Farm loan waivers, not real income growth, driving rural revival: Report

"But the extent of this pick-up depends on a number of factors. Firstly, 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," a report by HDFC Bank 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 the report penned by the banks chief economist Abheek Barua.

"The recent jump in items such as tractor sales could have at least been driven by the farm loan waivers. A similar phenomenon was witnessed in 2009 when the then 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 Barua.

Thirdly, despite the fall in agriculture output in FY18, rural demand might have risen on the back of affluent farmers spending and the rise in items such as tractor sales could partly capture this.

As per the price income survey, 34 per cent of rural consumption comes from only the top 5 per cent (according to income) of the rural population while 33 per cent come from the bottom 50 per cent. Therefore, strong demand from the more affluent rural population could have outweighed the decline in demand from majority.

Noting that the rural wages have been on a steady decline, which is the most important leg of the rural demand growth, 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 agri and non-agri shows that while farm wages saw a sharper decline, the fall is not restricted to the farm sector as both agri and non-agri wages declined with the former wages more than the latter.

Agriculture wage growth declined from close to 9 per cent in April 2017 to 2.3 per cent in February 2018 while nonagricultural 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 holds 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 Modi government and analysts have warned that this would push up retail inflation by at least 70-80 basis points.