Rural India | Food Price : Rural India, a cause no one worries about: fall in real wages, unemployment, food price rise hit hard


FMCG and auto companies sensed the heat first. The slow burn of tapering demand from rural India. Now others are flagging something that few are prepared to talk about: rural India is suffering from declining real wages, spiraling inflation, high unemployment, and consequent rising inequality.

“The second wave of Covid has indeed decimated the rural economy,” said Anand Venkatesh of the Institute of Rural Management to ET Online.

“There is unemployment prevailing and the reverse migration did leave a hole in the already fragile budgets of rural households. Though many of the reverse migrants have returned to work, it would take a while for these ill-effects to wear out.”

Rural Economy - High Frequency IndicatorsET Online

High frequency indicators suggest a mixed trend in India’s rural economy as per RBI’s April Bulletin

Early warning signs ignoredWhile the consumption trend in the hinterland exhibited some resilience in FY21, sluggishness has been noticed since, owing to the impact on disposable income due to rising inflation. The recent rise in farm input prices has also led to lower incomes.

Brokerage firm Prabhudas Lilladher said in its report that its channel checks suggest rural India’s demand slowdown was not led by poor income, but ‘a cautious stance for conserving cash due to severe impact during 2nd Covid wave.’

India Inc has been highlighting a rural slowdown in its reports and conference calls. These companies expect rural demand to remain soft as higher prices have altered consumer spending and preferences.

Analysts covering FMCG companies say that while inflationary pressures have disrupted demand in both rural and urban areas, rural bounce back is weak.

“Rural India saw a spurt of growth last year with reverse migration. But in the short term, rural consumers are facing income and liquidity challenges which would impact consumption,” said Ram Raghavan, the managing director of Colgate-Palmolive, on an analysts’ call led by brokerage firm ICICI Securities.

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Demand trends in the automobile sector too highlight weakness in rural demand. Data shows that though auto retails in India in FY22 rose 7% year-on-year, the two-wheeler segment, an important indicator of the rural economy’s health as nearly half of all two-wheelers are sold in rural areas, showed the lowest growth in FY22.

“The 2-W segment which was already a non-performer due to rural distress saw further dampening due to rise in vehicle ownership cost coupled with rising fuel cost,” Federation of Automobile Dealers Associations (FADA) President Vinkesh Gulati said.

Supply concerns and surge in input costs can force India Inc’s hand on prices. But increasing prices would mean impacting affordability and therefore demand which would not be ideal as private consumption accounts for around 60% of the gross domestic product.

Inflation impact

While headline inflation stands at a 17-month high of 6.95%, the food price inflation in rural areas has more than doubled, from 3.94% in March 2021 to 8.04% in March 2022.

Shweta Saini, an independent researcher, and a Senior Consultant at ICRIER told
ET Online that high rates of inflation have led to a deterioration of purchasing power in rural India, depleting savings.

“However, with rising agricultural prices, supported mostly by global factors, we do hope that rural areas, mainly farmers will be able to earn better,” she said.

While IMD’s recent forecast of a normal southwest monsoon should help boost foodgrain output, analysts feel inflation will continue to remain sticky. Prices of certain food commodities such as edible oils, and poultry food are being driven upwards by supply disruptions owing to the Russia-Ukraine conflict and as such, the normal monsoon may not do much to ease the problem.

A silver lining may emerge from the disruption of global food supply chains, read a research note by Prabhudas Lilladhar on April 1. Higher agricultural commodity prices, opening up the potential for exports, coupled with normal monsoons in India, could lift rural sentiments, the note said.

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However, the rising input costs of certain commodities pose a headwind for farmers. As per a Motilal Oswal (MOFSL) analysis, the farm input prices grew by 19.5% YoY against a 6.3% YoY growth in output prices during April 2021–Jan 2022, implying unfavorable terms of trade for farmers.

High demand for MNREGA

The rural economy contributed nearly half the nation’s overall GDP in 2019–2020 and employs 350 million people (68% of the total workforce), as per Bain & Company. Agriculture is the largest sub-sector in the rural economy, contributing approximately 37% of total rural GDP in 2019–20.

Total employment in the rural sector accounts for more than 70% of all workers in India. As per the Centre for Monitoring Indian Economy (CMIE), rural unemployment moderated to 7.29% in March after hitting an 8-month high of 8.35% in February.

graph-3ET Online

“Most of the people in rural areas are either employed in the informal sector or are self-employed or employed in agriculture. Barring the agri-workers, most others continue to suffer,” Saini said.

A look at the demand for Mahatma Gandhi National Rural Employment Guarantee Act, 2005 (MGNREGA), a social security scheme that seeks to enhance the livelihood security of households in rural areas by providing at least 100 days of guaranteed wage employment in every financial year to a household whose adult members volunteer to do unskilled manual work, shows 19 states overshot the expenditure on the scheme for the FY22 as of February, reflecting the slow recovery in the labour market and the continued stress and dependence on the scheme.

Work generation under the scheme fell 7.1% in FY22 compared to FY21. However, it was still 36.5% higher than the pre-pandemic level of FY20.

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An analysis by MOFSL shows that the count of individuals employed under the scheme had already reached 90 million in the first eight months of FY22, compared with 112 million in FY21 and far higher than the average of 77 million individuals in FY18–20, a sign of weakness in the economy.

Despite the higher demand, the government in the Union Budget allocated only Rs 73,000 crore towards the scheme for FY23, against the revised allocation of Rs 98,000 crore for FY22, much to the dismay of activists and workers’ rights bodies.

MOFSL analysis also shows that the ratio of ‘work demanded to provided’ under the scheme declined to record lows of 61.5% in November 2021, compared with the long-term average of 85%. Sustained demand for MGNREGA work, which is almost as high as it was in FY21, is a sign of worry, as wages per person for such work are exceedingly low at only around Rs 210, it wrote in a report dated February 23, 2022.

Data shows that rural real wages have been stagnant or declining much before the pandemic set in.

graph-2ET Online

“Several reasons are attributed to this ranging from the stickiness of agricultural real wages, that is, nominal wages not responding quickly enough to inflationary pressures, improper indexation of MGNREGA wages, rise in agricultural input prices, slowdown of the construction sector and so forth. COVID has exacerbated this wage slowdown further,” said Venkatesh.

The possibility of agri-inflation benefiting rural incomes does exist. “Rural can recover in the second half with sustained high inflation in wheat leading to higher realisations for farmers,” Marico MD & CEO Saugata Gupta recently told brokerage firm ICICI Securities.


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