Rural income: Expect 10% YoY growth in FY18

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During FY17, there was healthy Kharif and Rabi output along with improvement in the quality of produce. However, rural India was impacted adversely in the short-term after the demonetisation of high-value currency notes and the subsequent decline in cash-based transactions.

Reduction in cash transactions impacted income of smaller farmers during November-December 2016. The farmers typically sell their produce in cash, particularly the smaller farmers, and thereby a squeeze in liquidity severely impacted trade during November-December 2016 and till early January 2017. Consequently, sale realisations for smaller farmers, in particular, were delayed and lower than earlier expectations. In addition, fruit and vegetable farmers had to face a loss in income due to the perishable nature of the produce. The larger farmers also faced challenges in selling produce, but access to banking channels, ability to withhold sales and also access to the wider market place ensured minimal losses.

Consequently, we estimate that after two years of decline (FY15 and FY16), FY17 did see an increase in total income for farmers —5 per cent for the small farmer and 12 per cent for large farmers, given a healthy produce during the year. This is driven by 8 per cent /15 per cent year-on-year (YoY) growth in agri-income for small/large farmers, respectively, while non-agri income growth remained at 3 per cent YoY. Even among regions, given the distribution of rainfall in the past one year, there is a divergence and we expect farmer income to grow YoY higher in northern and eastern regions as compared to South India.

Convergence

Expect convergence in total income growth between small and large farmers during FY18. For FY18, broadly normal monsoons are likely, with the normalisation of liquidity challenges.

We expect 10 per cent YoY growth in income for both small and large farmers. The divergence in growth between a large farmer and small farmer, which was visible during FY17could normalise during FY18.

There will be acceleration in non-farm income, driven by the government’s clear focus on rural/irrigation spending and MGNREGA as well as a pick-up of small business activities.

We do estimate that given the change in consumer behaviour driven by demonetisation, the deleveraging would take longer than anticipated. The debt levels, which had increased after demonetisation, have likely reduced as farmers repaid debts taken from informal channels. However, we do reckon that the farm waivers could induce behaviour of delayed repayments for debt from state-owned banks, in particular. Consequently, we estimate a moderate improvement in credit metrics in FY18, after deteriorating in FY17 for a small farmer, while remaining steady for the large farmer.

Consumption

We expect consumption of relatively low-ticket items to see steady growth, given the increase in rural incomes. There is still caution on large ticket spending, which would also be on increased scrutiny by the government. However, as we see the increase in cash flow levels across the economy, there will be demand revival.

The key inference we derive from our visits is that the rural economy/farmer status has improved from “distress” levels one year ago to a more “normal level”, and unless the 2017 monsoon is highly deficient, we do not see a hold back in consumption.

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