Shot in arm for Modi: Rural economy leaves demonetisation, drought days behind; shows signs of revival

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Updated: Mar 29, 2018 2:39 PM

Hit by two consecutive drought years, when the rural economy was about to recover, it was hit again by demonetisation and suffered a great deal. But now, finally, on back of good monsoon, the rural economy is showing early signs of recovery ahead of 2019 polls, which could be instrumental in the re-election of Narendra Modi.

The rural economy is improvingAhead of 2019 polls, rural economy buries ghosts of drought, demonetisation; shows early signs of recovery

A couple of years ago, when India’s rural economy was on the cusp of recovering from the perils of two consecutive drought years, demonetisation struck another body blow. Now, with the impact of demonetisation far behind it, the rural economy is showing early signs of recovery ahead of the crucial 2019 Lok Sabha elections, which could be instrumental in the re-election of Narendra Modi.

A recently-launched index by Bloomberg, which looks for early indicators of the health of India’s rural economy, points towards a turnaround. A record harvest in 2017 and rapid remonetisation, backed by a good monsoon, will help, the Bloomberg Economics India Rural Output Index shows.

“Good monsoon projection for 2018 and government’s focus on the rural sector through measures such as free cooking gas cylinders and electrification is helping the rural economy show growth revival,” Abhishek Gupta, India Economist, Bloomberg LP, told FE Online in a recent interaction.

Further, even as some residual impact of the recent indirect tax overhaul remains, the rural economy is showing resilience in its growth trajectory. “Even as the money (less) spent on irrigation is a little concern, and there was some difficulty in the rural economy due to the GST, over-all, the rural economy is in recovery mode,” Abhishek Gupta said.

Rural economy is reviving(Bloomberg Rural Tracker)

While the government tracks the GDP of agriculture on a quarterly basis, the Bloomberg rural tracker took seven key monthly indicators to explain the health of rural economy beyond agriculture. “From tracking these seven indicators — three related to the agriculture sector and four related to the broader rural economy, we found that rural economy grew at 7% in January 2018. Moreover, there are positive signals on many fronts: Two-wheeler sales indicate that rural consumption is picking up. The agricultural trade balance is improving,” Abhishek Gupta explained.

What the seven key rural components indicate:


There was good rainfall in 2016 and 2017 after two drought years in 2014 and 2015. This along with a normal monsoon forecast between June and September is going to support the rural economy a great deal this year.

Agriculture Trade Balance

During drought years of 2014 and 2015, India became dependent on imports, but after record harvest in following years, exports improved and agricultural trade balance improved.

Tractor sales

Tractors are a key input to agriculture mechanization and its sales serve as a proxy for investment on the demand side and capture retail trade services on the supply side. According to the data, tractor sales correlation with agriculture GDP has increased from 0.3 over the historical sample (2005-2017) to about 0.7 over the last five years.

Real rural wage growth

Despite demonetisation, the real rural wage growth remained robust. However, had there been no demonetisation, the growth would have been higher. “Rural wages are slightly going up.”

Two-wheeler sales

Two-wheeler sales reflect directly on rural consumption. Data suggest that after demonetisation, two-wheeler sales have picked up.

Real change in currency held by the public

After demonetisation, there was a negative impact on currency held by the public but the cash demand seems to be picking up in rural areas.

Government rural expenditure

Government’s rural expenditure is picking up. The government’s focus on empowering farmers and rural households in the Budget 2018 supports the positive outlook for the rural economy. While Narendra Modi’s ambitious target of doubling farmers’ income by 2022 is tough, it does put a spotlight on farmers’ income gap — which has been one-third of those in the non-agricultural sector since the early 1980s.

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