The Indian economy has delivered a strong performance in the first half of FY24, with year-on-year growth in Q1 at 7.8 per cent and 6.8 per cent expected in Q2. While urban demand has continued to be robust, the rural engine has run on a slightly different track.
Post Covid, there had been a gradual albeit belated recovery in rural consumption since late 2022, aided by moderation in retail inflation, sizeable correction in agri-input costs and an improvement in rural wages. However, rural consumption recovery was interrupted in Q2 FY24 owing to a confluence of adverse macroeconomic and seasonal factors.
Pinch of inflation: CPI inflation in Q2 FY24 jumped 180 bps vis-à-vis Q1 FY24 to soar to 6.43 per cent YoY. Retail inflation in July peaked at 7.44 per cent, capturing the surge in tomato prices amidst supply disruptions. While tomato turned out to be a temporary villain, price pressures in key food categories such as cereals, pulses and spices have continued to remain a concern well into Q3. With inflation acting like a regressive tax, rural incomes and purchasing power are likely to have taken a hit.
Inadequate and uneven rains: The South West monsoon in 2023 displayed high intertemporal as well as interspatial dispersion. August rainfall deficiency at 36 per cent was the worst recorded in over a century. While the delayed resurgance in rains in September helped to bridge the season’s deficiency to a more respectable 6 per cent (versus LPA or long period aveage), the impact of geographical unevenness in rainfall distribution was indelible.
Though kharif sowing remained at par with last year’s level, sizeable shortfall in production is being anticipated for some varieties of pulses such as moong (-19.7 per cent) and urad (-18.2 per cent), as well as oilseeds (as per first advance estimates).
Some of the high-frequency data points have validated slowdown in rural demand in Q2.
Tractor sales have disappointed in September and October — the months of seasonal demand pick-up. April-October sales have contracted 4 per cent on an annualised basis.
Most FMCG companies recorded slower volume growth in rural markets in Q2 compared to that in Q1.
IIP data indicate that consumer goods output has grown by only 3.7 per cent YoY in the first half, even as consumer durables production declined by 0.7 per cent .
Demand for work under MGNREGS has been somewhat elevated in FY24. Typically, rural employment under MGNREGS serves as a proxy indicator for stress in rural economic activity. During April-October, employment in person-days has been consistently higher in each month compared to last year (see chart). Geographically, demand for work has been highest in Tamil Nadu, Uttar Pradesh, Rajasthan and Bihar.
Looking beyond the near term pulls and pressures, climate change is proving to be a serious threat to agriculture performance and, thereby, for the rural economy. For FY24-25, the performance of rabi crop as well evolution of El Nino will be critical.
Amidst the delayed withdrawal of the South West monsoon and subsequent commencement of the North East monsoon, rainfall was 33 per cent less than LPA in October, and the water level in reservoirs has receded sizeably in 2023. As of November 16, the capacity stands at 68.6 per cent of live capacity — that is, much lower than the 86 per cent in the year-ago period. Latest National Food Security Mission data indicate a slowdown in rabi sowing so far. As a global phenomenon, El Nino is expected to continue well into 2024 with a 55 per cent chance of it turning into a “strong’ El Nino.
The early months of 2024 could turn out to be warmer than historical standards, just as October and November have been hotter than normal. For India, a less severe winter could dampen the seasonality, typically seen in the case of perishables’ prices over November-February, while also not auguring well for the rabi wheat crop early next year.
Acuité Research expects 5-5.5 per cent GDP growth in H2 FY24 and holds on to its base forecast of 6 per cent for FY24. There are indications of weaker rural demand in the near term and the outcome on rabi sowing will be a strong test of the health of rural demand going into 2024. While certain fiscal support measures such as the increase in MSP for wheat, additional subsidy on LPG cylinders, extension of the free foodgrain programme under PMGKAY may help to invigorate rural incomes, there is a need to develop suitable policies to mitigate the impact of climate change and impart resilience to the rural economy.
The writer is Chief Economist and Head of Research, Acuite Rating and Research