Indian rural demand enters coma?

That the consumer demand in the developed world is in a state of coma after the Global Financial Crisis is a well known fact. It is also well understood that this economic coma is bound to persist for a long period, possibly a decade.

However, what came as a surprise to me was the possibility of the Indian rural market entering such a coma recently. The Economic Times carried such news in the second week of February – Rural India Loses Steam. Thereafter I began to hear stories from people getting affected from the slump. One textile trader complained of the missing rural demand even while the Indian wedding season was in its full swing. In other instance a sugarcane farmer complained of receiving low prices. A bicycle retailer in Bihar contemplated changing trade even when the cycle doling scheme of Nitish Kumar is on. So what is wrong?

Before we think of the reasons we must take all of this with a pinch of salt. I have found it to be a common habit of business people to over blow their worries even when the changes have been marginal. Sometimes this is done to make others feel good about their sorry state of affairs. At another level this tendency has caught up with salaried professionals too who have become attuned to hyper returns year after year. So for example a 10% hike in salary might be considered no hike at all, when all it might mean is that it is not the usual 20% with the same firm or the usual 30% when job hopping.

So let’s come back to the allegation that rural demand has fallen and the proposed reasons to which this slump is attributed.

• -          The MGNREGS has spoilt the rural economy
• -          The hiked Minimum Support Prices (MSP) do not reach the famers – This could be the case but this has been true for ages.
• -          Price crash and crop failures – This indeed appears to be the case. Prices of crops like Potato, Cotton, and paddy indeed crashed in different regions.
• -          Lack of liquidity and high loan rates
• -          Election fatigue in north

 A careful look at these suggests that these do not lead to a coherent story. These reasons are either not backed by facts or in other cases the fact has been in existence earlier too and is not a novelty.

The most baffling statement seems to be about a slowdown in sales of ACs since November. I thought this was common sense.

“Manish Sharma, Panasonic India director marketing and sales, says in tier-II and tier-III markets, sales have fallen 10-15% since November with the worst affected being direct cool refrigerators, small-screen LCD television and window air-conditioners.”

Broadly then my gut feel is that there is no new structural development that would reduce rural demand. Although unsubstantiated, the demand may be down for a while but that cannot be the new normal in India.

My confidence in the rural economy especially gets summed up well in what Pradeep Kashyap has to say:

“The rural economy is an authentic economy while the urban economy is a bubble economy and a speculative economy to a large extent. In rural India, nobody speculates on housing, no one really invests in financial markets, and again there is no IT sector in rural India. So that’s why our rural economy continued to grow in 2008-09 and we did much better than even China back then as ours is a domestic consumption-driven economy and theirs is much more export driven. The rural economy now accounts for 50% of India’s economy. So half of our economy remains stable and that’s a huge advantage.”