One of the strange things that happened during the Global Finance Crisis was that the Rural India did not feel the pinch of the crisis. In fact they were better off. The Farm Sector, which anyway did not have much surplus, was not affected by the demand drop. There is more work in the rural areas these days because of the partial success of National Rural Employment Guarantee Scheme, which assures 120 days of work, though the implentation is very very patchy. We have cases of reverse migration happening from cities to rural areas of late.
Indian economy has to be thankful to the resilent rural market for not being affected by the GFC. Figures show that fast moving consumer goods, such as shampoo and toothpaste, are growing faster in the villages than in the cities. Rural India’s purchases of chyawanprash, an ayurvedic paste that eases digestion and bolsters the immune system, outpaced urban India’s by over 6% in the second quarter. And Maruti Suzuki, India’s biggest carmaker, more than doubled its sales in rural areas in the year ending March 2009.
But this could change this year. The poor monsoon followed by floods has really dampened the mood in the rural areas. Agricultural production is expected to shrink between 6-8% in the year 2009-2010, thereby affecting the rural purchasing power.
The drought and flood is expected to raise the food prices, adding to inflation, which is very high already at the retail level. India is already the only big economy where consumer prices are rising faster now than they were before the crisis. The price of pulses rose by 20% in the year to August 28th; the price of sugar by 35%. Reserve Bank has already given indications that interest rates are on the way up, which will further slow down GDP growth. With Bank Rates expected to touch 9%, you will see more and more people prefering Fixed Deposits thereby sucking liquidity out of the system. Credit will also be very expensive, further dampening urban spending. It is expected that interest rates will raise by almost 2.5% to 3% during the next one year. Spending on drought relief will also add to the government’s already uncontrollable fiscal deficit, which will exceed 10% of GDP this fiscal year, if the budget gaps of the state governments are included.
All in all, we can expect a very tight 2010.
