Farm incomes and rural consumption: It will take time to rev-up the rural economy

Just when the rural sector was showing signs of revival, partial withdrawal of old currency notes in November last year created a dent in rural demand.

The government has given various arguments like Rabi sowing area, sale of milk, payments made via electronic systems, etc, to support the demonetisation drive. (PTI)

Just when the rural sector was showing signs of revival, partial withdrawal of old currency notes in November last year created a dent in rural demand. Even though the Union Budget FY18 tried to bring some relief to rural India, the mostly informal and cash dependent economy’s troubles have not subsided. Rural consumption accounts for around 55% of private consumption in India. Overall macro data points towards some resilience, however rural distress is far from over. Significant moderation in rural wages and rising indebtedness of rural households has had a long lasting impact on rural demand. Budget FY17 promised to double the farm income by 2022. But surprisingly Budget FY18 had no action items to augment farm income. Measures like increase in credit target (R10 lakh crore from R9.5 lakh crore last year) over the years have failed to reach small and tenant farmers, accounting for almost 85% of the farmer community. There is also no clarity over allocation of the long-term irrigation corpus fund of R40,000 crore. FY18 budget expenditure of R1.87 lakh crore for rural, agriculture and allied services is around 1.1% of GDP—almost the same as the allocation in FY17 budget.

The government has given various arguments like Rabi sowing area, sale of milk, payments made via electronic systems, etc, to support the demonetisation drive. In terms of seed consumption for the Rabi crop, the government has stated that compared to Rabi 2015, sale of Rabi seeds in 2016 has been either more or equivalent. Rabi sowing, too, has been better than last year. Data as of February 3, 2017, shows that Rabi sowing has been 5.6% higher than last year.

Considering inflation as a proxy for demand pressures, inflation hasn’t really seen a sharp fall or sharp rise in the aftermath of demonetisation. Thus, food supply chains have remained intact. Rural retail inflation (CPI) moderated gradually to 3.4% in January from 4.1% in November. Inflation in the miscellaneous category representing discretionary spending too remained sticky above 5% for the last three months.

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Rural retail inflation

Demonetisation has adversely impacted the sale of two-wheelers, which is usually taken as one of the indicators for rural demand. Sales of two-wheelers contracted 5.2% in November 2016, and further by 20% in December on a year-on-year basis. According to estimates, about 65% of two-wheeler purchases in India are in cash, especially in rural areas. Within this segment, scooter and motorcycles have been hit the most, while mopeds—which are primarily sold in rural areas—seem to have bucked the trend. Overall, January data shows some correction from the dip seen in December.

Domestic tractor sales were down 13.5% (y-o-y) in November 2016, but grew by 7.7% in December. Around 82% of the farmers in India own less than five hectares of land—who usually rent farm equipment. Ownership of tractors is majorly concentrated in the hands of a few big and wealthy farmers, which have likely been impacted to a greater extent by the note ban.

While some of these macro numbers reveal that the rural sector has remained resilient in the wake of demonetisation, they might be masking some of the ground realities. Rural economy is typically dominated by cash and informal credit. While cash and informal credit has been the norm of rural economy, demonetisation has led to multi-fold increase in credit. This huge increase in credit is a risk since farmers would eventually pay off their dues when the Rabi harvest gets marketed. According to the latest round of NSSO survey almost one in three rural households is indebted and the average cash dues outstanding per household have been estimated at R32,522. The average amount of debt per indebted household was R1.03 lakh for rural sector. The report further points out that institutional lending has plateaued over time and over a quarter of all debt is still owed to money lenders. Even more worrying trend, however, is that the loan taken under “other household expenditure” has been increasing while loan taken for productive purposes has been on a decline.

Moreover, farmers of perishable goods like vegetables and fruits have also been hit as they were not able to sell their produce in the APMC markets. While the Kharif production numbers (record food grains production—135.03 million tonnes) may reflect a good picture due to a normal monsoon it should be remembered that the whole supply chain from harvesting to mandi is entirely settled in cash. Trading at various APMC mandis declined significantly in November and December (in some cases up to 70%) due to crash crunch. This will impact farm income, and hence spending power of rural folks in the medium term.

Agriculture wage growth has fallen drastically from 22% in FY12 to 4.5% in FY16. Non-agriculture rural wage growth has more than halved from an average 18% y-o-y to 8% over the same period. Forty percent of the rural households depend on non-farm activities like construction, retail, transport and repair according to NSSO. Various non-farm activities like construction and repair are already witnessing a slowdown. Rural farm wages rose by only 5.9% from April to December 2016 despite good monsoons.

The Economic Survey has also warned that the impact of demonetisation may linger on in FY18. The survey states that while the sowing of winter crop is higher compared to last year, a commensurate increase in production will depend on the impact of demonetisation on farmers’ access to inputs.

Anecdotal evidence suggests that in some states like UP and Bihar, the timing of demonetisation has also impacted the Rabi crop. Coupled with poor monsoons over the previous two fiscals, demonetisation shaved off some of the gains expected from good monsoons of 2016. New seed sales and fertiliser sales seem to have taken some hit.

Given the current state of rural debt and wages, it may take time before farm incomes increase significantly and rural consumption takes off in a sustainable way. The government will have to come out with a clear strategy to augment farm incomes over the next five years, otherwise any revival in rural consumption will only be short lived.

Authors are corporate economists. Views are personal

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