We are seeing a slow and steady return of rural purchasing power, says Abhay Laijawala , MD and head of India research at Deutsche Equities. In an interview to ET Now, Laijawala said that a pickup in food inflation is encouraging. Edited excerpts:
Nikunj Dalmia: Your pet theme at Deutsche Equities is: Do not focus on consumption but focus on rural recovery; do not talk about capex but look at the resurgence in which the aam aadmi or the rural economy can make a comeback. Am I right?
Abhay Laijawala: Correct. We have done a very detailed dissection of what has really happened in rural India.
In the month of July itself, we had done a very detailed note on the agrarian stress in the country. At that time we came to the conclusion that a lot of the slowdown that we have seen in the Indian economy over the last two years is attributed to rural India.
Rural India constitutes 54 per cent of the country’s income, 47 per cent of the country’s expenditure and 68 per cent of India lives in rural India. Agriculture is the second highest employer in the country. Clearly, with all of this, if you are going to see agrarian stress, it is going to impact total aggregate demand.
One of the reasons why India's capex cycle was poor was the low aggregate demand. When total capacity utilisation rates in the country just continue to hover around a 65-70 per cent mark, it is a signal that the country has an aggregate demand problem.
In July, we highlighted that the agri-stress has reached a threshold level where there is a very low political tolerance. Therefore, our expectation was that there will be very a swift policy tailwind towards rural India.
Our thesis therefore since July — which we continue to maintain — is to buy rural consumption. We are beginning to see a rural recovery setting in. We are very encouraged to see that food inflation has started to move up.
The CPI inflation was up 4.9 per cent in November led by food 4.4 per cent rise in the inflation which was up 4.4 per cent, the highest in 15 months, and we see that food inflation is set to remain positive given that food prices had dropped very sharply after demonetisation going all the way till the month of May. Our sense therefore is that we are seeing a slow and steady return of rural purchasing power. An increase in food inflation also leads us to believe that the lingering impact of demonetisation, which did have an impact on demand, is firmly behind us.
Nikunj Dalmia: Your report is also centred around the fact that if rural demand remains low, it is going to challenge the current administration. There is going to be a political will to drive the rural demand. But if I look at the current administration, it has not turned a blind eye to rural India. Directly or indirectly, it is coming out with rural schemes whether it is home loan or Pradhan Mantri Bachat Yojana or DBT. What else it can do to suddenly spur up the rural demand?
Abhay Laijawala: The government has come out with a lot of moves aimed at improving the productivity of Indian agriculture. In fact, the prime minister has a vision of doubling agricultural incomes. We have seen measures from the government, but the time has come to address the problem in rural India. This is given the levels of stress to come up with a counter cyclical fiscal response. So while the productivity enhancement measures could probably continue, it will help only in longer term. There is a need to make agriculture more remunerative. Indian policy needs to be re-calibrated to ensure that while inflation remains in check, it does not come at the cost of making agriculture un-remunerative.
Nikunj Dalmia: In last two years, the only thing which we have not discussed is the macro risk: Interest rates have come down; crude prices have fallen and inflation has been below the mean line for the Reserve Bank of India. But bond yields are at 7 per cent. Do you think that this is going to be the so-called joker in the pack?
Abhay Laijawala: You yourself laid out the macros: You talked about inflation being down, you talked about bond yields being down, but you did not talk about the growth.
What happened to the growth when all of those macro variables did perform positively? We sacrificed the growth. In a country like India where the demography is so young, where job creation is so critical, we cannot let growth slip below a certain threshold.
We are beginning to see with the rural economy coming back, with aggregate demand being restored back to the normalised levels.
The aggregate demand was impacted last year on account of demonetisation. Two years before the last year, you had two consecutive droughts that also impacted rural India. Rural India as we said constitutes as much as 47 and 54 per cent of the country’s income and expenditure a slowdown there has had a corollary impact on economic growth. We are going to see a normalisation next year. You can argue that the rural economy is normalising after a gap of three years. It will bring with itself challenges on the inflation and the bond markets are already beginning to react to those fears.
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