Budget 2022 | Bharat needs revival of animal spirits to boost consumption

The first advance estimate of India’s GDP growth for 2021-22 indicated a steadfast recovery in the economy after the blow from Covid-19 in 2020-21. Yet, a key aspect of the economy – rural consumption – has turned sluggish again, lending credence to the argument that the recovery hasn’t been the same for everyone.

While it may be convenient to blame the pandemic, indicators of wages and income have been benign even before Covid-19 made them worse.

“Terms of trade have not been very good for the agriculture sector and at the same time, real rural wages have been trending down over the past few years,” said Madhavi Arora, lead economist at Emkay Global Financial Services. “There is a structural losing of consumption momentum in the rural areas since 2018.”

Growth in the average wage rate for rural labourers in agriculture and non-agriculture activities moderated to 4.75 percent on-year in November from a high of 6.1 percent in March 2021, data collated by Centre for Monitoring Indian Economy showed.

The recent challenges in the rural economy, however, are due to the devastation caused by the second wave in April-June. Workers who returned to their villages from urban areas are yet to go back to their jobs.

The elevated demand for work under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) is another sign that employment and incomes are yet to recover fully in India’s villages. Another wave could possibly hurt rural consumption even more.

Uncertainty over employment and income has meant that rural consumption is losing its initial strength. Indicators such as tractor sales and consumer staple volumes point to a rural economy that has steadily lost the resilience it displayed after the first wave of the pandemic in 2020.

Almost every tractor manufacturer reported a decline in sales in the December quarter, data showed. Sales of consumer staple producers fell 2.9 percent on-year in the September quarter, Edelweiss Securities said in a recent note, citing Nielsen India data.

Brokerages expect consumer staple companies to report a further moderation in volume growth in the December quarter.

Silent tax

Adding to the stagnation or even decline in rural wages is a spell of high inflation caused by the surge in global commodity prices and supply chain disruptions. High inflation in non-food items and healthcare services has wreaked havoc on rural household budgets.

The Consumer Price Index for rural India averaged 5 percent during April-December. The CPI Rural index rose to 5.36 percent in December from a low of 4.07 percent in October, data showed.

A study by ICRA in September showed that the Rs 11,000 crore increase in the income of farmers from the kharif crop season in 2021 was largely taken up by savings (about 20 percent) and inflation of 5-10 percent in non-food products.

“Therefore, the overall demand for non-food products may not receive a booster shot from this kharif crop performance in incremental terms,” ICRA, a unit of  Moody’s Investors Service, said in its note.

Rural sentiment, as a result, has taken a beating. The Reserve Bank of India’s index of economic conditions in rural India, which gauges the surveyor’s perception of their economic conditions, nosedived to 10.5 in the December quarter from 22.3 in the previous quarter.

Rural consumers are also less optimistic about the future than they were during the second wave, with the consumer expectations index sliding to 12.5 in the December quarter from about 18 in the June quarter, RBI data showed.

Budget relief?

While higher spending on MNREGS and free food may provide short-term fixes, economists said the rural economy needs a revival of animal spirits that have been dimmed by the pandemic and the economic slowdown prior to it.

“Generating employment in the rural sector is important, so maybe by creating a business environment in the rural sector that creates demand for labour is the way to go,” Arora said.

The situation is not hopeless for the rural economy as long as government execution remains strong.

“A higher outlay for infra programmes will spur urban remittances and rural economic growth indirectly,” Abneesh Roy of Edelweiss Securities said in a recent note.

Then there is the centre point of the rural economy – agriculture. Farming has been the silver lining during times of distress for the rural economy. Agriculture has lent a cushion to rural incomes, but there is still a need to encourage consumption through budgetary support.