Inflation in rural areas has been greater over urban prices for nearly 25%, and major FMCG companies are struggling with margins to halt the reduction in the volume of growth. Despite the abundance of harvests over the past two years the economy of the rural region is in a state of stress due to the fact that the manufacturing and service sectors — which account for nearly half of the GDP of the rural economy–are facing numerous changes in structure and challenges.
The slowdown in infrastructure investment has strained the labour market and is among reasons for the decrease in wages for rural workers. Additionally inequal distributions of rain has resulted in a decrease in sowing crops across a variety of regions, and is likely to increase the cost of farming. For instance, areas of Bihar, Jharkhand and Uttar Pradesh are moving closer to the onset of famine if rainfall doesn’t increase in September. The decline in agricultural production can cause rural distress over the next few months.
“The harvest will definitely be lower, but how much lower we don’t know,” says Madan Sabnavis, chief economist, Bank of Baroda. “We will get a sense of the real impact on farm income when the final (agricultural) output data comes in October onwards,” Sabnavis says.
This is an issue for FMCG firms looking to increase sales in the coming Christmas season. However, there are many variables at play, and the present situation is fluid because it could change when the circumstances change. For instance, in coming weeks, if the deficit from sowing shrinks and the government raises the capex, it can help increase consumer confidence.
An optimistic mood will boost spending and raise need for tractor, 2 wheelers as well as other household items and services. However, higher interest rates could cause a slowdown. “Growth of recovery isn’t as powerful in India. It is a good indication that tightening of monetary policies is not going to be too rapid. However, it is likely that the final repo rate is 5.75-6 percent for this cycle and there will be 1-2 rate hikesbefore the end of the cycle in December 2022.” states Nikhil Gupta, chief economist, Motilal Oswal Financial Services.
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