Rural recovery underway says Morgan Stanley

• A Morgan Stanley report says that rural demand is set to rebound, helped by wider reopening, improving labour market and more.
• Its rural activity tracker has picked up in the last 3-4 months.
• Rural wages have been showing improvement in August and rural unemployment hit an 8-month low in September.
• The structural outlook of rural areas is improving as well – thanks to policymakers’ focus on boosting rural incomes.

Rural economy is all set for a rebound as per readings from four key indicators – employment, credit offtake, auto sales and trade, according to a recent report by Morgan Stanley.

“We believe rural demand is set to rebound, helped by wider reopening, improving labour market conditions, and improving terms of trade for the rural sector,” the report said.

Apart from increasing food inflation since the start of this financial year, India’s villages have been suffering from the effects of the second wave of the pandemic – which dislocated livelihoods. Government spending too was reduced, as compared to the first wave.

However, the tide seems to be turning. “High-frequency data suggest that overall economic activity has been normalising over the past three months after remaining sluggish in the trailing 12 months. Our consolidated rural activity tracker shows a pickup in YoY terms over the last 3-4 months,” the report said.

Cyclical outlook
The first indicator is the unemployment rate which hit an 8-month low in September, as per CMIE. Secondly, two-wheeler sales reached 1.1 million in September, its highest since the pre-pandemic month of October 2020.

Agricultural credit growth also hit its highest in nine months in August – at 13.4%.

“Even as agriculture exports have been impacted by policy decisions to restrict exports of wheat and rice, they have grown 27.5% in the financial year to date FY23. The terms of trade are now turning with non-food inflation moderating,” Morgan Stanley said.

An increase in hiring in the informal sector and more employment opportunities in the semi-skilled space will also help improve rural household incomes, as per the report. Normalised activity will also boost monetary transfers from urban to rural areas - and give a much-needed fillip to the rural economy.

Moreover, rural wages – both farm and non-farm — have shown an improvement in August. “Rural wages are steady in nominal terms and probably at trough in real terms,” the report said.

Structurally speaking
Apart from the cyclical outlook, the structural outlook of rural areas is improving as well – thanks to policymakers’ focus on boosting rural incomes. Apart from improving agricultural productivity, they are building infrastructure, industry and services along with skill-building of the rural labour force.

“Progress has already been made in physical infrastructure, connectivity and digital infrastructure, and we expect policymakers to continue to focus on boosting productivity across the rural economy,” the report said.

While government spending in rural areas has reduced since the start of the pandemic, it’s still at 3.3% of the GDP — well above the pre-pandemic levels.

However, Morgan Stanley also insists that there are risks associated with their assumptions on rural recovery. They include slower-than-expected improvement in contact-intensive services segment growth, weak job creation in the semi-skilled segment, and an increase in commodity prices — which will increase non-food inflation and worsen terms of trade for the rural sector.

Monsoons: Scarcity plus surplus
The biggest drag however is the patchy monsoon this year. While rainfall was 6% above last year’s rainfall, as much as 40% of the total area received excess rainfall and six regions (17% of total) in the north and north-eastern parts of the country recorded a deficit.

As per the full-season data, decline in kharif acreage touched 0.8% year-on-year as the deficit in rice sowing – a key summer crop – remains steady at 4.8%. Sowing declined the most for rice, followed by pulses and oilseeds.

“The first advance estimates show rice production likely to be 6.8mn tons lower than in 2021. We will continue to monitor the government's measures to regulate the supply and demand balance in this area through procurement and other actions. Separately, the reservoir level is at 108% of the 2021 level, which is likely to support the winter cropping season,” the report said.

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