Are revival signs of rural economy for real or is it too early to call?

Many non-official parameters do indicate a rebound, but high inflation seems to hitting hard, eroding all gains

Satpal Singh, who runs a small milk business with three buffaloes in Jewar, near Noida, has seldom seen an increase in input cost as steep as it has been in the past few months.

Singh tells this correspondent over phone that dry fodder, which till last year was sold at around Rs 1,500-2,000 per tractor trolley, is now quoting at Rs 4,500-5,000.

The prices of other cattle feed such as mustard meal and similar mixes have gone up from Rs 2,000 a quintal to Rs 3,100-3,200.

“I'm not saying milk rates haven’t gone up, but their rise is still lower than the rate of increase in input costs, which is making rearing animals difficult for us,” he said.

The average feed cost per animal is Rs 125-150 per day. Till a few months it back was less than Rs 100.

Sandeep Kumar Singh, CEO–Animal Feed and Maxximilk at Godrej Agrovet Ltd, one of the biggest organised feed meal manufacturers in the country, concurs with Singh.

He said high feed meal prices could drive away small dairy and poultry farmers and lead to consolidation of the industry in favour of few big companies, who have the wherewithal to absorb the price shock.

“This could impact the country's self-sufficiency in eggs, meat and milk because the entire livestock value chain is dominated by small players--farmers who hold 1-3 cows, or who produce 3,000-5.000 eggs a day,” Singh of Godrej Agrovet said.

"Such players don't have the strength to absorb the feed meal price hike for more than 1-2 months and their ability to pass on the increase to consumers is limited," he added.

What Satpal Singh and Sandeep Kumar Singh pointed out is a phenomenon that is clouding every argument in favour of or against the elusive recovery in rural areas.

Various non-official parameters do indicate that rural economy has turned the corner, aided by various favorable factors that include high farm prices, improvement in economic activity in urban areas which has opened up work opportunities in the informal sector and also general economic revival, but high inflation seems to hitting hard taking away all the gains.

MGNREGA Work Demand

One very commonly used indicator of where the rural economy is heading is work demand for MGNREGA, the flagship scheme to absorb surplus manual casual labour and a safety net for distressed households.

Latest, data shows that around 23.26 million households had sought work under MGNREGA in April 2022, which is 11.15 per cent lower than the number of families that demanded work under the scheme during the same period last year.

Though the data shows that fewer households might be seeking manual casual work under the flagship scheme, reflecting somewhat improved work opportunities in rural areas, the data also reveals that compared to the pre-pandemic years, a disproportionately large number of people are still seeking work under MGNREGA.

This, some economists said, is also reflective of the fact that though rural economic activity is improving largely in the non-farm sector, but it has still not come to the pre-Covid-19 pandemic levels.

In April 2021, 26.18 million households had sought work under the scheme, which in April 2020 stood at 13.41 million.

The April 2020 demand data is not strictly comparable to previous years because work sites could not operate during much of that month on account of the lockdown during the first Covid-19 wave.

“The drop in the number of households seeking work under MGNREGA might be due to migration of manual casual labourers back from rural areas to the cities, where almost all economic activities including contact sectors like hotels, airlines resumed in full strength. Also, the severity of the fourth Covid wave hasn’t been acute so far, which is also fueling demand in other sectors,” S Mahendra Dev, Director of Indira Gandhi Institute of Development Research (IGIDR) had told Business Standard a few weeks back.

He said in the coming months demand for work under MGNREGA might go down even further but the fact that still over 20 million households are still looking for work under the scheme in April 2022. In the comparable pre-pandemic month, it was 16-17 million households, and clearly shows that things haven’t normalized to earlier levels yet.

“Also, I feel that demand for work usually goes down during April due to rabi crop cutting in several parts of India which requires manual labour, the real impact of whether rural economy has improved or not on MGNREGA should be seen in the months of May and June when agriculture activity usually goes down in rural areas,” another leading economist said.

Two-wheeler and tractor sales

Two-wheeler and tractor sales are a good indicator of rural demand because in the case of the former, almost half the consumption comes from rural areas while in the case of tractors, all the sales are in rural settings.

Latest data from Society of Indian Automobile Manufactures (SIAM) shows that in April 2022, two-wheeler sales were almost 15.15 per cent more than the same month last year.

But despite the jump, two-wheeler sales are even below the April 2012 numbers in total, Rajesh Menon, DG of SIAM said in a statement.

