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Weather worries rain on rural story

LiveMint logoLiveMint 11-06-2014 Ravi Ananthanarayanan

The rural sector was the one bright spot in an otherwise gloomy demand scenario for Indian industry. That too is coming under threat after the weather department confirmed that this year’s monsoon will be below average. In its second forecast, the department has said rainfall is likely to be at only 93% of its long-term average, 2 percentage points below an earlier prediction.

A column in these pages on Tuesday revealed how commodity prices are taking this news in their stride and another one sketched out its effect on the economy. If these forecasts play out and agricultural output is indeed lower, it could affect rural consumption.

Now, rural demand is typically driven by good agricultural output and higher food prices, remittances from migrant workers, and wages from local industries. The last two factors are, however, likely to have been affected by the economic slowdown. Farm wages, too, are decelerating since October 2013, according to a recent Morgan Stanley report. These may be responsible for a visible slowdown in rural consumption, though not as drastic as seen in urban markets. If agricultural income too takes a hit, then cracks may begin to appear in the rural growth story too.

Which sectors could face the heat of a slowing rural economy? The demand for tractors for farm purposes could get affected. An Ambit Research report dated November 2013 states that tractor sales in 2012-13 declined by 2% due to poor monsoons. But this report also notes the increasing usage of tractors for non-farm purposes such as transportation, which could provide some cushion from a slowdown.

The fast moving consumer goods industry too has come to rely heavily on the rural sector, launching variants targeted at this segment and also expanding distribution networks. Rural sales contribute to about a third of the total and grew ahead of urban markets in 2013, though the rate of growth has declined according to a report by The Nielsen Company. The industry’s sales growth in urban areas has declined to 8% in 2013 from 21% in 2012. Rural growth has slowed, but from 17% to 12%, and exceeds urban growth.

Other sectors have benefited from growing rural demand as well. Construction activity has seen a pick-up in demand for cement and changing aspirations are contributing to demand for decorative paints.

All these industries could face some stress from a rural slowdown. But it is early days yet and usually the monsoon’s effect is visible with a lag. A lot also depends on the timing and geographical spread of the rainfall.

The government could play a supportive role too. Specific measures to help farmers tide over this bad phase could stem their income erosion. A revival in urban demand could also provide a hedge. If the new government is able to recharge growth in the manufacturing and services sector, then urban demand is likely to see a smart recovery. That could then help pick up the slack caused by a slowdown in rural markets.

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