In general, conditions are ripe for a recovery but look deeper, more pain is in store
It is not often that India gets three continuous years of normal monsoon like in the period 2019-21. The last time this happened was way back in 1892-94, if one looks at the monsoon data that is available since 1871. Copious rain coupled with good harvests and higher than usual agri-commodity prices (if media reports are to be believed prices of many agricultural produces are ruling well above the minimum support price) should augur well for rural demand. In fact, rural India or Bharat, as some prefer to call it, should be driving the nation’s consumption story and, thereby, fuelling economic growth.
But the ground reality is different. Rural demand has been weak over the last 12 months or more. Tractor sales have slowed and so has the sale of two-wheelers. Fast moving consumer goods (FMCG) companies have been hit particularly hard. Dabur says there is demand compression in rural India. The company says it is forced to give higher credit to its retailers as collection efficiency has declined from 12 days to 20. Godrej Consumer Products which posted a reasonable growth in revenues attributed it more to pricing rather than volume growth. Almost all FMCG companies suffered margin erosion as poor rural off-take impaired their ability to pass cost increase (due to supply chain disruption and Russia-Ukraine war). No wonder FMCG stocks have taken a beating in the bourses.
Buoyant during first wave
The rural economy was buoyant even in 2020 when urban India was battered by the first wave of Covid. The pandemic had spared rural India then. That year saw historically high tractor sales and FMCG companies had to rapidly shift focus from large cities to smaller towns and villages to satiate the demand. Just when urban centres recovered from the first wave and everyone was hoping for a period of strong demand both from rural and urban India, the second Covid wave struck in April 2021.
This time smaller towns and villages bore the brunt of the pandemic. Lack of adequate health infrastructure complicated matters, causing large-scale deaths. Poor health insurance penetration in rural India meant that out-of-pocket medical expenses shot up. This caused rural demand to slump and has not recovered since.
A year on, the second wave of Covid is a distant memory. Thanks to vaccination, India handled the third wave effectively. For the third year in a row, rains were good. The Indian Meteorological Department has predicted a ‘normal’ monsoon in 2022 as well. Under the circumstances, is it time for rural demand to revive? HUL’s CEO and MD, Sanjiv Mehta, is hoping it will. In the recent analysts call, he said good harvest, decent rainfall, better agri prices and higher government capex are factors that could trigger rural demand. FMCG major Marico expects this revival to happen in the second half of the current fiscal provided the monsoon is good and the government spending is front-loaded.
Monsoon, heat wave
However, there are factors at play which could prevent a quick and a strong revival. While the 2021 South-West monsoon has been classified as normal, it had an extended run and this impacted harvest in certain parts of the country. Many farmers suffered from lower output and, consequently, lower realisation. Then came the heat wave which also hurt output. The government is fast revising downwards the wheat production on account of this. That apart, the heat wave has also caused the size of the wheat grain to shrink by 10-15 per cent. This is a quality issue and the farmer will not be able to get a good price for his produce despite high prices prevailing in the market. The heat wave is also impacting production of horticulture crops such as tomato and onion.
While IMD has said that the 2022 monsoon will be normal, there is a lot uncertainty on spatial coverage and its spread. Weather experts have warned that the monsoon will see ‘abrupt, intense rains interspersed by abnormally long dry spells’. They have also pointed out that the initial phase of the monsoon will be good. That augurs well for the sowing of the kharif crop. What is worrying is their forecast that the monsoon will withdraw quickly.
That is bad news for irrigation, especially those areas which are rain-fed. Some experts also point out that unusually high heat wave, in the past, have typically caused massive rains during the initial part of the monsoon. If that happens even sowing could be impacted. Experts, for their part, have marked down the agriculture growth for FY22 at 3.2 per cent as against 3.3 per cent in FY21.
Too many variables
With these uncertainties, it is a moot question whether farmers — even if they are sitting on cash due to good harvest and higher realisation — will spend.
Even if the agriculture part of the rural economy does well, the manufacturing and service sectors which account for 50 per cent of the rural GDP continue to be in a bad shape. MSMEs that dominate this space are cash strapped and yet to recover from the effect of the pandemic. They too need to fire on all cylinders for a vibrant rural economy.
Experts have also flagged that rural wages have been on the decline recently. It looks like funds allocated for MGNREGS are getting exhausted and this is causing wages and also the quantum of work allocated to drop. There have also been reports of rural infrastructure spending, such as on roads, slowing down. While this will mean that more labour will be available for farming activity at a lower cost, lower income would mean lower spending.
As too many variables are at play, it is extremely difficult to predict a revival in demand.
The government should keep a close watch on the progress of the monsoon and other pain points of the rural economy. After all, it accounts for 46 per cent of national income and 30 per cent of the nation’s GDP. Proactive measures will certainly help weather the crisis in case monsoon plays truant. If not, such measures will ensure faster bounce back in rural demand.
Published on May 26, 2022