Mumbai: Two-thirds of the country’s total working population resides in rural areas. It is only natural that their revenue charts and progression trajectories define the current and future course of the Indian economy.
Setting aside serious concerns about falling self-employed income levels has resulted in the current situation, where consumption levels and sales volumes in a number of segments, in particular high-end products consumption, suffered collective blows. The revival of large-scale consumption in the country will only be possible when the real wage levels of rural workers experience a significant increase.
Published on April 20, a research note from brokerage firm Motilal Oswal gives many reasons to be concerned about the plight of casual workers. The memo highlights how the self-employed find themselves at the bottom of the worker hierarchy. They are hurt not only by stagnating income levels, but also by limited access to bank credit and other formal channels. Given the lack of institutional support, rural workers have had to bear the full brunt of the pandemic, vis-à-vis any other category of workers.
While salaried or regular wage workers employed by state governments or publicly traded companies have done quite well over the past two or three years, given that they received a 6-7% raise in In calendar year 21, the self-employed, on the other hand, saw real farm and rural non-farm wages fall by 2% and 4% in EC21.
A combination of factors – beginning with the downturn, the transition to income and job destruction in the wake of the pandemic, and the recent spike in food, fuel and fertilizer inflation – have all contributed to slamming the rural woman worker from both sides: her real wages have seen dramatic erosion while her spending has boiled over, leading to a situation where the rural woman worker’s standard of living has either remained stagnant or has fallen further.
It’s not that things were going great for the self-employed before the pandemic hit. In fiscal 2018, a slowdown had begun to loom in India’s macroeconomic scene and was holding back wage growth, employment opportunities and rural consumption.
Between CY15 and CY18, real agricultural and rural non-farm wages increased at a CAGR of 1.5% to 2%, which is not very encouraging but still much better than the negative CAGR of 0.6% and 1 .3% recorded in CY19 and CY20. Employees of state governments and publicly traded companies haven’t had much luck either, as the average real growth rate of their salaries over the past three years has been much lower than it was in the past. during the years CY15-CY18.
When it rains
There has been a double whammy for the self-employed. As their income levels have depleted over the years, banks and other formal institutions have stepped back when it comes to extending credit to them. Motilal Oswal’s note separates disbursed household loans into three parts: personal loans, agricultural loans and loans to unincorporated businesses such as sole proprietorships and partnerships (read: MSMEs).
Personal loans are borrowed entirely by individuals and would represent (part of) the debt of regular wage earners in the country. “Agricultural credits” are also contracted by individuals, although they are part of the category of self-employed. These two components account for 70% of total SCB loans to households. The remaining 30% is represented by what we call “unincorporated businesses”, including industrial activities, transport operators, wholesale and retail trade, professional services and others.
Research by Motilal Oswal indicates that over the past two years, banks have preferred to give loans to regular employees in the form of personal loans. This practice is essentially a continuation of what was also happening in the pre-COVID-19 period. At the same time, the share of “agricultural loans” and “unincorporated business loans” has declined almost steadily over the past decade.
The data speaks for itself: personal loans, which accounted for 41% of household loans in EC14, have steadily strengthened. These loans increased from 48% in CY19 to 51% in CY21. In contrast, the share of agricultural loans fell to 19.4% in CY21 from 24% in CY14, while loans to unincorporated businesses fell to 29.6% from 34% in the same period.
This discrepancy is also evident in granular data. Since the last quarter of CY19, total loans to households increased by 22%, personal loans increased by 29%, but agricultural loans and loans to unincorporated institutions lagged by 16% and 15 % respectively until T4CY21.
What does the future hold?
In a geopolitical scenario marked by conflict, crippled supply chains and inflationary commodity cycles, the future could hardly look bright for the Indian worker. Yet another brokerage, Prabhusdas Lilladhar, sees the Indian farmworker taking advantage of the foodgrain vacuum left by Ukraine.
For Prabhudas Lilladhar, the fall in rural demand has less to do with collapsing incomes and more reflects people adopting a “cautious attitude to keep cash in rural India due to the impact severe from the second wave of Covid”. The brokerage maintains that the central government has given adequate free rations to a large part of the rural population since April 2020, which has led to a situation where overall agricultural production and income have not been affected.
The brokerage expects a slight uptick in rural incomes in the coming quarters. In fact, researchers expect a 30% growth in the overall farm income benefit from the rabi crop, reaching up to Rs 57,800 crore. This increase in profits, according to Prabhudas Lilladhar’s research note, will be led by wheat (Rs 30,200 crore), mustard (Rs 21,800 crore) and maize (Rs 5,300 crore).
“Additional income from the sale of stored Kharif crops such as cotton, soybeans and barley will further add to the gains. We performed sensitivity analysis for different price levels and open market and MSP purchases by the Indian government. We believe farmers will earn a minimum of Rs 18,300 crore more from this year’s harvest and a reasonable scenario of Rs 26,000-28,000 crore and a best case of Rs 36,000 crore-38,500 crore. This may increase further in cases where farmers do not sell at harvest time and prices increase further. Rural experts have estimated that after the harvest of crops and clarity on the monsoons, rural demand is expected to rebound strongly, which will trigger another cycle of growth in the economy,” the note reads.