Broken heartland

Rural demand may not be as robust as expected, revealing the limits of aam-aadmi policies

Finance Minister Pranab Mukherjee explained the government’s helplessness over inflation in the Rajya Sabha with great eloquence on Thursday. Much of what he said may have solid economic fundamentals, but the United Progressive Alliance (UPA) government cannot claim helplessness forever — not when the signs of the cracks it is creating in India’s rural prosperity are becoming so obvious. If any one thing that has protected the Indian growth story since the global downturn began in 2008, it has been its strong domestic demand. India’s companies have been relatively insulated from cutbacks in household budgets in the struggling West, because they are focused on Indian consumers. While urban spending may not have been strong enough to keep growth going, rural demand has been robust. For fast-moving consumer goods companies, for example, that has been a crucial support. Rural consumers are nearly half their market, with many expecting that share to cross 50 per cent soon. Aggregates from market research companies showed rural demand growth outpacing that in urban demand quarter after quarter. But this financial year has been different. The changing trend is bolstered by anecdotal evidence from manufacturers of consumer durables, with demand in the month of November apparently collapsing — although, in most years, the income that comes in after the harvest causes a spurt in rural purchasing.

As long as rural demand remained strong, propping up Indian growth, the welfarist policies of the UPA seemed like they’d had an unexpected positive by-product. Yes, they had overstrained the fiscal deficit and pushed up the inflation figures; but rural demand served to insulate Indian producers from the downturn in the world economy. Now, analysts seem certain that the rural employment guarantee programme, the high procurement prices and easy agricultural credit can no longer support explosive demand growth. The rising price of food appears to have cut hard enough into real disposable income to cause many rural households to cut back on spending. If nothing else, this should serve as a crucial reminder of the price-sensitivity of rural demand, and how food inflation can seep through the system, hurting corporate bottomlines.

It should also be a matter of grave concern for the UPA. After all, it is a clear indication that its prized rural constituency is suffering gravely from its policy paralysis. Its aam-aadmi programmes clearly haven’t managed to protect rural India from the impact of poor fiscal management. The initial spurt of rural growth that they induced might well be tailing off — which should be a brutal reminder of how sustainable they are as growth-inducing, not just poverty-ameliorating, programmes. The obvious corollary is that the UPA needs to re-imagine its approach to rural India as soon as possible. Transfer politics may be politically potent, but reform is the only sustainable economic solution. FDI in retail should be just the beginning of a more creative approach to rural growth: pushing up irrigation, increasing access to skills, and expediting the introduction of well-regulated technological change in the agricultural sector should be prioritised.