The growth in demand seen in some rural pockets is driven by farm loan waivers and not by real increases in rural incomes and wages, indicating that the economy is still far from a full-blown rural revival, says a report.
Noting that rural demand has been on the rise in recent months, the report says the upward trend is visible from the sale of big ticket items like tractors and the latest corporate earnings of consumer goods companies.
According to recent Nielsen data, rural growth outpaced urban demand, rising by 13.5 per cent in the March quarter.
Many large states had announced farm loan waivers last year as farmer suicides increased
Last week, Karnataka became the latest state to join Uttar Pradesh, Maharashtra and Punjab among others to write off farm loans.
"But the extent of this pick-up depends on a number of factors. First a good monsoon alone will not do the trick. Adequate procurement and the effectiveness of MSPs to act as a floor for crop prices will be crucial," an HDFC Bank report said.
Though there are clear signs that rural demand is recovering from setbacks due to the 2016 note-ban and GST disruptions, "we have our reservations over the extent of this increase as this could be due to the loan waivers," says report penned by the bank's chief economist Abheek Barua.
"The recent jump in tractor sales has at least been driven by the farm loan waivers. A similar phenomenon was witnessed in 2009 when the government had waived farm loans and tractor sales grew by 30 per cent. So, it is uncertain whether the recent increase is a one-time spike or a reflection of genuine improvement in the rural income situation," he explained.
Secondly, the higher numbers come from weak a base. "The increase in rural demand is coming over two years of weak growth as demonetisation took a hit on consumption. Therefore, this could be a bounce back from the 2016 lows and not necessarily translate into the required higher momentum in rural demand," argues Mr Barua.
Third, despite the fall in agriculture output in 2018, rural demand might have risen on the back of affluent farmers' spending. As per the price income survey, 34 per cent of rural consumption comes from only the top 5 per while 33 per cent comes from the bottom 50 per cent.
Noting that the rural wages have been on a steady decline, the report says nominal rural wage growth has been moderating since the middle of 2017. Wage growth declined to 3 per cent in February 2018 from over 7 per cent in April 2017.
Also, real wage growth has seen a secular decline over the last year and has now turned negative. For a strong and sustainable rise in rural consumption, an increase in rural wage growth is essential.
Usually, rural wage growth is linked with the performance of the monsoons and agriculture growth. However, the non-farm sector of the rural economy bears an equal if not higher influence over overall rural wage pressures.
Non-farm activities like construction, manufacturing and services account for over 60 per cent of the value added in rural output. The break-up of rural wage growth into agriculture and non-agri shows that while farm wages saw a sharper decline, the fall is not restricted to the farm sector. Both agricultural and non-agricultural wages both declined.
Agriculture wage growth declined from close to 9 per cent in April 2017 to 2.3 per cent in February 2018 while non-agricultural wage growth moderated from 5 to 3.7 per cent during the same period.
Construction wage growth rose for during 2016 and 2017 driving up agriculture and overall rural wage growth during this period. However, in recent months, construction wage growth has declined sharply from over 6 per cent in April 2017 to 3.2 per cent in February 2018) and is likely to have pulled down agriculture and overall rural wage growth.
On the impact of the MSP hikes, the report says that mere announcement will not increase the income of farmers but adequate procurement hold the key. Similarly a good monsoon does not necessarily imply a rise in rural incomes.
It can be noted that ahead of the elections, the Centre recently announced massive hikes in minimum support price across a slew of farm produces. This is the steepest such increase by the PM Modi government. Analysts have warned that this would push up retail inflation by at least 70-80 basis points.