Monsoon to drive rural consumption MARKET INSIGHT

Sectors like FMCG, two-wheelers and textiles will benefit

Over decades, policies targeting the rural vote have led to large economic distortions and created many moral hazards. As an economy develops, industry and services contribute more and the work force shifts away from agriculture.

In nominal terms, agriculture contributes only six per cent to the global gross domestic product (GDP), while manufacturing contributes 31 per cent and services contribute 63 per cent. In the US, agriculture contributes only one per cent and services contribute 80 percent. There are similar splits in Japan, France and Germany. Among major emerging economies, agriculture contributes nine per cent in China (services 48 per cent) and 5.5 per cent in Brazil (services 67 per cent). In India, agriculture contributes 17 per cent (services 57 per cent). The average annual rate of growth for agriculture is less than 2.5 per cent. Services and industry are much larger sectors and both grow much faster. The agro-contribution to India’s GDP should continue to fall. But, employment patterns in India have not shifted in ideal fashion. About 69 per cent of the population still lives in villages and about 60 per cent depends on agriculture for a substantial part, or all of their income. In effect, 30 per cent of the population produces 80 per cent of GDP.

This leads to a big income disparity between the rural and urban population. Since India is a democracy, the rural population might be poor but it has a loud voice. In fact, as in most democracies, rural voters have more say than urban voters. Not only are there more rural constituencies (given larger rural populations), on average, there are fewer voters per rural constituency (since urban areas have higher population density). So, rural votes count for more.

Politicians target rural voters in many ways. Agricultural income is not taxed. Farmers receive highly subsidised power and fertiliser, and are eligible for low interest loans. There are cheap crop insurance schemes. The government sets what it considers high procurement prices for specific food items. In addition, there is the Mahatma Gandhi National Rural Employment Guarantee Scheme only for rural workers. As a result of all this, farm labour is slow to move off the land to seek employment in industry and services. Farmers also take loans, which they cannot repay, expecting writeoffs. If those anticipated write-offs are delayed, there is a widespread rural distress and high suicide rates as a result.

At the same time, the rural economy is neglected in many ways. Farmers get a tiny portion of the prices paid at urban mandis, as the supply chain is subject to many distortions and controlled by vested interests.

Despite the targeting of rural votes, uneven public investment means infrastructure is poor. Rural roads have indeed improved in the past 10 years. But, there has been hardly any increase in land under irrigation over the past decade. Long standing inter-state disputes over river waters is a pointer to the problems in improving irrigation.

Rural power supply remains poor and intermittent. Cold storage chains hardly exist, and this means massive waste along the supply chain. As much as 40 per cent of fruits and vegetables get damaged, according to some estimates. Cold chains will not happen, until organised retail is allowed to operate freely and source directly from farmers.

Inadequate irrigation means that the monsoon has a large impact on rural consumption. The large population tied to the land also means that the agricultural economy has a disproportionate impact on overall consumption. Despite being the smallest economic component in value terms, agriculture drives demand in both industry and services.

India would grow much faster if agricultural policy was less warped. But this is the reality and the National Democratic Alliance’s wholesale adoption of the United Progressive Alliance’s social security schemes makes it clear that this policy of lopsided rural development will continue.

This year, agricultural growth is expected to be good, as the monsoon has been excellent so far. Rural consumption should pick up. Agro-based industries that sell seeds, fertiliser, etc, should be obvious beneficiaries. Other traditional beneficiaries of rural consumption are industries like fast-moving consumer goods, two-wheeler manufacturers, tractor makers, textiles, and gold jewellery. In addition, there are non-banking finance companies which specifically target rural and semi-urban citizens.

These segments have suffered through the past two years, as drought hit rural India. We can only hope that the monsoon will live up to expectations and that the pattern of rising rural consumption in step with more rain will hold.