If the RBI has got it right, PM Modi will have to do some major firefighting in India's villages. The RBI's monetary policy review statement says rabi sowing till end-November has been 8.3% lower than last year and this could get worse in the coming months. That's because we didn't have good rains this year and there isn't enough moisture in the soil. Also, there's only 61% water in the major reservoirs the main sources of irrigation in the rabi season. The central bank wants us to be prepared that all this "may adversely affect agriculture and hence rural demand."
What has taken India's monetary policy makers by surprise is how much food prices have fallen in the past few months. The drop has been driven by vegetables, pulses and sugar, which have become cheaper, while cereals, milk products and fruit prices have stayed the same as last year. While this is bad for farmers, it is great for consumers who are paying less for their food.
It's not just food cooked at home, but prepared meals, snacks and sweets have also become cheaper for the first time in the Consumer Price Index series. What does that mean in real human terms? Think of the daily-wagers in our cities and towns who crowd around small roadside vendors to buy quick hot meals. If they spend less on their food, they'll have more in their pockets to spend on other things or to send home. On the other side are hundreds of thousands of self-employed hawkers, tea-sellers and dabba-wallas. Their money earnings have clearly gone down. These people are electorally important because 'hotels and restaurants' account for 3% of all non-agricultural jobs in India.
Cheaper food reduces rural demand, but it increases urban demand for consumer goods, especially when urban households believe that food prices will stay benign for some time to come. The RBI does regular household surveys to check their inflation expectations. The latest one, done in November, shows that households now have a 40 basis point lower expectation of price rise in the next three months compared to the previous survey. That means they will be more confident about spending on consumer durables, which require larger one-time expenditure.
That is probably one reason why the Purchasing Manager's Index (PMI), which reflects the business expectations of the top 500 companies, hit a two-year high in November. India's corporates are expecting to do better in coming months, not only because they see demand picking up, but also because input costs have started to ease. The big one here is crude, which affects almost everything from plastics to paint, tyres to textiles. Oil prices have collapsed over the past six weeks and the RBI believes if this continues, India Inc will make more profits and invest more.
Already, the RBI's OBICUS report says, India's factories were running their machines for longer in Q2 than the long-term average of 74.9% capacity utilisation. Other indicators that the RBI studies suggest things are even better in Q3. Railway freight traffic has hit a five-year high while domestic air passenger traffic has "sustained robust growth." Both indicators suggest India's business climate has improved. The RBI also says there's been a "significant acceleration in investment activity" and it is likely to be sustained.
To the political economy watcher, this suggests Lok Sabha 2019 could see a big urban-rural divide. The RBI's policy statement indicates that manufacturing and services will recover from the slowdown they faced in the first half of this fiscal. It has also brought down its inflation projection, as long as the prices of crude and food remain benign. That could mean that urban voters, especially those employed in the organised sector, might go into the elections feeling reasonably happy with the Modi government. On the other side is the other half of India which depends on agriculture for its livelihood. A bad rabi crop, low prices and "sluggish growth in rural wages" could cost the BJP big amongst these people.
(Aunindyo Chakravarty was Senior Managing Editor of NDTV's Hindi and Business news channels. He now anchors Simple Samachar on NDTV India.)
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