Farm loan waivers, not real income growth, driving rural revival: Report

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New Delhi, Jul 15: 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 of factors. Firstly, a good monsoon alone will not do the trick. Adequate procurement and the effectiveness of MSPs to act as a floor for crop prices will be crucial,” a report by HDFC Bank said.
Though there are clear signs that rural demand is recovering from setbacks due to the 2016 note-ban and GST disruptions, “we have our reservations over the extent of this increase as this could be due to the loan waivers,” says the report penned by the banks chief economist Abheek Barua.
“The recent jump in items such as tractor sales could have 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 weak growth as demonetisation took a hit on consumption. Therefore, this could be a bounce back from the 2016 lows and not necessarily translate into the required higher momentum in rural demand,” argues Barua.
Thirdly, despite the fall in agriculture output in FY18, rural demand might have risen on the back of affluent farmers 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 to income) of the rural population while 33 per cent come from the bottom 50 per cent. Therefore, strong demand from the more affluent rural population could have outweighed the decline in demand from majority.
Noting that the rural wages have been on a steady decline, which is the most important leg of the rural demand growth, the report says nominal rural wage growth has been moderating since the middle of 2017. Wage growth declined to 3 per cent in February 2018 from over 7 per cent in April 2017.