Slowdown in rural consumption: India cannot grow without Bharat

Govt spending should not flow into big infrastructure projects and should instead be used to increase outlay in areas such as low-cost housing, rural roads and the MGNREGA

Slowdown in rural consumption: India cannot grow without Bharat

Tathagata Bhattacharya

Demonetisation pulled the rug under the feet of India’s cash economy and the informal sector was the worst hit. The much-hyped reform triggered the current economic slowdown,” says Pronab Sen, former Chief Statistician of the Government of India, former member of the now-scrapped Planning Commission and presently director of the India programme at the London School of Economics’ International Growth Centre.

Sen feels that one will need to address the root cause behind the slowdown, i.e. lack of rural demand. Government spending should not flow into big infrastructure projects and should instead be used to increase outlay significantly in areas such as low-cost housing, rural roads and the Mahatma Gandhi National Rural Employment Guarantee Scheme, he says.

“The current crisis is about consumption. The problems of the rural economy have now spilled over to urban formal economy. Given the pathetic IIP numbers, I doubt if the festive season can help,” Sen says.

Consumption in rural India, which accounts for about a third of the market, has been under stress over the past three quarters even though its rate of expansion has been faster than that in the cities.

“Rural growth has further moderated and is now growing at the same level as its urban counterpart or slower due to the weak overall macroeconomic scenario including lower government spending, liquidity crisis hurting wholesalers, lower procurement despite MSP (minimum support price) hikes and limited beneficiaries of the PM KISAN scheme,” said Abneesh Roy, executive vice president, Edelweiss S

ICICI Securities recently met executives of 40 companies, 18 listed and 22 unlisted, across the consumer space to gauge the extent of the rural slowdown. “The conclusions were rural demand slowdown is likely to lead to growth deceleration in FY2020 and recovery will take time,” it said in an investor report.

Usually, there are three ways to boost an economy — exports, domestic consumption and government spending. While exports from India have been stagnating for over five years, the central government does not have the fiscal space to increase government spending sufficiently.

“The current slowdown is driven by a demand collapse. Falling farm incomes and stagnant rural wages is taking its toll on the rural poor who comprise two thirds of India’s population,” says Himanshu, associate professor at Centre for Economic Studies and Planning at Jawaharlal Nehru University.

He adds, “While real wages in agricultural occupations declined by 0.5 per cent in two years to June 2019, rural and urban consumption expenditure declined by over 4 per cent per year between 2014-15 and 2017-18. Incentives to corporates or interest rate cuts will not revive the economy until the slide in demand is checked.”

The government is providing incentives to exporters, realtors and mulling over bringing the GST rate for automobile makers. But they are all supply-side actions whereas the crux of the problem is low demand.

The drone attacks on Aramco’s Abqaiq oil refinery and Khusair oilfield in Saudi Arabia could not have come at a worst time for India, the world’s third-largest oil importer. Globally, experts expect crude oil prices to rise by 10 to 15 per cent because of these attacks.

This sudden increase in global oil prices is likely affect India’s oil import bill and its trade deficit if the prices do not come down soon. Every dollar rise in the price of crude oil raises New Delhi’s import bill by Rs 10,700 crore every year.

In such a climate, the rise in price of crude will lead to higher retail prices. Once diesel price rises significantly, it will push up transportation prices.

If that happens, Indians are likely to experience just not a spike in retail prices of nearly all goods but also pay more for services.

Follow us on: Facebook, Twitter, Google News, Instagram 

Join our official telegram channel (@nationalherald) and stay updated with the latest headlines