Rural demand push may offset limping growth in metro cities
3 min read . Updated: 21 Jul 2020, 07:29 PM ISTAccording to the data, outstanding rural credit grew by 10.87% year-on-year (y-o-y) in rural areas to ₹7.26 trillion in FY20.
As the economy looks up to rural India for recovery, it is the larger cities where the slump in growth has been pronounced even in FY20.
Latest disaggregated data released by the Reserve Bank of India (RBI) shows rural credit growth, mimicking the economic conditions, has staved off the slowing economic environment to a great extent. Experts believe that in the short-term rural demand will lead to the rescue of the overall economy, although it urban growth is essential in the longer run.
Outstanding rural credit grew by 10.87% year-on-year (y-o-y) in rural areas to ₹7.26 trillion in FY20. The growth in rural credit was 15.2% in FY19, the data showed.
In contrast, urban and semi-urban areas have seen tepid credit growth. The steepest decline in growth rate recorded between FY20 and FY19 was in metropolitan areas at 790 bps, from 12.83% in FY19 to 4.92% in FY20. This segment has 65% of all bank loans and has been affected the most by the slowing economy in 2019-20.
“There has been a case of reverse migration that has happened from urban to rural areas. Naturally, when the population moves, there will be higher growth in consumption in rural areas, at least for the basic items," said Sameer Narang, chief economist, Bank of Baroda.
According to Narang, some of these people might stay back and never come back to the cities depending on their specific skillsets and this will be the trend in near term. “We have to remember that in the long run, what we have seen globally as well as in India is, urbanisation has been the force of growth for most investments. That underlying theme does not change over the long-run although in the near-term rural areas will be the point of rescuing the economy because in terms of population, these areas account for 65% of our total population and 45% of the gross domestic product," said Narang.
In fact, bank branches in rural areas were the only ones to have recorded a double-digit growth in FY20. RBI considers bank centres with population of less than 10,000 as rural; 10,000 to less than 100,000 as semi-urban; 100,000 and above to less than 1 million as urban and above 1 million as metropolitan areas.
Sanjay Agarwal, senior director, Care Ratings said that reasons why metro branches have seen slower growth is because large-ticket loans, typically disbursed by the corporate branches in metro cities, have slowed down in the last year. “Moreover, some transactions get closed in the last few days of March every year and because of lockdowns and disruptions in the last part of March, these could not be completed," said Agarwal.
Although coming from a smaller base, the rural sector's resilience is quite evident even in a year when overall credit grew by only 6.28%, as opposed to 12.93% in FY19. Even in a post covid-19 scenario, experts are optimistic that India’s recovery will be led by the rural economy.
For instance, Rahul Bajoria, chief India economist at Barclays believes that a stronger rural sector should mitigate, but not fully offset, the ongoing economic damage caused by the covid-19 crisis. “Despite the gloomy healthcare backdrop, the strong pickup in monsoon rainfall is a major positive for the rural economy. Not only has the country received above normal rainfall – as of 15 July, the monsoon surplus rainfall stands at 10% – the temporal and spatial distribution have been conducive to crop sowing," Bajoria wrote in a note on 16 July.
There are a set of data points that give assurance of a rural revival taking shape despite the pandemic and the ensuing lockdown. For instance, the sown area for kharif or summer crop was higher by 21% on a year-on-year (y-o-y) basis as on 17 July after a good monsoon. Then, the sale of fertilisers jumped 83% in three months to June to 111.61 lakh tonnes, PTI reported on 3 July. Meanwhile, Hero MotoCorp Ltd and Bajaj Auto Ltd also plan to sharply expand two-wheeler production amid a sustained recovery in demand in rural and semi-urban markets since the easing of the lockdown.
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