Revival in rural economy still a quarter away; monsoon, inflation, budget to play key roles: Experts

Monsoon and lower inflation key for pick up

India's rural economy will need another quarter to rebound, economists told Moneycontrol, as they noted that the consumer goods growth seen in May was temporary.

“The Q3 will be indicative of full revival, if at all,” said Madan Sabnavis, chief economist at Bank of Baroda.

Consumer durables production, an indicator of rural demand, increased to 12.3 percent in May from 10 percent a month back, according to data released on July 12.

But economists warn against reading too much into the data.

“IIP only partly explains rural recovery. After rabi harvest and wedding season, there was an uptick. Also, price realisation was higher on several products,” Sabnavis said.

A Moneycontrol analysis shows that the durables growth in the first two months of the year was still trending below the pre-pandemic levels.

In May, production was down 3 percent compared with same period in 2019, while the April production data was 6.5 percent below the 2019 period.

“We can’t label this as a sustainable revival. Last year also, IIP showed some signs of revival, but then came back to 4-5 percent range,” said Paras Jasrai, senior analyst at India Ratings and Research.

Monsoon, inflation and budget to play a role

Experts indicate that monsoon and inflation will play a big role in deciding the course of rural recovery.

“Inflation would moderate in the coming quarter owing to high base effect of last year, but food inflation needs to stay contained. More important, monsoon needs to be better (normal) with not much deviation in spatial spread—as was seen in the past few years—for a sustainable recovery,” Jasrai noted.

Only 16 states in the country faced normal monsoon until July 15, with 12 facing deficient rainfall and eight facing excess or largely excess rain.

India’s consumer inflation rose to 9.4 percent in June compared with 8.7 percent in the previous month, on the back of simmering prices of vegetables and pulses. Both onion and potato inflation trended above 50 percent.

Pulses inflation has been in double digits for a year now. A high inflation erodes the purchasing power of consumers.

Rural inflation has trended above urban inflation in 25 of the last 30 months.

Experts contend that Budget is also likely to play a role in addressing rural demand.

"Government emphasis on reviving consumption will also be watched in the upcoming budget, even as focus is more likely to sharpen on rural infrastructure rather than welfare spend," said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

Agriculture output had slipped to an eight-year low of 1.4 percent in FY24, compared with 4.7 percent in the previous fiscal.