Retail price inflation reached 7.4% year-on-year in September, driven by a general increase in prices, mainly for food. With the rupiah depreciating and crude oil prices still high, the higher cost of imported goods has also fueled inflationary pressures. While skyrocketing prices would undoubtedly impact consumption across all income groups, those at the bottom of the pyramid are bearing the brunt. A study by Crisil found that the poorest 20% of the population were hit hard by an average inflation of 7.8% and 8.1% respectively in rural and urban India. For middle-income groups, the hit was a little softer at 7.7% across all regions of the country. For the top 20%, average inflation was lower at 7.3% and 7.2% in rural and urban areas, respectively. The results are not surprising since generally essential items, such as food and fuel, make up a larger share of the consumption baskets of lower-income classes.
The fact is that 80% of India’s workforce is employed in the informal sector, which has been hit the hardest by the pandemic and is struggling to recover. About half of them are employed in the agricultural sector. Moreover, of the remainder, many work in rural India. While urban India is recovering, having survived the first year of the pandemic reasonably well thanks to strong government support, the rural economy has been sluggish last year. Indeed, while India’s gross domestic product (GDP) growth contracted by 6.6% in fiscal 2021, growth in agriculture – the mainstay of the rural economy – increased by 3.3%.
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However, consumer spending in rural India slowed in FY22, likely due to slowing government spending and the dislocation of livelihoods due to the pandemic. The terms of trade have also deteriorated. In contrast, urban consumption suffered during the FY21 pandemic, but consumer spending picked up after normal activity resumed last year. Also in the current year, rural India is not doing very well as evidenced by the trend in rural wages. Real rural wages have fallen every month since January this year, by 0.7 to 1.2 percent. However, nominal wages increased monthly by 4.8 to 6.1 percent over the same period. The decline in wages was more pronounced for non-farm workers, suggesting that the farm economy is in much better shape than the non-farm economy.
Unemployment is a serious concern. In August, for example, the rural unemployment rate reached 7.7%, according to CMIE data. In addition, agriculture lost 11 million jobs. Slightly more than half of them were farmers, the rest being agricultural workers. Certainly, most of them have been able to find employment in the non-agricultural service sectors, although the remuneration of these jobs is unclear.
The government must create employment opportunities for non-agricultural workers; rural spending by a handful of ministries contracted 12% year-on-year in Q1FY23 after falling 34% year-on-year in Q1FY22, according to analysis by Motilal Oswal. This brought the share of rural spending down to just 9.4% in Q1FY23 from 12% in 1QFY22 and 18.8% in Q1FY21 which, by the way, was a 12-year high. While higher support prices would help farmers, opportunities need to be created for non-agricultural workers, semi-skilled workers, whose real wages have contracted in four of the last five quarters. Otherwise, the terms of trade for rural India will continue to deteriorate.