Whether the dreaded El Nino strikes or not, and whether this results in a drought, India’s agriculture sector is already in trouble. And, along with it, so are various FMCG firms that have been depending upon a strong rural story—especially in the absence of an urban one these past few years —to bail them out. In a recent study, Bank of America Merrill Lynch estimates farm incomes might now grow at a much slower pace than they were earlier, thanks to recent freak weather. It believes that incomes from the coming summer rabi harvest—3% of GDP—will grow at a much slower 10.3% compared with 16.5% last year and the autumn kharif harvest’s 17.8%. Farmers who are likely to take the biggest hit are those cultivating pulses—incomes are tipped to grow at just 5.2% versus 18.4% last year—and oilseeds whose incomes are estimated to grow at just 9.8% compared with 24.3% last year. Wheat farmers too could be less lucky this time around—their earnings growth may slow to 10.2% from 17.3%, partly due to the damage from the hailstorms in February. Farmers growing sugarcane and raw cotton, however, are expected to make good money. Given the high MSP hikes in the past, future hikes are likely to be muted for most crops.
In addition, rural wages are decelerating for a couple of reasons. To begin with, the government’s build-up of infrastructure in the countryside—roads, electrification and irrigation—which was creating jobs and putting money into the pockets of labourers has all but come to a halt since the government has scaled back its expenditure on projects. Spends on rural roads and electrification have been pruned each year since FY12. A combination of smaller MSP hikes, less government rural-spend, slower growth in construction and even static MGNREGS allocations has also meant the days of high labour income growth are over. So, while real rural wages grew at 10% in the two years between January 2010 and January 2012 and had peaked at 13%, this has now slowed significantly to 3.5% over the last 8 quarters. The combination of a slower rise in both farm incomes and wages is bound to put a leash on discretionary spends. While FMCG firms like a Hindustan Unilever that rely on rural catchments for more than half their revenues will find consumers downtrading, two-wheeler manufacturers like a Hero MotoCorp which, too, depend on a big chunk of their top line coming in from rural customers might find sales slowing significantly.