Rural demand to stay muted on poor rains, global agri price

Demand in rural India is likely to stay under stress, largely on account of poor rains and weak global agricultural prices, says a report by Bank of America Merrill Lynch.
According to the global financial services major, the only immediate trigger for a revival in rural demand is the gradual implementation of the Swaminathan formula by the government. The formula suggests raising minimum support prices of rice and wheat to above 50 per cent of cost before the April-May 2017 UP polls.
The BofA-ML report said the Indian economy is likely to witness a consumption-led recovery rather than a turn in the capex cycle, which is not expected till 2017.

It noted that pick-up in consumption of over 1 per cent of GDP in mid-2016 is likely to be driven by hike in Central government salaries due to the 7th Pay Commission award, lending rate cuts and household saving on lower oil prices.
"Note we have not factored in any significant turnaround in rural consumption demand," Bank of America Merrill Lynch (BofA-ML) said in a research note.
According to the global brokerage firm, the summer 2016 rabi harvest income will rise only 4.7 per cent, while the autumn 2015 kharif farm income would grow 3.8 per cent with delayed rains hurting the crop.

Moreover, income growth from horticulture and milk is also expected to decelerate to 5.7 per cent in this fiscal from 11.3 per cent last year.
The other factors that are likely to impact rural demand include global agricultural commodity prices and monsoon.
"Fed tightening has pulled down the global agricultural commodity prices to a five-year low, curtailing domestic power despite a double drought. Finally, there is a question mark on the 2016 south-west monsoon, although a third year El Nino is rare," the report noted.