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LATEST NEWS UPDATES | Rural demand: How much can the monsoon help? -Renu Kohli

Rural demand: How much can the monsoon help? -Renu Kohli

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published Published on Jun 23, 2016   modified Modified on Jun 23, 2016
-Livemint.com

In the last decade, the rural constituent has emerged an important factor for overall private final consumption, which forms more than half (55-60% range) of India’s demand side GDP


An above-average monsoon is commonly expected to be a key demand driver in 2016-17. Gross domestic product (GDP) forecasts for the year incorporate a revival in rural consumption—a segment that suffered severe setback from two successive years of adverse rainfall. In the last decade, the rural constituent has emerged an important factor for overall private final consumption, which forms more than half (55-60% range) of India’s demand side GDP. Its significance can be gleaned from the last National Sample Survey’s consumer expenditure survey round (July 2011–June 2012) which showed that monthly per-capita consumption expenditure in rural areas grew at 16.7% compounded annual rate over 2007-08 to 2011-12. Urban consumption went up more modestly at 15.6%. So, the optimism seems quite reasonable.

But UBS, an investment bank, notes the monsoon’s role isn’t all that significant. According to news reports, although an improved in sentiment on this count may help spur rural spending, UBS says this may not be “...necessarily backed by a sharp improvement in rural incomes” (Role of monsoon in reviving rural economy not significant: USB, The Economic Times, 16 June 2016). Its analysis suggests that only around 20% of agriculture GDP is directly dependent on monsoon. Overall agriculture GDP accounts for 40% of the rural economy. Therefore, rural incomes and demand may not be bolstered as much by an above-average monsoon.

Looking back to the factors that propelled rapid growth in rural consumption, the above view cannot be disregarded altogether. The robust growth captured by consumer expenditure surveys for 2007-2011 reflects combined effects of at least five prominent drivers of rural income and expenditure in that period. One, high farm support prices, especially for cereals, altered the terms of trade towards agriculture; annual increases averaged 10% for wheat, paddy and coarse cereals over 2005-06 to 2012-13, and were higher (15%) in the case of pulses. Two, net agriculture trade boomed, helped by the global commodity price boom and net farm exports rose six-fold from 2003-04 to 2013-14. Three, government spending on rural infrastructure grew at a faster pace, touching 0.9% of GDP in 2008-09 and 2009-10. Four, robust construction activity in housing, real estate and infrastructure generated non-farm employment and remittances back into the villages. Five, there was welfare spending from schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme.

All five cylinders firing the rural economy in the past have now fizzled out. Minimum support price increases are down to 2-3%; agriculture exports have suffered both in volume and price terms from the depressed global conditions; fiscal consolidation has constrained public spending; construction activity has miles to go before a meaningful recovery takes place and welfare spending is far more disciplined and prudent.

So yes, the monsoon bounty will help rural demand recover. But the magnitude could be quite small considering that the familiar drivers of rural incomes are either absent or very feeble at the present juncture.

Renu Kohli is a New Delhi based economist.


Livemint.com, 21 June, 2016, http://www.livemint.com/Opinion/WB4aYqUqR6W9vyItTGZxVM/Rural-demand-How-much-can-the-monsoon-help.html


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