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MOSL: ECOSCOPE-Initial signs of rural sector bottoming out but sharp urban weakness to keep consumption growth subdued

ECOSCOPE: Initial signs of rural sector bottoming out but sharp urban weakness to keep consumption growth subdued

 

• Real rural wages declined 1.5% YoY in 1HFY20, marking its first decline in 13 years. However, the reality for the rural sector is not as grim as these numbers suggest as almost the entire decline in real wages can be attributed to higher inflation. Nominal wage growth was 4.5% in 1HFY20, same as that in FY19.
• In contrast to the broad economic dynamics, higher inflation is benevolent to the farmer community, as it is a reflection of the higher prices fetched for their output. Not only retail food prices, but wholesale food prices have also increased at 6-year highest pace in the first eight months of FY20.
• Moreover, while farm output prices (at wholesale level) have increased sharply at 7.3% in Apr-Nov'19, farm input prices have declined slightly in FY20, implying better profitability for the farm sector this year after two years (FY18 and FY19) of declining margins.
• Interestingly, the central government's spending on the rural sector has increased ~21% YoY in the first seven months of FY20 (Apr-Oct'19), marking the fastest growth in 11 years. It was >13% of total spending, the highest in eight years.
• Combining the above mentioned facts with unusually strong water reservoir levels and pick-up in rabi crop sowing activity, there are sufficient initial signs pointing toward the rural sector bottoming out. Nevertheless, even if the rural sector picks up in some time, total consumption growth may continue to remain subdued as the urban sector has weakened sharply in FY20 and is not showing any signs of abatement.