The post-harvest cum festival season in October and November has been associated with both lower price realisation and slower flow of credit
A theme which is played every year is the rural story. The rural economy is very important as it provides not just the supply of goods and services which we associate with agriculture output but also demand in the form of impetus to be received by other sectors as 60% of our workforce resides here. While roughly half the rural economy GDP comes from farming, the balance is in the SME sector of both manufacturing and services. Therefore, the state of this economy is important.
In the last two years, the rural economy was affected by demonetisation and GST and 2018-19 was expected to be better. While a lot has been said about the southwest monsoon this year, it ended up being short by 9%. The implication is two-fold. The first is that while overall output has been satisfactory, output of certain crops is expected to be lower than last year as per the first advance estimates of agricultural production which includes bajra, tur, urad, groundnut and cotton. The shortfall in rainfall in states such as Maharashtra, Gujarat, northern Karnataka and parts of AP has caused stress in areas producing these crops.
The second is that these drought-like conditions in parts of the states of Gujarat, Maharashtra and Karnataka also imply that the rabi crop will get impacted due to lower moisture retention. The reservoir levels have been affected due to a weak monsoon in September and October this year and greater recourse to irrigation will be required. Crops like chana and mustard could be affected. The other issue relating to farmers is price realisation. This year the government announced fairly aggressive increases in the MSP for various kharif crops which were 8-10% higher than last year on an average basis. In fact, it was felt that these increases would actually add to inflation potential as, while this would enhance the income of farmers, the consumer would pay higher prices. Not surprisingly, this has also been a constant risk factor pointed out by RBI in successive monetary policy statements.
The picture on price realisation is quite mixed. As can be seen, the problem is with pulses and oilseeds, where prices are ruling lower than the MSP. In case of pulses, overproduction in the last few years has actually led to high levels of stocks being created. This has come in the way of market prices going up despite lower production levels. Farmers, in fact, have cut back on pulses cultivation due to low prices received last year. However, the carry-over stocks have created a glut leading to lower prices. The government has taken a positive step to ban imports, but unless there is active procurement at MSP, it is unlikely that farmers will get a higher price. Further, with higher prices of diesel during the sowing and harvest months, cost of cultivation, too, has gone up which has affected their net income.
In case of oilseeds, it still surprising because, while soybean production is higher this year, groundnut is expected to be lower. Yet, both their prices are ruling lower than the MSP. It is clearly the buyers’ market where imports coming at competitive prices have tended to compete with domestic output. Yet, with the rupee falling sharply in October, it would have been expected that the landed cost would be higher.
The lower income received by one section of farmers will definitely come in the way of sustaining the demand spiral which, prima facie, appeared to be visible at the national level in September and October when retail sales picked up sharply, especially through the e-commerce channel. Several FMCG companies, too, have reported healthy rural demand, and it will be interesting to see if this can be sustained. How about the non-farming segment? Here again there are two sections. The first is the SME producers. They have been impacted by the credit crunch due to the NBFC crisis. The flow of funds has tended to stagnate which has caused measures to be taken by both the government and RBI to improve this flow. Otherwise, with large industry doing well, the ancillary benefit has percolated to these units. Further, with exports, too, increasing at a healthy rate of 13% till October, there has been some impetus received which is good for them. But a credit squeeze will definitely come in the way of operations of some of these SME units.
The second part is rural demand in general from the credit route which is both banks and NBFCs. Here, this has been impacted mainly due to the NBFC issue where liquidity constraints have slowed down the flow of funds. NBFCs are a major source of funding for tractors, two-wheelers, consumer goods, etc. With there being constraints in terms of availability of funds with these institutions, there has been a tendency for overall demand to get affected. While this has not yet come out in the Q2 data, it may be expected that there would be a slowdown in demand from this segment in Q3 when the liquidity crisis peaked. What is interesting is that, with elections on for five states, affirmative action would tend to be taken in areas of prices for farmers, which is not too evident presently. Also, government expenditure should be more proactive at this stage within the confines of what was announced in the budget.
Data on both industrial production as well as credit for the months of October and November will be critical to form a view on whether, on balance, the rural economy has done better this year relative to 2017-18. The post-harvest cum festival season in October and November has been associated with both lower price realisation and slower flow of credit. This can impact the consumption cycle involving consumer goods which is the starting point of building strong backward linkages. For credit, it is still uncertain whether the liquidity issue with NBFCs has been substituted by banks. Banks, too, have been proactively vying for the retail pie as this is considered to be safer to corporate loans where the propensity to create NPAs is higher.
As of now the picture looks balanced with a tilt towards a recovery, albeit a gradual one. The straight path of more robust growth that was expected at the onset of the monsoon has, however, not played out.
The writer is Chief economist, CARE Ratings