India:Rural Spending Rises 18% in FY12

HAPPY HOURS Rural poverty is likely to have dropped to around 26% in 2011-12; the rural-urban divide narrows too     Time to stop glaring at the gloom in Europe and see the light at the bottom of the pyramid right here in India. Recent data show that poverty is coming down fast and that the rural-urban gap in income is narrowing, thanks to rapid economic recovery after the financial crisis and generous transfer payments from the UPA government.  The numbers will give Prime Minister Manmohan Singh's government some ammunition to counter the charge that economic growth under its seven-year rule has not been inclusive.  Monthly per capita rural consumption rose 18% in real terms in 2011-12 to . 707.24 (2004-05 prices) from . 599.06 in drought hit 2009-10, provisional data released by India's statistics office showed, explaining the surge in rural consumption in recent years.  In the same period, urban consumption rose 13.3% to . 1,359.75 from . 1,200, explaining the narrowing of the rural-urban divide. "The figures are much better than we anticipated. It shows that the trend in declining poverty has continued," said Himanshu, an assistant professor of economics in Jawaharlal Nehru University.  Poverty figures for the whole country are likely to have dropped because of the surge in the income that has delivered higher consumption.  Back-of-the-envelop calculation shows rural poverty is likely to have dropped to around 26% in 2011-12 from 33.8% estimated for 2009-10. In the case of urban areas the decline in the same period is marginal— from 20.9% to 19%. However, finer calculations that compare consumption figures of comparable reference periods could modify these figures a little. The same phenomenon that harried consumers in urban areas curse as food inflation is responsible for turning the terms of trade in favour of agriculture (farm produce prices go up faster than industrial prices), raising rural incomes and rural spending power.  This, of course, is in addition to higher farm sector growth and spending on the government's flagship social scheme Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and other rural development schemes for road building, sanitation, drinking water, etc called Bharat Nirman.  In the past three years, the government has spent over . 1 lakh crore on MGNREGS alone, which apart from putting more income in the hand of rural population has also helped set a floor on wages.  "The RBI also pointed out, in its first quarter review for the year 2012-13, that the increase in rural wages continued to be much sharper than compared to the comparable rate of inflation," said Vidya Mahambare, Principal economist, Crisil.  The 7% GDP growth in agriculture in 2010-11 after the drought hit in 2009-10 also helped boost rural incomes and expenditure.  "We have seen growth from all quarters. The rural space has contributed significantly," said Chittranjan Dhar, CEO of ITC Foods. "We had expected rural consumption levels to increase from levels seen in 2009-10 as we had a bad year due to the drought. However, the quantum of increase is substantial," said Pronab Sen, Principal Advisor, Planning Commission. Although there was an improvement in overall spending capacity, the poorest in the country continued to have abysmal incomes.  The bottom 20% of the rural population spent less than . 23.96 per day in 2011-12 while the poorest 10% existed on less than . 20 a day. In urban areas, the poorest 20% spent less than . 36.2 a day while the poorest 10% spent a daily . 28.6.  The richest 10% of rural India spent a daily . 115.32, about 6.9 times that of the bottom 10%. This ratio was 6.4% in 2009-10, indicating widening rich-poor divide.  The disparity in urban areas was highest with the top 10% of urban population earning . 255.06 per day, about 10.9 times that of the bottom 10%. The disparity has not risen in urban areas.      VIEW  Growth is Inclusive  When rural incomes grow, consumption follows. This is what seems to have happened last fiscal. Some of the growth in rural consumption can be attributed to the low base two years ago, which was a drought year, and some to the government's NREGS and stimulus packages. Much of the growth in consumption has come from higher rural wages, which is welcome. High rural consumption growth helps explain why FMCG companies have been doing so well, beating analysts' predictions of doom. The government, too, should be happy and get to work on reforms which can sustain income and consumption growth across the economy.