Consumer confidence has fallen to levels seen three years ago, just before the Modi government came to power, according to the latest Reserve Bank of India (RBI) survey. The Current Situation Index fell to 96.8 in June from 100 in May, slipping into the pessimistic zone with sentiment showing deterioration across all parameters. While the sentiment in urban India has been subdued for some time now, the mood in the hinterland too is beginning to turn somewhat sour.
The sharp fall in food prices has lowered nominal realisations for farmers leading to a smaller rise in nominal incomes. This is reflected in the collapse of the growth in nominal agri GVA to 0.3% year-on-year in Q1FY18, compared with 7.9% in Q4FY17. “The adverse impact of lower food prices on rural incomes is weighing on growth — agriculture value addition and rural consumption, says Sonal Varma, chief economist at Nomura.
The smaller farm incomes, experts say, could dampen the mood in the hinterland even as sowing for the kharif crop this time around, at 1,028.14 lakh hectares, is slightly lower than last year’s levels. Economists predict a growth in agriculture this year of 3% at best on the high base of 4.9% in 2016-17.
To be sure, real rural wages have been rising and post the good monsoon in 2016, unemployment has been falling. Also, the non-farm segment, which economists say accounts for about 30-35% of the rural economy is doing relatively better. However, sentiment is starting to weaken as real indebtedness has risen leading to a clamour for loan waivers. “Some of this distress is likely to have been triggered by the large fall in food prices and the consequent shifting of the terms-of-trade against rural India,” says Pranjul Bhandari, chief economist at HSBC.
Even without the rural distress, the rise in consumption had been tapering off.
Private consumption has clocked a double-digit growth in just one of the last six quarters, slowing to 6.7% y-o-y in Q1FY18, the lowest rise in six quarters. Economists worry about fewer jobs being created in a slowing economy; GDP grew at 5.7% y-o-y in Q1FY18, the slowest in three years and growth forecasts for 2017-18 have now been pared to levels of 6.7-7%.
More pertinently, as DK Joshi, chief economist at Crisil points out, the growth in labour-intensive sectors — construction and manufacturing — has decelerated in the last two quarters, undershooting GDP growth.
The increase in government consumption, meanwhile, although robust in some periods, also slowed to 17.2% y-o-y in Q1FY18. The Union Budget for 2017-18 pencils in a rise in expenditure of just 7%, though a bigger rise of 10% for rural spends.
Rural spends (including agriculture) have been budgeted to go up to Rs 1.6 lakh crore in 2017-18 from Rs 1.4 lakh crore in 2016-17. The allocations for rural housing programmes are bigger but the budgeted spends on MGNREGS at Rs 48,000 crore are only slightly higher than those in 20161-17. While in the past — FY2007-13 — large increases in the minimum support prices (MSPs) boosted farm incomes, the hike in MSP for 2017-18 has been modest.