Erratic rains hurt rural demand

The revival of rural demand is below expectations. Even though the southwest monsoon is above the normal reading so far, it brings little cheer. The major rice-growing states of Uttar Pradesh, Bihar, Jharkhand, West Bengal and Kerala experienced rainfall deficit. As a result, plantings of kharif crops have taken a hit.

Up to 73% of the monsoon season by quantum of rain is done and these states had insufficient rains of 27-47%, noted analysts at Jefferies India. “This could be negative for food inflation/rural demand in S2FY23,” the August 22 Jefferies report said.

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A worrying sign

Recent trends in rural wage and employment growth rates have also not been encouraging. Economists said rural wage growth is below retail inflation and that points to a lackluster near-term rural demand outlook.

Low commodity stockings may not leave low- and middle-income households in rural areas with excess funds for expenses, especially for discretionary items. As the holiday season approaches, a gloomy rural feeling is party crazy.

“After two consecutive failed festive seasons, the development of this year’s festive demand and the participation of the rural economy in it is crucial,” said Jitendra Gohil, Head of India Equity Research, Credit Switzerland Wealth Management, India. So far, plantings have declined year-on-year, but Rabi crops have also been affected by the heat wave. So, at the macro level, if rice prices continue to head north, it would keep inflation high, he warned.

This is a cause for concern, especially for companies in sectors such as fast moving consumer goods (FMCG), paints and consumer durables, for which rural demand is a key driver of growth. The normal monsoon and government measures were expected to be a boost to the struggling rural economy.

But some of those hopes could be dashed.

Given the potential impact on purchasing power, Rahul Bajoria, chief economist for India at Barclays, said a drop in trade in FMCG and durable consumer goods in areas rural is expected. In another spin-off, the poor spatial distribution of rainfall would cause people to migrate from rural to urban areas in search of employment. “So the rural recovery was already lagging behind the urban recovery and with migration rural demand growth will lag behind,” he said.

Moreover, even if the spatial distribution were to improve in the rest of the season, it would not result in a better sowing cycle. “The 16-week sowing-to-harvest cycle required for paddy will be missed,” he said.

On the non-agricultural side as well, the overall inflationary environment is seen as spoilsport on the demand side.

Additionally, due to the K-shaped recovery, mass consumer items could see sales decline relative to high-end items, the economists said. Note that growing income inequality is one of the key features of a K-shaped economic recovery.

Many states in the western, northern and central parts of India experienced either excessive rainfall or normal rainfall. Even so, weak rural demand in some large, populous eastern states could weigh on the overall revival of the rural economy.

Meanwhile, the benefits of higher government grants should begin to show results over a period of time.

“Increased job availability due to infrastructure projects, increased farm incomes (expect high Kharif crop prices and dairy prices) should rekindle sentiments, the moment seems uncertain,” said a report by Prabhudas Lilladher.

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