Traction in rural recovery could lose pace if weather impact is severe

New Delhi, July 16 (SocialNews.XYZ) After a delayed start, monsoon has gained traction over the last few days. However, rainfall distribution remains uneven and sowing progress is behind last year’s levels, HDFC Bank said in a report.

Daily mandi prices show that prices of tomato have already shot up, milk inflation remains elevated, and wheat and pulses prices are beginning to inch up, the report said.

Looking at past El-Nino years, it was observed that rainfall was not deficient each year, instead some years received normal/slightly below normal rainfall. Therefore, this year, the rainfall situation is likely to depend on the intensity of El-Nino

As of July 9, all-India rainfall was 2 per cent above its long-term average, compared to a 30 per cent deficit in mid-June. However, rainfall distribution remains uneven. While rainfall is in a deficit in South India, cyclone Biparjoy related disruptions have resulted in excess rainfall in the North-West.

Further, monsoon distribution is a concern for Central India as well, with Maharashtra and Odisha recording a rainfall deficit, Madhya Pradesh receiving normal monsoons and excess rains in Gujarat, the report said.

Impact of uneven rainfall is reflected in sowing. Overall Kharif sowing was down by 9 per cent y-o-y as of July 7, with weak progress in rice and pulses.

This could be due to weak rainfall progress in major rice and tur producing states. Looking ahead, as majority of season’s sowing takes place in July, rainfall progress during the month will be crucial.

Food prices are already feeling the heat, but there are supports, the report said.

Prices of major vegetables like tomato, chili, ginger etc. have increased sharply in the past few days on account of adverse weather conditions. Besides vegetables, prices of milk, tur, wheat and rice have also increased.

To reduce the impact of steep increase in tomato prices, some state governments (Tamil Nadu, West Bengal) have taken supply related measures.

Among cereals, sufficient buffer stock of wheat and rice might offer a cushion and keep a check on prices. Lastly, to encourage pulses production, the government has removed 40 per cent procurement limit on pulses like tur, urad and masur, the report said.

The rural sector was hit hard due to pandemic-related disruptions over the last three years. Rural recovery started picking pace only from the second half of the 2023 fiscal and appears to have intensified during the last quarter of FY23.

Encouragingly, high frequency data suggests that recovery held up even in the first quarter of FY24. Going forward, given the looming monsoon risk, traction in rural recovery could lose momentum if the impact of weather-related disturbances is severe, the report said.

Going by trends in consumer non-durables (IIP sub-segment), tractor sales and rural wage growth, rural demand seems to have started picking up from the second half of FY23.

Encouragingly, after declining for five consecutive quarters, rural FMCG (volume) sales bounced back in Q4 FY23. More recently, two-wheeler sales expanded by 17.4 per cent YoY in May and consumer non-durables output grew by 11 per cent in April, indicating that demand from the sector could be holding up in Q1 2023-24 as well, the report said.

Rural inflation moderated to 4.2 per cent in May from a peak of 8.4 per cent in Aprril. Moderation was driven by a cool off in food prices, which in turn could have opened space for discretionary spending.

Rural job sector conditions appear healthy. While CMIE’s rural unemployment rate rose to a two-year high of 8.73 per cent in June, it was primarily on account of seasonal factors.

June is generally a lean month for the agriculture sector as after the completion of Rabi harvest in April-May, Kharif sowing progresses mainly in July. However, after increasing for 10 months in a row, rural wage growth seems to be peaking, the report said.

Demand for MNREGS work (minimum job guarantee scheme) has also picked up in FY24, which is usually taken as a sign of stress in the rural job market. Though this could be partly explained by seasonal factors and in part by some underlying changes -- a) revision in MNREGS wages b) possibility of households opting for MNREGS work to supplement income and c) better data collection.

After rising substantially during the pandemic period, rural telecom subscriber base has been declining. Discouragingly, it has fallen below pre-pandemic levels.

While a part of this could be explained by the reopening effect, it also suggests that households could be shifting their consumption away from communication services (that became essential during the pandemic for things like education) and towards other discretionary items, the report said.

“In our opinion, the upside risks to inflation are hinged to the El Nino and the monsoon performance in the current year. We have retained our average forecast at 5.3 per cent for CPI inflation in FY24 although MPC has pegged it to 5.1 per cent.

"We believe that the RBI will continue with its pause stance for an extended period possibly till December to watch for such risks while also assessing the impact of the 250 bps rate hike on the economy," said Suman Chowdhury, Chief Economist and Head-Research, Acuite Ratings & Research.

El-Nino and 2024 Lok Sabha elections remain a key risk. A stable government post elections and continuation of economic policies can take markets to the next level, brokerage firm Prabhudas Lilladher said in a note.

Monsoons (El-Nino) and inflation can increase stress for rural India and urban poor and add to the woes for the ruling dispensation, the report said.

Deficient rainfall, and consequently lower rice sowing, will push rice prices higher. Rising global rice prices would further push local prices up. Rice constitutes around 4.4 per cent of the overall CPI basket, Motilal Oswal Financial Services said in a report.

A deficient monsoon in major rice-producing states (with 49 per cent share), such as West Bengal (11 per cent below normal), Uttar Pradesh (2 per cent below normal), Andhra Pradesh (22 per cent below normal), Odisha (25 per cent below normal), Telangana (35 per cent below normal), Chattisgarh (12 per cent below normal), Bihar (29 per cent below normal) and Assam (2 per cent below normal), has affected rice sowing, the report said.

However, states with higher irrigation cover, such as Uttar Pradesh, Andhra Pradesh and Telangana, will be less impacted.

Kharif sowing as of July 7 stands at 8.7 per cent lower than last year. This is mainly due to lower sowing of rice and pulses. The area under paddy cultivation is still 23.9 per cent lower than last year. The area under pulses is 25.8 per cent lower than last year, the report said.

(Sanjeev Sharma can be reached at Sanjeev.s@ians.in)

Source: IANS