Rural Consumption issues are due to credit availability

There is no news all around – Rural India has slowed down leading to a slowdown in the economy

While I have chosen just two articles, there are zillions more (with consumption data) concluding that rural India is suffering and hence the slowdown.

But is it really suffering? Check these out

  1. Agriculture which makes up for about half of rural GVA grew 7.9% in Q1 2019-20 vs 6.8% in Q1 2018-19. That is nearly 50000 crores more this time versus last year same time. This figure was 40000 crores last year. Surely, there is more money in rural India at least from agriculture. You would say rural India is more than agriculture. Fair
  2. Under the PM Kisan Samman Yojana, some Rs 21000 crores has already been transferred to Farmers between March and August 2019.
  3. Rural wage rates (Inflation adjusted) while low have grown faster than 2018.
  4. Now, let us look at banking data closely in rural India
  • Let us look at Term Deposits¬†– Term Deposits in rural India grew 11.2% in 2019-20 vs 7.2% in 2018-19. That is Rs 60000 crores more in 2019-20 vs Rs 30000 crores more in 2018-19.
  • Let us look at Savings Deposits¬†– Savings Deposits in rural India grew 12.5% in 2019-20 vs 10.7% in 2018-19. That is Rs 80000 crores more in 2019-20 vs Rs 68000 crores more in 2018-19.
  • But did they borrow more?¬†– Bank Credit in rural India grew 13.8% in 2019-20 vs 8.3% in 2018-19. That is Rs 100000 crores more in 2019-20 vs Rs 56340 crores more in 2018-19. Add farm loan waivers in a few States and this may have grown even faster.

So, not only at an aggregate level did income and deposits grow, credit (through banks) too grew at a higher rate than 2018-19. Also, looking at how much the deposits have grown, it is clear that the non-agriculture sector too appears to have performed quite well.

So we have an interesting scenario at an aggregate level, consumption growth has slowed down but bank deposits and credit are up.

So what seems to have happened is, some of the consumption has moved to savings and therefore one cannot argue that there is a deterioration of income. The question is why is there such a trend?

My hypothesis-

Rural Credit by institutions other than banks has fallen significantly which is forcing consumers to save instead of putting up down payments

Let us look at some data

  1. MFI credit growth is down from 50% to about 42%
  2. MUDRA loans for example, just Rs 82000 crores was disbursed in the first 5 months as opposed to Rs 312000 crores in the 12 months of last year. If one extrapolates, it comes to 62% lower every day
  3. While no data for NBFC Credit growth is readily available, the fall in tractor and bike sales is enough evidence of the slowdown in NBFC credit.

The fact that term deposits grew at a time of reducing Fixed Deposit rates is itself an indicator that consumers are unable to utilise the money.

I looked at a lot of other data items as well – Slowdown in Govt spending in rural India, High Healthcare and Education Inflation as well as Monsoon Patterns. They may also explain some of the changed behaviours but my lead hypothesis is that there is a clear problem with credit in rural (and urban) India. While Banks appear to be replacing the credit that was earlier provided NBFCs, they are perhaps not doing at an adequate pace.

One thing is clear, the lazy argument that incomes haven’t grown probably made a sense a year ago but as the latest GDP data shows, it does not anymore. The savings data confirms the fact. I accept that there are State level variations that will show that income growth variations are not the same. However, the larger problem is perhaps that of credit. More accomplished academic oriented researchers and those from Niti Aayog must quickly come with specific diagnosis so that the economy can start moving forward.

Data Sources

Deposits Data: RBI Quarterly Deposits

Rural Wage data:

Agriculture GVA data:

MFI growth: Newspapers

MUDRA data: Official Mudra web-site

PMKSY data from PMKSY web-site

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