Report on India's rural economy by Edelweiss Research

Rural cycles: Looking beyond monsoon

It’s monsoon forecast time and markets are praying to weather gods. That could be useful, but given the contradiction of a bumper crop (up 8% in FY17) and lingering rural distress, we believe there is a fundamentally bigger dynamic at play determining fortunes of India’s rural economy.

That dynamic — a complex mix of: a) terms of trade/global agri prices; b) currency; c) urban economy pull; and d) government transfers/policy — overrides a season’s rainfall and ultimately shapes rural India’s capex, wage, asset price and debt cycle.

We present insights from India’s rural cycles in the past 25 years and compare them with the trend in the US farm sector (yes, it is relevant). We aver that while the rural economy has stabilised (at subdued levels), the onset of a favourable dynamic is still distant and this distinction, in our view, is vital. We also present macro-implications of the same.

Look beyond the monsoon

Monsoon revival and end of the global food price deflation have ushered stability in rural India after 2 years of sustained slump. While we do appreciate monsoon’s role, the perception of it being the lynchpin of rural prospects is certainly flawed.

If it indeed was the manna, what explains the current widespread rural distress and clamour for farm loan waivers amidst plentiful rainfall and a bumper crop (up 8% YoY). Similarly, how can one explain nearly a decade-long boom in rural India (2005-13) when the period had its fair share of bad monsoon?

Further, why is the US farm sector, which is not rain dependent, currently facing the most difficult period since the 1980s? We attempt to address these questions.

Decoding the rural dynamic

The rural dynamic is driven by 4 key elements other than output — global agri terms of trade, currency competitiveness, migration channel and government transfers. These forces shape rural India’s capex/productivity, wage, asset price and debt dynamic.

We elaborate this through past 25 years’ rural cycles in India (1993-98, 1999-2004, 2005-13). Among the factors cited, a few have stopped being a drag, but none is likely to turn into a big support in FY18.

We also find a striking resemblance in farm cycles in US and India, implying that global factors are at play. Notably, US farm distress started in 2014 and farm incomes are expected to decline for third year running in 2017.

Macro-economic implications

The rural economy has stabilised, but at subdued levels. And, chances of onset of a sustained uptrend are dim even if the monsoon is good. This subdued dynamic may imply delay in rural demand revival or pressure on farm loan repayments or it could even rear its head via stress on government’s finances (demand for debt waivers on the rise).

Ultimately, the political economy will determine how these costs are distributed. Meanwhile, overly strong INR will eventually dent agri trade balance (and CAD in general). On the positive side, the benign inflation trend will sustain, implying a stable interest rate regime.

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