By Sachchidanand Shukla
The state of consumption, especially in the rural economy, has become akin to a riddle ever since the second wave of the Covid-19 pandemic. Multiple shocks, and that too in quick succession, have only added to the chaos. Unseasonal rainfall in Q1FY24 damaged crops and hurt output. In Q2, an erratic monsoon impacted sowing. Then, higher inflation, especially food inflation, had an adverse impact on discretionary expenditure and weighed on rural revival. Reservoir levels have fallen well below last year’s levels, with the southern region’s reservoirs being the worst hit. India’s agricultural exports have seen the lowest growth in five years for the April-January period.
The busy electoral calendar, with several state elections in a short span of time, created differential expenditure patterns, as pre-electoral cycles typically meant higher government spending by the respective states. Poor spatial and temporal rainfall spread also had a debilitating impact on rural demand. Both these factors created huge distortions in income and consumption patterns that accentuated the skew across states and categories.
Importantly, according to latest data, real agriculture activity shrank by 0.8% year-on-year in Q3FY24, the first negative reading in nearly five years. Foodgrain production of major crops is estimated at 309 million tonnes for agricultural year (AY) 2024, which is 6% lower as compared to AY23. The Central Statistics Office’s advance estimate for FY24 indicated negative growth in Q4FY24, too. If that does play out, it would mean two consecutive quarters of negative real agri gross value added growth, the first such instance since FY15.
Yet, there has also been a distinct pattern of K-shaped rural recovery manifesting via high-ticket consumption and premiumisation across sectors within the rural sector. Demand for higher HP tractors, i.e. above 40 HP, reportedly grew thrice that of lower HP (sub-30 HP) tractors over the last three years. Demand for four-wheel (4W) drive in tractors also witnessed a rise. Similar trends, data and anecdotes are rife for categories such 4W, 2W, real estate, and white goods categories across rural and urban segments, despite continued price hikes by companies.
However, there are some early signs of change in the background.
Private weather agency Skymet has predicted that India will have a normal southwest monsoon in 2024. Monsoon rainfall between June and September is expected to be 102% of the long-period average (LPA).
There have been early cues for monsoon being normal from January onwards this year. APCC, the South Korean meteorological agency, and even Skymet hinted at a normal monsoon in January. The World Meteorological Organization (WMO) recently said that the current El Niño, one of the five strongest on record, has peaked, is gradually weakening, and is transitioning to La Niña, which typically results in stronger monsoon circulation.
The RBI’s latest survey on consumer confidence for the current period has been on a path of sustained recovery. Consumer confidence for the year ahead has also improved further. The latest RBI report also pointed out that rural demand, which was lagging urban demand earlier, has picked up since Q2FY24. Notwithstanding lower estimates of rabi production, it cited a robust 20% rise in agricultural credit growth, strong upticks in two-wheeler and tractor sales, and a fall in demand for the Mahatma Gandhi National Rural Employment Guarantee Scheme as evidence of improvement in non-farm employment in rural areas and recovery in the informal sector.
Farm input prices deflated during September 2023-February 2024 due to a decline in the prices of diesel, fodder, pesticides, and fertilisers. The wholesale price index of electricity — a key component in both industrial and farm inputs — remained deflated for the most part in H2FY24. Nominal rural wages increased by 5.9% in January 2024, driven by wage growth in the non-agri rural sector.
However, one key factor that could have a huge impact on the fortunes of the rural sector is the government spending pattern. The Centre’s revenue expenditure slowed to a mere 1% in February, even though, in aggregate, it grew 7%, driven by capex spending that increased to 36.5% y-o-y. State governments’ spending on revenue account slowed to 6% y-o-y even as capex spend growth doubled. The pace of spending is likely to remain lacklustre till the new government presents the final Budget, and should likely rise in the second half of the year, giving a fillip to rural activity.
A normal monsoon is an important prerequisite for broader economic growth. Also, stronger rural and aggregate consumption will spur capacity utilisation levels that have flatlined lately around 75%. Importantly, a normal monsoon will be a critical input for the RBI to move decisively towards interest rate cuts, given the role of food inflation in queering the inflation pitch for long now. But make no mistake, while rural consumption may see a cyclical recovery, broader consumption will continue to play a secondary role as the government continues to lean on a capex-led growth strategy.
The author is Group Chief Economist with L&T.
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