Rural purchasing power waning on inflation, rising input costs

The rural growth story is slowly losing sheen because of inflation and rising input costs. In fact, rural price level is higher than urban price level. The March Consumer Price Index number for rural India stood at 116.3, while that for urban India stood at 114.6.

Mr Ajay Sriram, Chairman and Senior Managing Director, DCM Sriram Consolidated Ltd, says the rural growth story has reached a plateau. “The purchasing power of the rural population, 70 per cent of which depends on agriculture, has eroded. After several years of increases in minimum support price, there is a moderation now leading to relatively lower increase in farm incomes. Coupled with increase in input costs, the farmer consumers are feeling an income squeeze and this has impacted the spending power of the rural consumers,” he says.

Income squeeze

His company has considerable exposure to agri-businesses under the verticals of sugar, urea and agri-inputs.

While the fast moving consumer goods (FMCG) sector continues to perform well, white goods such as consumer durables have been facing rough weather in the rural markets. Burdened by price hikes, the consumer durable industry witnessed a shrinkage of 6 per cent in calendar year 2011 in rural markets, according to a study by rural consultancy MART. The study covered 24 villages and 24 small towns across four regions — Uttar Pradesh, Maharashtra, Andhra Pradesh and West Bengal.

“Consumer durable industry growth has remained flat in both urban and semi-urban areas because of inflation and interest rate hikes. The rate of consumption has gone down,” says Mr Kamal Nandi, Vice-President, Godrej and Boyce.

Labour shortages

The Great India Road trip report by Religare points to labour shortages caused by rising wages in non-farming activities such as National Rural Employment Guarantee Act (NREGA). With relatively moderate increase in minimum support price, and better NREGA wages, and a boom in land prices, which have soared 5-10 times in the last 7-8 years, farming has been rendered uneconomical.

Mr S. Sivakumar, Chief Executive, Agri-Businesses, ITC, had another angle to add. “While the earlier growth in rural India came from the higher income group (agriculture) and very low income group (subsidies), we now see increasing disposable incomes with rural middle class that is the non-farm income. This is resulting in faster growth of categories like apparel, footwear and branded FMCG compared to durables. However, in line with rising input costs, the farm productivity growth must keep pace to sustain this trend in the medium term.”

The prices of key farm inputs like fertiliser have been surging. Di-Ammonium Phosphate (DAP) prices have doubled between April 2010 and December 2011 from Rs 9,350 a tonne to Rs 18,500 a tonne. Urea prices which are controlled by the government were revised on April, 1 2010 to Rs. 5,364.69 a tonne from Rs 4,830 a tonne. The government is currently contemplating another 10 per cent hike.

Demand boost

Interestingly, the Religare report mentions that automobile demand has remained robust. Hero MotoCorp Ltd, for instance, which has reach in more than 1 lakh villages across the country, sees 45 per cent of the total sales coming from rural India. Maruti Suzuki India Ltd too has seen the rural share in its sales rise from 5-6 per cent in 2005-06 to 26 per cent now.

However, the report points to increasing instance of private remittances used to buy automobiles. “The young customers who have migrated to larger towns return to buy high-end cars for their parents and families,” the Religare report says.

However, urban consumers are getting worse off faster than rural consumers. Data from the Ministry of Statistics and Programme Implementation indicates that while CPI index numbers for rural India is higher than urban India, the rate of growth or the inflation rate in urban India is higher.

> heena.k@thehindu.co.in