Will weak monsoons sap rural demand? Rural sector much bigger than just agriculture, says Jefferies

Jefferies further said the rural economy is in the early stages of a recovery, as partly evident in rural wage growth at a 27-mth high and NREGA employment demand being below pre-COVID levels.

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Concerns of weak monsoon impacting rural demand are not justified as the rural GDP (40% of economy) is far bigger than the agri GDP (18%), while structural improvements such as better roads, credit, irrigation, and digitisation have reduced the monsoon dependence of the farm sector, brokerage Jefferies said.

The comments come amid worries over El Nino (the warming of the central and eastern tropical Pacific Ocean) impacting monsoons this year.

Playing down the fears of a weak monsoon hitting rural demand, Jefferies in a recent report said services and manufacturing account for a substantial chunk of rural incomes.

“Migration of labour from rural to urban areas is persistent as evident in urban population growth (~2% p.a.) being ~4x rural growth. A large part of the rural consumption / local activity is hence driven by the remittances from urban areas,” its analysts said.

In addition, bottom of the pyramid (BoP) demand is not rural alone, as the urban poor also account for a significant share of this segment and their incomes are not agri dependent.

“The recent narrative about a potential weak monsoon keeping rural economy weak in FY24 is, we believe, an oversimplification,” the report said.

Jefferies further said the rural economy is in the early stages of a recovery, as partly evident in rural wage growth at a 27-mth high and NREGA employment demand being below pre-COVID levels.

“Construction activities are getting a leg-up as the housing starts reach a 9-year-high level. Moreover, government’s spending push on infra will also boost construction jobs. With 2023 being a pre-election year, government is likely to maintain its spending push and likely boost the BoP / agri sector policies (e.g. higher purchase prices for crops, income transfer schemes etc) in the run-up to 2024 elections,” it noted.

Four of the past 15 years had deficient rainfall. While a drought does reduce the food grain production by an average 5 percent below trend, the intensity of decline has been reducing, likely on better irrigation.

“Our analysis of 12 high rural exposure stocks during weak monsoon periods (36-data points analysed) found no significant correlation with data evenly split between out / under performance,” Jefferies said.

The brokerage remains ‘overweight’ on staples due to factors such as recovering rural demand and improved margin visibility.

Speaking to MoneyControl on February 27, MD Director General Mrutyunjay Mohapatra said, “There is a weak El Niño in the Pacific. As of the latest situation, we are moving to a neutral situation in May-June. During monsoon there can be an El Niño impact. We should wait for April when the El Niño prediction will be accurate.”

Many parts of the country received unseasonal rains and hail in the last few days due to western disturbance.

The Centre has said there has been some damage to the rabi (winter) crops including wheat due to the unseasonal rains and hailstorm.

As per the Economic Survey 2022-23, around 65 per cent (2021 data) of the country’s population lives in the rural areas and 47 per cent of the population is dependent on agriculture for livelihood.