Drought raises the possibility of rising food prices and a negative impact on rural consumer demand. However, a point needs to be appreciated here. When we talk rural, we are not talking just agriculture. Agriculture-based enterprises employ nearly a fifth of the non-farm rural workforce. Non-farm incomes? share of the rural economy is expected to reach nearly two-thirds by 2012, which makes the traditional view of rural economy outmoded. Share of industry and services sectors in rural GDP has risen to 58.4% in 2007-08 as against 48.6% in 1999-2000.
Rural India accounts for 70% of India?s population, 56% of national income, 64% of total expenditure and one-third of total savings. Rural consumers are expected to maintain a dominant share in the country?s consumer durables market even by the decade end. They accounted for 60% of the total ownership of low-cost items like bicycles, pressure cookers and wristwatches in 1995-96. This share is expected to rise to 75% in 2009-10, by when rural demand is also projected to rise for motorcycles (55%), scooters (40%) and car/jeeps (over 9%). The already high rural share (53%) in the FMCG segment is likely to increase to 60%.
Projections apart, a drought can have a major impact on GDP growth and consumer demand. With agriculture constituting nearly 20% of India?s GDP, a five percentage point decline in agricultural production could result in a one percentage point decline in GDP growth, as agriculture and GDP linkages are influenced by both supply and demand changes. The impact would be felt immediately in FMCG product categories like shampoos, but with a time lag in case of consumer durables such as tractors and TVs.
As drought pushes down household incomes, consumption is sought to be maintained via savings or increased borrowings. In urban areas, the higher rate of savings and increased availability of credit will help households maintain their consumption levels. But lower income households, in both rural and urban areas, are likely to shift from better quality products to cheaper/lower quality products.
?The author is senior fellow, NCAER