Ind-Ra: Agriculture and Rural Are No longer Synonymous

India Ratings and Research (Ind-Ra) says even if monsoon turns out to be deficient this year, its impact on rural spending will be less severe than what it used to be a decade ago or earlier because the rural landscape of the country has changed a lot.

More than two-thirds of rural income now originates from non-agricultural activities. Higher growth of the industrial and services sector in rural areas over the years has increased the share of non-agriculture in rural income. Due to space constraints, new industrial establishments are increasingly coming up in rural areas leading to net value-added per factory in rural areas being consistently higher than in urban areas since the beginning of the new millennium. This trend has accentuated since FY05. As a result, rural economy is now benefitting more from industrial expansion than urban economy. All this implies that rural income now is far less vulnerable to monsoon than it was few decades ago.

While rural monthly per capita expenditure is still lower than urban monthly per capita expenditure, the composition of goods and services consumed by rural India is increasingly urbanising and rural spending on discretionary goods and services is growing rapidly. Ind-Ra expects this trend to only accelerate over the coming years with the physical and digital connectivity of rural area improving with each passing year. The agency also believes that rural consumption will witness a much faster urbanisation than that witnessed in the past if the Jan Dhan Yojana, Aadhaar and Mobile numbers becomes a reality and seamlessly allows the government to offer subsidies as monthly transfers.

A reduction in rural spending nevertheless due to a bad monsoon will be more a psychological outcome and less due to a sudden fall in affordability. Companies having rural exposure could overcome this by innovating and shifting their goods/services to lower price points to offset the psychological barrier of perceived lower affordability.

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