A person working under the Mahatma Gandhi National Rural Employment Guarantee Act or MNREGA scheme (Image: By PradeepGaurs/ShutterStock)
Sometimes perceptions overrun reality, especially when one is projecting the future of an economy as varied as diverse as India. This seems to be the case with concerns over El Nino damping the rural economy and hurting the growth trajectory of the world’s fastest-growing major economy.
The shape of the rural economy is changing and there is more to it than agriculture. Two-thirds of rural income now comes from non-agricultural sectors such as manufacturing, construction and services, says CareEdge Ratings. This limits the ability of El Nino, often associated with depleted monsoon rains, and other extreme weather events to hurt rural growth.
Monsoon and El Nino
India’s weather office has predicted a normal monsoon this year, while private forecaster Skymet has predicted a below-normal monsoon. The probability of El Nino, a weather pattern that occurs when the Pacific Ocean becomes warmer than usual, causing weather changes around the world, has increased sharply.
Since 1950, there have been 21 El Nino years and 15 drought events in India. Ten of these 15 droughts were led by El Nino events, according to an analysis by CareEdge Ratings.
The June-to-September monsoon is significant for the overall economy because it accounts for 70 percent of annual rainfall in a country where about half of the farmlands depend on annual showers for irrigation. Agriculture, which employs more than half of the workforce in the world’s most populous country, makes up about 18 percent of India’s economic output.
Any disruption in domestic agricultural production could result in lower income for rural households as about 60 percent of the rural population is still employed in the farm sector, in turn hitting demand.
Still, not all El Nino years lead to below-normal monsoons. Even during El Nino years, rainfall during the southwest monsoon was normal owing to favourable offsetting factors, the agency said.
Rural economy is more than agriculture
Moreover, the rural economy extends beyond just the agricultural sector, according to CareEdge Ratings.
“There has been a significant diversification in the rural economy in the past 50 years with an increasing contribution of non-farm sectors to rural income. About two-thirds of rural income is contributed by non-agricultural sectors such as manufacturing, construction and services,” it added.
Going ahead, the infrastructure push and focus on the tourism sector would further boost non-farm employment, contributing to rural income and limiting the downside risk of El Nino on rural demand and India’s gross domestic product.
The rural consumer may not be the weak link
After a post-Diwali easing of growth indicators, overall economic activity has reaccelerated. India’s services Purchasing Managers' Index jumped to a 13-year high in April, while the manufacturing PMI was at a four-month high. Still, there are concerns that the El Nino impact on monsoon could dampen rural demand, which is already seeing some signs of faltering.
El Nino
This may, however, not be the case. Morgan Stanley is of the view that rural spending will strengthen from here, as rural and lower-income consumers are taking longer to revive spending as they have not received stimulus, and they had suffered a loss of purchasing power as inflation rose. As these effects fade, spending is recovering.
The brokerage cites real agricultural credit growth—a proxy for rural activity—which has rebounded to the highest level since 2016, as boding well for rural employment and consumption.
Despite the fourth-quarter slowdown in consumer spending, this engine of growth is likely to do much of the heavy lifting in 2023 as inflation subsides and real spending power returns, according to DBS Research.
At the same time, the government has taken a lot of steps to enhance productivity in the agriculture sector which has grown at an average annual growth rate of 4.6 percent during the last six years, according to the latest Economic Survey. The promotion of Farmer Producer Organisations and the National Agriculture Market have empowered farmers, enhanced resources, and boosted returns, it added.
These and several other measures could also help buffer the rural sector any hit from the monsoon.
Overall, India's economy is going from strength to strength as it enjoys both cyclical and structural tailwinds, according to Chetan Ahya, Chief Asia Economist at Morgan Stanley Asia.
“We see healthy balance sheets sustaining the robust trends in domestic demand. Improving macro stability means monetary policy will not have to turn restrictive, allowing the economic expansion to continue,” Ahya added.