Statsguru: Rural India's distress conundrum

It’s difficult to make sense of what’s happening in the rural economy. 

On the one hand, leading economic indicators suggest a recovery is underway. As Chart 1 shows, unemployment is down and real wage growth is up. Two-wheeler sales are also up — suggesting a recovery in household demand. Yet, rural sentiment has weakened of late as shown in Chart 2. 

What explains this dichotomy?

One possible explanation rests on the diverging fortunes of the landed and the landless, says a report by HSBC Global Research. The report classifies landless households as those owning less than one hectare of land, while the remaining form the landed class. The latter account for less than a third of the rural households, as shown in Chart 3. 

Landless households typically receive the bulk of their overall income from wages and are much less dependent on the income from cultivation. But, as Chart 4 shows, the opposite is the case for the landed class, who tend to rely majorly on the income from cultivation.

This distinction matters as higher wage growth positively impacts the fortunes of the landless, while a crash in food prices negatively impacts the landed class. 

Now, the consumption expenditure of the landless often tends to be higher than their earnings, as shown in Chart 5. As such, this class tends to borrow to finance consumption.

Yet it is the landed class that is more indebted, as shown in Chart 6. While this debt could be to finance both consumption and capital expenditure, the high level of debt relative to income puts them in a financially precarious position at a time of falling food prices. But as this class tends to borrow mostly from formal sources of finance, they are the ones who benefit disproportionately from a farm loan waiver.  

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