Disequilibrium | India's Struggling Farm Economy

Every time India has outperformed, as in managed to cross 8 per cent GDP growth, the real inflection point has come thanks to agricultural growth closing in on 4 per cent. The tipping point for what essentially remains an agrarian economy, even if services and manufacturing have displaced agriculture's contribution to the GDP basket remains how the rural economy performs in Bharat. For some time now, rural incomes have been down beat and this is reflected in consumption patterns as well.

Every rural household survey thus attains singular importance because it tells us whether there is a pick up in Bharat's economy. J M Financial is the latest to do a survey, which is actually a follow up to the one that it did in the first quarter of calendar year 2015. Unfortunately, it tells us that the trajectory is still headed southwards. Policy mavens are struggling with two important metrics - consumption which refuses to see an uptick and the investment pipeline which remains on skid row. Till we revive these two obvious metrics, the struggle to lift ourselves will continue. Obviating the farm crisis by providing fresh oxygen has to be a focus area.

JM's first survey showed a disturbing, yet emerging thread of falling rural incomes and diminishing wealth effect impinging on consumption in rural India. Since then, consumption metrics they track has declined further. To gauge if the thread has developed into a full blown trend, JM's team of surveyors travelled to states that account for 50 per cent+ of India's agriculture GDP to meet small and large farmers, business owners, and traders in rural India. The visit highlighted that:

A) Farm incomes (c.36 per cent of rural income) and sentiment has continued to decline due to the third consecutive crop failure, weak outlook on the next crop, lower MSP hikes, and global commodity price rout,

(B) Non- farm income (2/3rds of rural income) has been, at best flat, given that utilization of man and machine are down though wages and rentals have held up. Even as India awaits a further increase in government led capex, and the 7th pay commission, JM continues to expect rural demand to remain subdued and that from a portfolio perspective, they recommend to be underweight plain vanilla rural stocks and stick to stocks which have "rural/semi-urban optionality" even as near-term stock performance is driven by other factors.

Farm income declines while non-farm income remains lackluster: Farm income has been under pressure due to a) monsoon deficits (12 per cent-CY14 and 14 per cent-CY15), b) unseasonal rains, c) pests, d) lower MSP growth and e) decline in global agri commodities. On the other hand, a) declining tractor utilization, b) low manpower utilization, c) lower spending by agri ministry (-22 per cent YoY, FYTD) and rural development (7 per cent YoY) have been a drag on the non-farm incomes while rise in infra spending (49 per cent YoY) and resumption of sand mining have been supportive with the overall non-farm incomes being stagnant. Combined, JM expects the overall rural income will continue to decline.

Rural consumption on the wane: With wage growth spiraling down, small farmers income (60 per cent from wages) has been on a downward trajectory while low crop realization has led to a decline in income of large farmers (cultivation 70 per cent+ of income), all leading to weakness in consumption. We observed that rural consumption has been weak across auto, durables and FMCG with pronounced slowdown in tractor volumes (-20 per cent YoY in 1HFY16) and two wheelers (Avg.0.1 per centYoY-4Qtrs). Even large rural FMCG players such as HUL have reported weak volume growth (Avg.5.5 per cent YoY) and pricing pressure.

More govt intervention needed to boost rural economy: The govt has announced higher MSP's (wheat: 5.5 per cent YoY, pulses:~10 per cent YoY). Besides, a) Increased uptake by FCI, b) disintermediation and c) thrust on ware house development are much needed measures. The central government may have to step up allocation for rural infrastructure spending (Pradhan Mantri Gram Sadak Yojana) to boost employment opportunities. The 7th pay commission and Direct Benefits Transfer (DBT) may also have a positive trickledown effect on incomes. State govts have to focus on a) crop insurance (MP model), b) irrigation and c) power availability.

Other findings: Farm mechanization such as laser leveling of fields (Punjab), mechanized milking (Kar.) are picking pace. Solar powered irrigation systems and electrification are being implemented in some parts. In almost all places we visited, DBT for LPG is prevalent.

Reading this report makes one wonder what the silver bullet is for a slowing rural economy. Rural stress is a reality which cannot be ignored anymore. The government needs a strong dose of truth serum to revitalise the rural economy. A theorem which cannot be overlooked is that rural India's share of national income and expenditure is above the half mark. The ICE 360 survey (2014) known as the People Research on India's Consumer Economy reveals that rural India contributes over half of India's income (55.4 per cent), has a share of 56.1 per cent of consumption expenditure, and its 179.5 million households have a share of 52.3 per cent of the country's surplus income.

These numbers are staggering for what perception tells us is of a bouquet of people who reside at the bottom of the pyramid. Top researcher Rajesh Shukla, director & CEO, People Research on India's Consumer Economy-ICE 360° reckons that the way forward for state and central governments is to focus on issues and create a healthy rural economy that offers opportunities in agriculture and non-agriculture sectors while enhancing skill-sets of people employed in both. My contention is that nothing will move till large dollops of investment are made in agriculture to lift the gloom in the rain dependent sector. Unfortunately, it is one of the least priorities of the present government.