The rural market can support economic recovery but cannot substitute for urban demand, India Ratings & Research said on Friday.
Accordingly, the ratings agency said that any two or three consecutive healthy harvests generally translate into a robust rural demand.
"So, the hope is that while the industrial and services sectors are still struggling to recover from the adverse impact of COVID-19, the agricultural sector could become an engine for economic recovery," the ratings agency said in a statement.
However, the agency pointed out that a large part of the rural demand, notwithstanding the encouraging sales number of motorcycles and tractors in June 2020, comes from consumer non-durables.
"No wonder, among the use-based Index of Industrial Production classification data, the first category to record positive growth in the post lockdown period is consumer non-durables which grew 14 per cent yoy in June 2020," the statement said.
"Since the share of agriculture in India's gross value added is about 17 per cent, Ind-Ra believes rural demand at best can extend support to consumption demand, but cannot be a substitute for urban demand."
According to the agency, the COVID-19 led business disruptions during end-March-May 2020 have been so severe for the production, supply or trade channels and the activities especially in sectors such as aviation, tourism, hotels and hospitality that FY21 GDP growth is expected to contract for the first time since FY80.
"Although non-agricultural economic activities are slowly limping back, they are still much lower than pre-COVID-19 level," the statement said.
"Ind-Ra expects 1QFY21 GDP growth to come in at negative 17.03 per cent. The current account in 1QFY21 is expected to record a surplus of around $18 billion."
Besides, Ind-Ra cited that agriculture has largely not been impacted either during or after the lockdown.
"Ind-Ra expects the agricultural sector to grow at 3.5 per cent yoy in FY21. After several years, this sector has witnessed three consecutive good harvests - Rabi 2019, Kharif 2019 and Rabi 2020," the statement said.
"Moreover, the adequate pre-monsoon rainfall followed by the timely arrival of monsoons in most part of the country has led to an increase in the total kharif sowing area in 2020 in comparison to the last year."