming and allied activities continued without hindrances, thus allowing the rural economy to flourish. In fact, the sector clocked a 3.6 per cent growth during 2020-21; mostly on the back of increased rural consumption, a stable monsoon season, improved availability of irrigation channels and piped water facilities, as well as increased government spending on welfare schemes to strengthen agricultural and allied sectors. Meanwhile, institutions were directed to step up their grain procurement efforts, thus enabling the total food grain production in the country to reach a record 305.44 million tonnes, 2.66 per cent higher than the previous year.

Traditionally, the rural economy has been the bedrock of India’s economic growth, given that two-thirds of its population and 70 per cent of the workforce resides in rural areas, and the rural economy generates nearly 46 per cent of the national income. In times of economic distress, the agriculture and allied sectors have been able to absorb the excess labour released into the market.

However, all this took a turn when the second wave hit the country this year. The sector’s labour absorbing capacity reached its threshold, with the monthly unemployment rates in rural areas touching an all-time high of 10.63 per cent during May 2021. As cases began rising in Tier-3 and Tier-4 cities, the expenditure pattern of the rural households changed significantly due to increased out-of-pocket expenditure on healthcare services. This was compounded by disruptions in remittances sent by millions of migrant labourers to their native villages, thus negatively impacting rural consumption, growth, and nutritional security. Disruptions in supply chains also adversely impacted sectors such as FMCG, electronics, etc. that were booming in rural India during the first wave.

While the steps taken to nudge rural recovery were essential, in the long run to reduce income disparity and regional inequity, localisation of industries and employment is the need of the hour. Apart from providing enhanced access to credit in agriculture and MSME sectors via Direct Benefit Transfers (DBTs), there is also a need to work on institutional factors and a robust governance framework for effective implementation of these policies. A renewed focus on the use of technology in agriculture, promoting fintech, creating opportunities for self-employment and entrepreneurship, as well as building resilient value chains in both rural and urban markets will go a long way in making the economy disaster-resilient for the future.

There is no doubt that the pandemic has pushed the rural economy further towards a massive technology upgradation phase with e-commerce channels developing, low ticket electronic items becoming essential commodities, and mobile phones becoming household necessities for education and other purposes. While it would have been easy to assume that the rural economy’s boom during the first wave would be enough to see India through the pandemic years, it is also clear that there is a need to strike a balance between the rural and urban economies so that the country’s economic revival can be initiated in a manner that places it on the path of sustainable growth and development.

Nilachal Mishra is Partner and Head - Government Advisory and Health, Human & Social Services (HHSS), KPMG in India.