When most of India’s urban pockets struggled to stay afloat after the first wave of Covid-19 hit the country in 2020, its rural economy managed to remain buoyant. Rural India hit historic high tractor sales in FY21, reflecting the prosperity that the country’s villages were basking in. But within a year’s time, things seem to have changed.
After withstanding the first wave, rural India could not escape the wrath of the second Covid wave and the sporadic lockdowns, and has been grappling since last year. Today, just like the rest of the country, it is plagued with high inflation, high unemployment, dipping wages and inequality. Tractor sales are down, so are two-wheeler sales. Fast-moving consumer goods (FMCG) demand, a key indicator of rural buoyancy, has also been witnessing a continuous slump.
Fixing the deteriorating health of the rural economy, which accounts for 30 per cent of the nation’s GDP and 46 per cent of its national income, will soon take centre stage as the 2024 General Elections closes in with the Narendra Modi-led National Democratic Alliance eyening a third term at the Centre.
Bharat’s Persistent Bane
The second Covid wave fell heavily on rural India as it brought with it unplanned medical expenses which shot up due to abysmal health insurance penetration in rural India. Rural demand, which had started trailing ever since, is yet to recover.
Add to that the declining farm and non-farm wages and the demand situation only gets grimmer. The average nominal agricultural wage growth in April-November 2021 fell to 2.3 per cent from 6.6 per cent around the same months in 2020. The 2020 figure had seen an uptick from the 5.8 per cent that was recorded in the same period in 2019. Similarly, the non-farm wage growth declined to 1.8 per cent in April-November 2021 from 7.9 per cent in April-November 2020.
In terms of farm produce, the heat wave that pounded several parts of the country this summer made matters worse for the farmers as it shrunk the size of the wheat grain by 10-15 per cent. Despite high wheat prices in the market, the shrinkage has impacted the price that the farmers would have been able to quote in the market otherwise.
Some respite came in the form of massive demand for Indian wheat in global markets after the supply chains got impacted by the Russia-Ukraine war. Wheat was being exported at Rs 24,000 to 25,000 per tonne (Rs 2,400 to 2,500 per quintal), which is 19 per cent higher than the government’s set minimum support price (MSP) of Rs 2,015 per quintal. But right when the farmers were beginning to gain from the demand influx, the government announced a ban on wheat exports citing food security risks.
As hopes are now pinned on a good monsoon, experts seem to be worried. The initial phase of the monsoon is predicted to be good and bodes well for kharif sowing but the forecast also says that the monsoon is expected to withdraw quickly. That would put further stress on the already stressed rural economy.
Insidious Impact Of Inflation
The rural demand for products manufactured by the fast-moving consumer goods (FMCG) companies has been severely hit by the lingering national and global uncertainties. Demand slowdown amid rising inflation has been giving the sector sleepless nights even as the cooling down of edible oil prices, after a sharp global spike, has come as a huge relief to FMCG firms.
The companies, across categories, opted for inflation-induced price hikes over the past one year. Between April 2021 and April 2022, soaps recorded a price increase in the range of 25-50 per cent while detergents posted a 4-18 per cent price rise in just the three months between February and April this year. In the same period, the prices of toothpastes increased by 2-18 per cent and some shampoo brands even opted for nearly a 47 per cent price rise. While edible oils saw a 10-29 per cent increase in prices, the prices of noodles jumped by 10-17 per cent.
In March, Hindustan Unilever Limited (HUL), one of India’s largest FMCG companies, increased the prices of cleaning and personal care products across stock keeping units of brands like Surf Excel Matic, Comfort fabric conditioner, Dove body wash and soaps, citing significant inflationary pressures.
In a recent analyst call, Alan Jope, chief executive officer of Unilever, had highlighted that the consumption weakness was primarily linked to inflation, especially in rural areas.
Sanjiv Mehta, the FMCG giant’s CEO, pointed to the fact that the Indian markets continue to remain soft, especially through the lens of volumes, adding that inflation still remains much of a concern. HUL reported a 6 per cent volume growth in the April-June quarter this year when the industry saw a volume growth contraction of 5 per cent. In the June quarter last year, the company saw a volume growth at 9 per cent.
Then there were brands like Britannia that went for grammage reduction instead of increasing prices to tackle rising inflation. In FY22, the ratio of grammage reduction was 65 per cent and the biscuit maker expects it to be higher in FY23. During an analyst call in May, Varun Berry, the company’s MD, had said that the “grammage cut might end up being even higher than that” going forward.
Owing to demand compression in rural India, FMCG major Dabur said that it had to provide higher credit to its retailers as collection efficiency declined from 12 days to 20. In the case of Godrej Consumer Products, the brand posted a reasonable revenue growth but attributed it more to pricing than volume growth.
The firms are now hoping for favourable monsoon conditions to ease the demand situation in rural India.
More Than Monsoon
With the India Meteorological Department saying that the monsoon would be normal in 2022, everybody—from politicians to corporate India—is banking on a good monsoon. A good harvest would mean better agricultural prices and, together with higher government capex, these factors could trigger rural demand.
Agriculture aside, the issues might persist as the manufacturing and services sectors, which account for 50 per cent of the rural GDP, are still struggling. The cash-strapped micro, small and medium enterprises that dominate in these sectors are fighting to recover from the pandemic punch.
Work generation under the Mahatma Gandhi National Rural Employment Guarantee Act fell 7.1 per cent in FY22 as compared to FY21 but it was still significantly higher—by 36.5 per cent—than the pre-pandemic level of FY20.
Looking at all these factors, it is clear that the Modi government would have to pay special attention to the ways in which consumption can take off in rural India, ways that go beyond its reliance on monsoon, in its fight to win another term.
