Rising Inflation, Increased Indebtedness And Falling Wages Hit Rural India Hard
Inflation has become a global issue. Reserve Bank of India Governor Shaktikanta Das, while making the policy announcement recently, referred to the globalisation of inflation and increased the projection for financial year 2022-23 from 5.7 per cent to 6.7 per cent.
Rural India is equally in the clutch of inflation as urban India. As a result, demand has been falling in rural India. The World Gold Council’s Q1 2022 Gold Demand Trends report highlighted that the demand for gold in rural India has gone down significantly in the last few quarters.
“Briefly, if you look at the rural market, our economy was in deep trouble even before the pandemic and disruption. The crises majorly were not on the supply side or because of the supply constraint, but due to lack of demand, particularly in the rural economy. As I see it, the reason behind it is that the major portion of rural India is still suffering from falling real wages, inflation, high unemployment, and a rise in inequality. All these reasons are leading to a slowdown. So it’s more demand driven,” says Neeraj Pokhariyal, senior consultant, Microsave Consulting, a consultancy company.
Apart from that, FMCG companies, which derive a major portion of their income from rural India, also noted in their quarterly results that as a result of the inflationary price rise, rural demand for products might slow down in the coming quarters.
Says Arijit Chanda, a management consultant working in the MSME lending space in urban and rural India: “Rural economy was impacted in a big way in 2021 during the second Covid wave, where the income of rural households was disrupted and decreased. In addition, increased inflation has also impacted rural demand, resulting in a negative growth in consumption.”
Here’s a lowdown of how inflation has impacted people in rural India:
Increased Concern About Rising Interest Rate: People in rural India are more concerned about interest rates rising even higher in the future. Therefore, they are trying to pare down the costlier debt. Debt collections have traditionally been difficult in rural areas, primarily due to barriers of language, education levels, reachability, awareness about maintaining credit profile, and ingrained cash usage.
“However, lately, there has been a significant transformation due to digital innovations. After the pandemic, we saw a structural shift towards digital means of repaying loans. So, our customers in rural India are now repaying back their old loans using digital means. This is a positive development, since they are now more focussed on paring down their debt rather than letting it (debt) grow,” says Rishabh Goel, co-founder and CEO, Credgenics, an AI-enabled loan recovery platform.
Increased Input Cost: Due to a rise in commodity prices, farmers are getting a better price for their commodities produced, but the input costs have increased as well due to inflation. Hence they are consuming fewer goods and services and investing the surplus income for future growth.
Aspirations: Tractor sales for May 2022 saw an increased demand, with Mahindra & Mahindra reporting a 48 per cent increase in sales of tractors. Likewise, Sonalika Tractors also reported a 42 per cent higher sales for the month of May 2022. This shows a clear trend that people in rural India are buying more farm equipment and vehicles, such as tractors.
Increased Indebtedness: According to an All India Debt and Investment Survey (AIDIS), rural indebtedness stood at 84 per cent when compared to 42 per cent for urban as of 2021.
“There has been an increase in rural indebtedness in recent years. More so in certain northern and southern states. There are several reasons for this. To name a few, income impacted due to COVID, migration back to villages, prolonged lockdown, and improvement of access to formal finance, to name a few. Rural aspiration is more now – owning a tractor, building a house, investing in proper farming techniques, livestock, starting or expanding micro-businesses, and increase in household expenses,” says Arijit Chanda, a rural India analyst.
Rising Rural Debt Is A Cause For Concern
Experts, however, say that rising rural debt is a cause for concern. Unlike urban areas, the majority of people in rural India are employed in the agriculture sector. But there were other significant portions of people too who were employed in the informal sector, or were self-employed or employed in allied services.
So, while those in the agriculture sector were doing relatively well, since it was kept out of lockdown, and now that commodity selling prices have gone up, people employed in the other sector were not so fortunate.
The World Gold Council Q1 2022 press conference highlighted that migrant workers suffered the most, and were facing higher income disparity due to the Covid-19 pandemic, even now.
“Majority of the rural population is earning their livelihood directly from the farm and allied activities. They avail credit for consumption purposes, which adds to the already existing quantum of the debt and intergenerational transfer of the debt, inherent credit as you can say. Also, the majority of the microfinance loan portfolio is coming from the rural market. Looking at this, I would clearly make it out that rural indebtedness has enhanced in recent years. The post-pandemic world and recent disruptions have worked as a positive catalyst to it,” Pokhariyal further says.
