Rural Economy Continues To Recover Even Amid El Nino And Heatwave Concerns
After a slow recovery post the pandemic, India's rural economy continues to show a pick up even as it faces fresh headwinds.
After lagging the urban regions in recovery post the pandemic, India's rural economy continues to show a pick-up even as it faces fresh headwinds from heatwaves.
High-frequency indicators available for the rural economy suggest stabilising conditions and improving incomes.
Tractor sales rose 24.4% year-on-year in January, while rural unemployment fell to 6.5%, according to data compiled by Nirmal Bang Institutional Equities. Two-wheeler sales grew 5% year-on-year but are still lagging pre-pandemic levels.
Rural wages, the brokerage said, picked up to rise 7.8% in November 2022, after having remained subdued for most of the past year.
Strong rabi sowing and a higher wage growth has supported gradual recovery in rural demand, said Gaura Sen Gupta, economist at IDFC First Bank. Improvement in employment conditions is also confirmed by falling demand under the rural jobs guarantee scheme.
The total area sown under rabi crops increased to 720.68 lakh hectares in 2022-23 from 697.98 lakh hectares in 2021-22, according to data by the Department of Agriculture and Farmers' Welfare. It rose for all crops and is 13.7% higher than normal sown area.
An analysis of 12 rural consumption indicators by Nikhil Gupta, chief economist at Motilal Oswal Financial Services Ltd., suggests that spending rose 5.3% year-on-year in the first nine months of FY23 against a 0.6% growth a year earlier.
After the back-to-back shocks of lockdowns and rising global commodity prices, the informal sector has begun to regain its footing, according to Pranjul Bhandari, chief economist at HSBC. There are strong interlinkages and similar consumption patterns between rural and informal sector demand, she said.
Still, Gupta said, a close look at the farm sector suggests a mixed bag. While fiscal spending, rabi sowing and water reservoir level appear to be performing well, rainfall, wages of farm and non-farm workers and farmers’ terms of trade continue to lag, he said.
Is Rural India's Recovery Under Threat?
During the upcoming hot weather season between March and May, above normal maximum temperatures are likely over most parts of northeast, east and central India and some parts of northwest India, the Indian Meteorological Department said in Feb. 28 update. Enhanced probability of occurrence of heatwave during March to May season is likely over many regions of central and adjoining northwest India, the release stated.
Early onset of summers and heatwaves led to a fall in yield of wheat crop in 2022, with production estimated at 106.84 million tonnes as compared to 109.59 million tonnes the year before. This year, farmers growing horticultural crops are already seeing a hit.
A possible El Nino condition—warmer Pacific waters linked with monsoon shortfall—later in the year could also disrupt the country's agriculture, the weather forecasting service said.
"It's a risk we need to monitor," said Sonal Varma, chief India economist at Nomura. But how severe an El Nino is going to be, what is its impact, which month is going to hit, and impact on prices is difficult to predict, she said.
"We've had periods in the past of El Nino with not-so-bad rains or bad rains with less impact on production or production hit but limited price impact," Varma said. "So, I think we are hopping over so many bridges to come to the view that El Nino is equal to high inflation and bad production and therefore bad for rural demand. Right now to my mind it's a risk. It is not a clear cut negative."
The moderation in inflation, from a real income perspective, is becoming a positive for rural India, she said. The one segment that is still doing very well is infrastructure and investments, and construction activity does tend to be better for rural income, she said.
"The glass is more half full at this stage."