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LATEST NEWS UPDATES | The looming spectre of rural distress -Vatsala Kamat

The looming spectre of rural distress -Vatsala Kamat

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published Published on Sep 15, 2015   modified Modified on Sep 15, 2015
-Livemint.com

Amid all the gloom, the lower inflation rate and commodity prices could bring some respite

With the southwest monsoon retracing, concerns about the deficiency of rainfall and its impact on the economy are increasing. The 15% rainfall deficit makes it the second consecutive year of less-than-normal monsoon dotted with some unseasonal showers. Together, this would have multiple ramifications on economic growth.

Both macroeconomic and sectoral analysts have turned cautious and some have even revised growth estimates for fiscal 2016 downward. With the first glimpse of a weak monsoon, equity brokerage and research houses forecast a low 1.5% agriculture growth for the current fiscal in spite of a weak base of 0.2% in the previous year. This is just half the growth rate in a normal year.

Here are some sectors where growth would hit roadblocks:

Tractors and farm equipment

August data showed a sharp 23% drop in tractor sales from a year ago. A poor rabi crop, doubts about the kharif season output, along with a marginal increase in the minimum support prices, cascaded into poor demand for farm equipment. From April till August, tractor sales are down about 17%.

Crisil Ltd adds that areas such as Marathwada and central Maharashtra, north interior Karnataka, Telangana, Rayalaseema (Andhra Pradesh), Gujarat, Uttar Pradesh, Punjab and Haryana are still grappling with a huge rainfall deficit. These states accounted for about 50% of total tractor sales (40%, excluding Punjab and Haryana, which are highly irrigated). Hence, the forecast for fiscal 2016 has turned gloomy, with analysts hinting at a decline in sales from the earlier hope of sales in line with fiscal 2015.

Fertilizer and pesticides

In early June, with the onset of the monsoon, fertilizer sales grew by a robust 15-20% year-on-year (y-o-y) on the back of strong demand. However, hopes waned as deficit rainfall affected sowing and crop output. Industry now reckons the next two to three quarters would be dull, dragging down the demand for fertilizers and keeping it at last year’s level.

The story for pesticides would be similar. Adding to the woes is the weak demand from Brazil (a large export market for India). Low agri-product prices and Brazilian currency depreciation are both detrimental for Indian pesticide exporters.

This is not all. The weak monsoon and slowdown in rural economy will have a cascading effect on rural spending for discretionary items, too. “This time round, we need to view the rain deficit in the broader context of weak food prices globally, low off-farm income, and a subdued increase in rural wages,” according to D.K. Joshi, chief economist, Crisil Ltd.

How will this hurt rural spending? First, farm income will be directly hit as crop output will be lower. Logically, one would think that this would translate into spiralling food inflation. But, the story has a different twist this time round. World food prices are at a seven-year low, which will reflect on domestic prices, too. While this is good news for the masses, it is detrimental for traders and exporters of agri-products. Low prices mean lower returns on exports and, therefore, lower off-farm but related income.

Another factor that could drag rural spending is the fall in rural wages. A Barclays Research report highlights that nominal rural wage growth has decelerated to 4.6% for the 12 months ending June 2015, compared with 12.5% in the year-ago period.

Without doubt, lower rural disposable income will trickle down into lower demand for discretionary items. Some sectors that might feel the heat are:

Automobiles

Leading automobile makers in the country owe at least one-third of their sales to rural demand. Lower rural income has already dampened demand in these regions, mirrored in weak domestic sales growth. Data from the Society of Indian Automobile Manufacturers (Siam) show a 4.3% drop in motorcycle sales from April to August. Analysts have toned down estimates for the full fiscal from higher end single-digit growth in fiscal 2016 to flat or a decline in sales. Rural incomes would also hurt moped sales, which are predominantly driven by rural areas.

Only scooters, which have a stronger urban presence, may fare better, though the slowdown could engulf urban areas, too. Also, passenger vehicles may be better off, although lower-end compact cars could see a slowdown in sales.

Textiles and gold

Depressed rural income will tell on the consumption of textiles and garments. In fact, the cumulative domestic demand for yarn between April and June grew by a mere 7%, which is not something to cheer about, given that it is just ahead of the festive season, when textile-fabric and garment sales are high. Although the recent Index of Industrial Production, or IIP, data show decent growth in apparel, it seems insufficient to spur yarn demand. Perhaps, excess stock has kept domestic yarn prices subdued.

Meanwhile, rural India accounts for 60% of the country’s gold consumption, which may drop this year as rural income remains subdued. Media reports signal a 10% drop in gold imports in 2015.

Analysts are certain that the weak monsoon would hurt water levels and also hydro-electric power generation in the country. A report from Motilal Oswal Financial Services Ltd says that as on 7 August, water levels were at 50% the total reservoir capacity and lower than both the previous year and the 10-year average.

Weak demand across sectors would also impact financial institutions that have a substantial exposure to rural areas by way of farm and farm-equipment financing or lending for purchasing of retail consumer goods could see lower growth.

Amid all this gloom, the lower inflation rate and commodity prices could bring some respite. The equity market is hopeful of a 25-basis points cut in interest rate in September that might bring some cheer to the Street, though it may not help fuel demand in the near term. One basis point is one-hundredth of a percentage point. For now, the focus is on the festive season. Will it boost demand to bring some temporary relief for the economy?

Livemint.com, 14 September, 2015, http://www.livemint.com/Home-Page/zAYYIYX28riSfNGYvC48BN/The-looming-spectre-of-rural-distress.html


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