Experts said an early harvest coupled with a pent-up demand for weddings and festivals bumped up sales.

Last year’s low base also made the YoY sales performance look impressive and the good show is unlikely to continue beyond a few months.

High raw material prices forcing companies to jack up prices will weigh on demand, and the continuing shortage of semiconductors will plague supplies.

Meanwhile, those at the bottom of the pyramid have yet to recover from the economic impact of the pandemic.

In the case of tractors, data shows that sales in April 2022 were around 100,000 units, the highest since January 2022.

Real rural wages

Several economists say the most accurate way to look at whether the rural economy is improving or not is to see if wages are growing.

But here, absence of updated data is a big handicap.

However, last available numbers show that real rural wages of general agriculture labourers (male)-–which is sometimes considered as the benchmark--have grown by a miniscule 0.40 per cent in February 2022.

That made it the sixth successive month starting September 2022, that real rural wages have been in positive territory, barring a minor blip in January 2022.

However, the increase is so nominal that it makes absolutely no impact and is almost like flat growth. 

A big reason for wages not growing faster despite the opening up of the economy is the absence of non-farm activities in rural areas.

Experts said that unless there is prolonged period of healthy growth in real rural wages, the ground situation won’t improve substantially in rural India.

FMCG sales

A recent report in a leading economic daily said that packaged consumer goods companies expect rural demand, which started slowing from last September but bounced back by the next quarter, to sustain on the back of good monsoon forecasts, higher capital investments and additional spending in government programmes like the rural employment scheme.

The daily quoted Mohit Malhotra, chief executive of Dabur, as saying that he believes the slowdown in rural markets is temporary and should get corrected by the end of the June quarter, or at the most the second quarter.

According to the same report, around 35 per cent of the sales of FMCG companies comes from rural markets.

“The proportion of farmer households that considers this to be a better time to buy consumer durables compared to a year ago has been rising on a steep gradient since May 2021, when only 2.3 per cent of households felt it was a better time to do so,” Mahesh Vyas from the Centre for Monitoring Indian Economy (CMIE) wrote in a column published in Business Standard a few weeks back.

However, he advised monitoring the consumption pattern for some more time before arriving at a definite conclusion.

Crop prices

The biggest thing favouring the argument of a rural recovery is crop realisation this rabi.

Crop production, despite its falling share, still constitutes about 38 per cent of the monthly average income of an agriculture household in rural areas, NSSO data shows.

Starting with wheat, which is by far the biggest crop grown in North India during rabi and going right up to to cotton and vegetables, prices of most food items have been ruling above their state mandated price or last year’s levels since the past few months.

The situation has been further boosted by the global breakdown in supply chains due to the Russia-Ukraine war since end of February.

Strong exports and healthy domestic demand, coupled with drop in yields, have pushed prices of agriculture commodities to their best levels in some time.

Data sourced from various market agencies and traders showed that among the crops that were grown in the ongoing rabi season, prices of most crops except for chana, were selling way above their MSPs.

Wheat, prices have been ruling almost Rs 100-300 per quintal more than their MSP of Rs 2015 per quintal since the start of the season.

So much so, even fodder rates, which is considered the least priority of all crop for an average has been selling much above last year’s levels.

But, here too there is a catch.

In several crops, the sudden heat wave in March and April pulled down yields, leading to per-hectare losses for the average farmer. 

This, coupled with high input costs, means that unless farm gate prices are sufficiently high for the next few months, income levels won’t go up sharply for many growers.

Expert speak

Himanshu, associate professor at Jawaharlal Nehru University (JNU), and someone who has for long tracked the rural economy closely, told Business Standard that though there is some uptick in income levels in rural India driven largely by high crop prices, it can’t be regarded as a recovery unless it is sustained.

“You need to watch the situation for the next 5-6 months because while crop prices may have gone up this time, so also have input prices for an average farmer, be it electricity, labour or fertilisers,” Himanshu said.

He added that wages will go up in nominal terms for the average labourer, but high inflation will eat into his earnings.

“I was recently on a tour of the countryside and I saw that post Covid, while some people have gone into debt and are struggling to make ends meet, for others there is some resumption in economic activity,” he said.

Also, there is pent up demand for many things like spending in marriages, which had been postponed for two years and which might be pushing up rural spending. Whether it is sustained needs to be seen in the coming months, Himanshu said.