India's rural economy shows uneven growth as Covid-19 spread eases

India’s rural economy, which is known for its resilience to withstand economic shocks, is showing signs of uneven growth. On the one hand, investment in the rural sector seems to have taken off at a time when the pandemic seems to be relenting.

Sales of heavy vehicles that help in farming and marketing have jumped more than 30 per cent, while those of construction equipment by more than 60 per cent since the beginning of 2019.

On the other hand, rural consumer demand has stagnated. Rural sales of fast-moving consumer goods (FMCG) grew below 5 per cent in August and September. Two-wheeler sales are far from their 2019 levels, television sales have fallen in smaller towns, farm credit has grown only 19 per cent over two and a half years, and there is an excess supply of labour — nearly 10 million — currently working on Rs 210 per day. 

Stress in rural consumer demand

Two-wheeler retail sales in September 2021 recovered only to 75 per cent of January 2019 levels, according to the Vahan dashboard of the Ministry of Road Transport and Highways. Nearly half the two-wheelers — especially geared motorcycles — are sold in rural areas. 

Consumer non-durables, or FMCG sales, have grown, but their growth in rural areas tanked in recent months, according to NielsenIQ’s latest data (presented by Hindustan Unilever in its quarterly financial results). 

The sales growth of FMCG products has dropped from more than 12 per cent in January-July 2021 to nearly 3 per cent in August and September 2021 (year-on-year). The multiple data points to phenomenal growth in e-commerce. For instance, NielsenIQ finds that e-com sales in 2021 are 33 per cent higher than 2019 levels.

Sales of consumer durables have recovered to 92 per cent of the pre-pandemic levels, according to GfK, a consumer analytics firm.

Despite 130 million households not having a TV, demand for TVs has collapsed, and it is a telling indicator about low-income households in India. However, microwaves and washing machines have done better than in 2019. 

Sales of paints also show a skew in terms of consumption. Luxury ranges and decorative business in tier-1 and tier-2 cities drove business for Asian Paints, market leader in India’s paints industry, in April-September 2021. In its July investor call, Amit Syngle, managing director and chief executive officer, said demand for paints in metros and top cities was 25-30 per cent higher than in smaller towns. Last week, he said, “The volume growth rates in tier-1/2 far outstrip the growth rates of tier 3/4.”

Rural investment demand is strong as ever

If consumption is in tatters, rural investment is booming in 2021. Sales of tractors, food-carrying trailers, and harvesters grew more than 30 per cent in two years since 2019, despite the pandemic. Harvesters have become the hot favourite of upwardly mobile farmers. From an average of 370 harvesters sold monthly in 2019, sales went up to 580 per month in 2020, and have zoomed to 820 a month in 2021.

While 30,000 to 45,000 new tractors were being registered in 2019, the range went up to 40,000 to 60,000 in 2020, the Vahan data shows. New registrations have largely been above 45,000 per month in 2021, and topped at 74,000 in July 2021, followed by 65,000 in August 2021, exhibiting healthy growth from pre-pandemic times.

From fewer than 3,000 food-moving trailers sold monthly in 2019, sales are consistently more than 4,000 per month since the pandemic began, with occasional dips during the second wave.

Investment is up in the non-farm rural economy too. Retail sales of construction equipment have grown 61 per cent since January 2019, according to the Vahan data.

Sales of fertilisers have remained flat in the June-August period of kharif sowing, at 17.3 million tonnes. However, the combination of fertiliser use has changed -- costlier fertilisers are seeing lower demand.

Employment situation shows labour market stress

But what could be a more telling bellwether is the demand for jobs under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), which empowers every rural household with a right to demand work at a standardised wage any day of the year. 

Demand for work under the MGNREGA has assumed a higher normal than average. While the government pushed the MGNREGA as a cushion to absorb job losses elsewhere in 2020, the demand for this work is high even in 2021. 

Ten million more households are demanding work each month under the programme in 2021 against the pre-pandemic period.

Households demanding jobs in September, which is usually the lean period under the programme, were 10-11 million in 2016 and 2017. The number went up to 14-15 million in 2018 and 2019. In 2020, it touched 24 million, and settled at an above-average normal of 23 million in September 2021.

The employment situation improved in September. At the aggregate level, the rural unemployment rate fell to 6.2 per cent in September 2021 from the second-wave peak of 10.1 per cent in May, according to the Centre for Monitoring Indian Economy (CMIE), a data agency. 

Mahesh Vyas, managing director and chief executive officer at the CMIE, said: “It’s a K-shaped recovery so far. The richer households in rural India are prospering while the rest in the hinterlands are not doing similarly well."

How inflation plays spoilsport

While the texture of the rural economy is changing, rural labourers working on farms and outside agriculture are witnessing lower inflation than the population at large. But is that protecting them? 

Though food prices are so low that they are pulling headline inflation down, a slow pickup in consumer demand could be due to inflation in other things, especially cooking. For instance, electricity and cooking fuel put together are 11.5 per cent costly compared to a year ago in rural areas. 

But it hurts rural homes more as — being relatively low-income households — a larger share of their consumption pie is on food.

Contrary to what one would believe, this inflation is not due to exorbitant retail fuel prices because they fall not in the “fuel and light” group but under transportation. Inflation in “fuel and light” has been caused by suddenly rising prices of cooking gas (LPG), kerosene, firewood, and chips.

Dearer petrol and diesel are only adding to costly cooking expenses in the household balance sheet in the form of costs. The Reserve Bank of India’s (RBI’s) second monetary policy report of 2021 highlights how domestic kerosene prices suddenly skyrocketed in this year.

Finally, even as jobs improve, wages are stagnating. The first few months into the pandemic saw healthy growth in wages to general farm labourers, as well as non-agricultural workers. This was primarily due to a truncated number of workers vying for severely reduced work opportunities. 

But in 2021, wage growth too has suffered on a higher base. The RBI finds that while farm labourers are seeing wage growth of less than 2 per cent, non-farm labourers saw 0.5 per cent growth in July 2021.