Volume growth of rural sales suggests this is
Despite several quarters of private consumption slowing, the one bright light has been the steady increase in rural demand. This has lifted sales of FMCG firms, of motor cycles, tractors, etc. And the best proxy for rural demand was what was happening on rural wages—between January 2010 and January 2012, real wages growth surged to around 14%. How much of this was due to the MGNREGA or due to higher minimum support prices for major crops, or higher government spending in rural areas through the Bharat Nirman programme is not clear. Much of this, as our front page story today points out, has now come to a halt. The sharp correction in the fiscal deficit has taken place by compressing expenditure, since revenues are running way below target—corporate taxes, for instance, are growing at 9.6% versus the 17.7% target and customs duties at 4.3% versus the 13% target. As a result, government spending in rural areas has slowed, whether on rural roads or rural electricity projects. Not surprisingly, growth in rural wages, in real terms, is down to around 3.5% today. The impact of this can be seen in slowing sales of two-wheelers, volume growth of FMCG, indeed the sales of all consumer goods. So while industry has reason to celebrate the lower pressure this puts on industrial wage growth, the flip side is slower topline growth.
Some part of this will naturally get reversed in the next financial year as government spending will once again rise, but there is a limit to this since the fiscal deficit will have to continue to be a ‘red’ line even for the next government. So, until tax revenues pick up significantly, the chances of substantially higher government spending in rural India look low. In which case, the only way in which rural growth can be revived in the short run is through higher agriculture growth. This would involve, for instance, bringing in more high-yielding varieties of crops into low productivity areas like Bihar and West Bengal. While this is already taking place at a small level even today, more intelligent targeting of government subsidies—giving farmers in Bihar the same per acre subsidies given in Punjab and Haryana for instance—would play a big role in quickening the pace. Finance minister P Chidambaram made a start in announcing a separate fund for diversification of agricultural produce in this budget. This is something the next finance minister needs to devote more attention to.