The trends emanating from India’s rural economy are so conflicting, it is hard to tell how stressed the hinterland really is. On the one hand, consumption of two-wheelers, tractors, cars and other consumer durables in these markets have been brisk, and suggests there is demand. Companies such as Hero MotoCorp and Maruti Suzuki, which sell more than a third of their volumes in the hinterland, have not reported a slowdown in recent months. Sales of tractors jumped 43% y-o-y in the January-March period, showing there is purchasing power. Management commentary from manufacturers of consumer staples, post the Q4FY18 results, confirms demand in these markets has seen an uptick and is back at close to pre-demonetisation levels. Hindustan Unilever, which sells close to half its volumes in rural India, reported an 11% increase in volumes in the March quarter. This would suggest consumption is holding up.
On the other hand, there’s talk of farm distress as farmers have been unable to get a good price for their crop. Prices have either stagnated, or are falling—especially those for fruit and vegetables—leading to the clamour for loan waivers. Moreover, it is a fact that the rise in rural wages has been slowing. In January, the increase in rural wages for men dropped to 3.09% from a rise of 6. 57% in January 2017. That’s the slowest y-o-y growth in three years, and in real terms, the growth was negative. Specifically, rural agricultural wages were growing at above 7% for four quarters starting Q3FY17 but have since moderated, growing at just 4.7% y-o-y in Q3FY18, and an even slower 3.6% y-o-y in January. An assessment by Pranjul Bhandari, chief economist at HSBC, in July 2017, concluded that the landed class—those owning more than one hectare of land and comprising 30% of households—were worse off due to a rise in real indebtedness following lower inflation. These were households that were paying wages. On the other hand, the remaining 70% of households—those owning less than one hectare of land—were relatively better off because at that time, rural wages were rising.
Bhandari observed that following two consecutive droughts—in 2014 and 2015—the good monsoon in 2016 led to an increase in the demand for labour which benefitted the wage-earning landless class. That trend appears to have changed in the last few months. With the landed class unable to get a good remuneration for its crop, the growth in rural wages is tapering off. And the smaller ones, who are worse hit, are asking for a loan waiver. If households dependent on agriculture are in trouble, the fairly good consumption demand is clearly being generated in the non-agricultural sector of rural India. To be sure, demand has also recovered because there is more cash in circulation now than there was post-demonetisation in November 2016. Nonetheless, the fact that consumer durables are selling in large numbers suggests a fair degree of prosperity. Lender L&T Finance Holdings reported a strong 28% y-o-y increase in loan growth in the three months to March, driven by the rural business, which grew 64% y-o-y. The growth is impressive, the low base notwithstanding. It is important rural consumption holds up, given private final consumption expenditure (PFCE) has been tapering off over the last several quarters.