Farm Loan Waivers Driving Rural Demand, Says Report

Mumbai: The green-shoots of demand growth seen in some rural pockets is driven by farm loan waivers and not likely due to real increases in rural incomes and wages, indicative that the economy is still some time away from a full-blown rural revival, says a report. Noting that rural demand has been on the rise in recent months, the report says the upward trend is visible from the sale of big ticket items like tractors and the latest corporate earnings of consumer goods companies. According to recent Nielsen data, rural growth outpaced urban demand, rising by 13.5 per cent in the March quarter.    

Many large states have announced farm loan waivers last year, as farmer suicides became a big political tool. Last week, Karnataka became the latest state to join UP, MP, Maharashtra and Punjab among others to write off farm loans.    

"But the extent of this pick-up depends on a number offactors. Firstly, a good monsoon alone will not do the trick. Adequate procurement and the effectiveness of MSPs to act as afloor for crop prices will be crucial," a report by HDFC Bank said.    

Though there are clear signs that rural demand isrecovering from setbacks due to the 2016 note-ban and GSTdisruptions, "we have our reservations over the extent of this increase as this could be due to the loan waivers," says thereport penned by the banks chief economist Abheek Barua.    

"The recent jump in items such as tractor sales couldhave at least been driven by the farm loan waivers. A similar phenomenon was witnessed in 2009 when the then government had waived farm loans and tractor sales grew by 30 per cent. So,it is uncertain whether the recent increase is a one-time spike or a reflection of genuine improvement in the rural income situation," he explained.    

Secondly, the higher numbers come from weak a base."The increase in rural demand is coming over two years of weakgrowth as demonetisation took a hit on consumption. Therefore,this could be a bounce back from the 2016 lows and notnecessarily translate into the required higher momentum inrural demand," argues Barua.    

Thirdly, despite the fall in agriculture output inFY18, rural demand might have risen on the back of affluentfarmers spending and the rise in items such as tractor sales could partly capture this.    As per the price income survey, 34 per cent of rural consumption comes from only the top 5 per cent (according toincome) of the rural population while 33 per cent come fromthe bottom 50 per cent. Therefore, strong demand from the more affluent rural population could have outweighed the decline indemand from majority.    

Noting that the rural wages have been on a steadydecline, which is the most important leg of the rural demandgrowth, the report says nominal rural wage growth has been moderating since the middle of 2017. Wage growth declined to 3per cent in February 2018 from over 7 per cent in April 2017.    

Also, real wage growth has seen a secular decline overthe last year and has now turned negative. For a strong andsustainable rise in rural consumption, an increase in ruralwage growth is essential.    

Usually, rural wage growth is linked with theperformance of the monsoons and agriculture growth. However,the non-farm sector of the rural economy bears an equal if nothigher influence over overall rural wage pressures.    

Non-farm activities like construction, manufacturingand services account for over 60 per cent of the value addedin rural output. The break-up of rural wage growth into agriand non-agri shows that while farm wages saw a sharperdecline, the fall is not restricted to the farm sector as bothagri and non-agri wages declined with the former wages morethan the latter.    

Agriculture wage growth declined from close to 9 per cent in April 2017 to 2.3 per cent in February 2018 while non agricultural wage growth moderated from 5 to 3.7 per centduring the same period.    

Construction wage growth rose for during 2016 and 2017 driving up agriculture and overall rural wage growth during this period. However, in recent months, construction wage growth has declined sharply from over 6 per cent in April 2017 to 3.2 per cent in February 2018) and is likely to have pulleddown agriculture and overall rural wage growth.    

On the impact of the MSP hikes, the report says thatmere announcement will not increase the income of farmers but adequate procurement holds the key. Similarly a good monsoon does not necessarily imply a rise in rural incomes.    

It can be noted that ahead of the elections, the Centre recently announced massive hikes in minimum support price across a slew of farm produces. This is the steepest such increase by the Modi government and analysts have warned that this would push up retail inflation by at least 70-80 basis points.