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Shopping drought ahead?

Rashmi Pratap | Updated on: Jul 11, 2014
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The lack of any budget sops adds to rural India’s woes

If there has been a saviour for India Inc after the 2008 Lehman crisis, it has been rural India. While urban dwellers were struggling with pay cuts, pink slips and a nose-diving stock market, nearly six lakh villages were busy rejoicing bountiful harvest after good monsoons, rapidly rising minimum support price (MSP) for crops and steady cash-flow from the government’s rural employment guarantee scheme. From buying bikes and tractors to fairness creams and noodles, rural India led the consumption party — offering hope to corporates in the doldrums.

But going by the Modi government’s recent decisions and the below-normal monsoons so far, the rural growth story may slow down sooner than later. Additionally, the annual Budget has called for reforming urea prices and for targeted subsidies. While the Budget offers 13 per cent growth in total expenditure, rural development will receive only 6.7 per cent more, at around ₹80,000 crore.

More importantly, the Budget proposed that the National Rural Employment Guarantee Act (NREGA), which assures a minimum of 100 days’ work to every rural household, has to be revamped. While the previous government increased NREGA allocation by 10 per cent to ₹33,000 crore last fiscal, the Modi government has raised it by just 1 per cent to ₹33,300 crore.

So far, NREGA meant giving employment, and wages, to rural workers irrespective of the quality or necessity of the work done. But not anymore. “It will be linked to agriculture-related activities,” Finance Minister Arun Jaitley has said.

The Economic Survey also pointed to the need to ‘prevent the misuse’ of NREGA, which has been cited as a major reason behind the recent price rise. The daily wages under the scheme vary from ₹153 in Meghalaya to ₹227 in Chandigarh. Now, the wages will depend on asset creation. This means a check on the almost unhindered dole-out for rural workers. This, in turn, will adversely affect rural spending power.

“Indicators suggest a further slowdown (in rural consumption). For the last one year, there has been some slowdown and quarterly results have been showing stress in volume growth,” says Dhananjay Sinha, head of research at Emkay Global Financial Services.

Sales volume growth for HUL, India’s largest FMCG company, has fallen to four per cent in December 2014 from 10 per cent two years ago. “This trend may be reinforced,” he adds. HUL faces a slowing market growth, both by volume and value, across categories.

The MSP for rice has been increased only by 3.8 per cent this year, compared with the 9 per cent a year increase on average since 2007-08. This means a rice-growing farmer’s income would have increased by nearly 50 per cent in the last five years. The government is now unwilling to be as generous with the MSP hike.

By increasing the minimum export price of onion by 67 per cent to $500 per tonne, the government has made it difficult for farmers to profit from exports. This limits the earning opportunity for onion growers too.

Jaitley said during the Budget speech that the government shall undertake open market sales (of agricultural products) to keep prices under control.

“If the government goes aggressively after containing food inflation and couples this with offloading grains (in the market), then realisable income at the farm-level will start reducing. That means the cash flow will start reducing,” says Sinha.

And that would impact the rural consumption story. The looming possibility of drought is further likely to slow down rural consumption, but will not stop it altogether. “While drought may become a reality this year, it is not impossible to find one extra customer in every village. Moreover, the rural economy is not only about farming. There are others supporting the economy — teachers, artisans, weavers and many others,” says Mayank Pareek, COO at Maruti Suzuki. And he has another reason to be upbeat. “People in rural areas have accumulated wealth in the last five years. There is resilience if the incomes have increased by 50 per cent in five years,” he adds.

Idea Cellular, which has built a strong telecom business in rural areas, remains optimistic too. “These are measures with long-term benefit. In the short term, there may be some hiccups, but these measures are required as a bitter pill for a sweeter future,” says Idea CMO Sashi Shankar.

Published on September 12, 2014

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