India's rural recovery: Don't count on it just yet

Mint

15-07-2025

Nikhil Gupta Several data points make a case for optimism but there are also signs of the revival losing strength. Investors would still need to watch the rural sector for a few months before they can get a clear picture of its performance. There are at least five indicators that suggest fading rural strength in the country.
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In the last two quarters of 2024-25, India's rural sector posted a solid recovery. Based on various official macroeconomic indicators, our in-house analysis suggests a four-year high growth in India's rural sector during the period. This came as a huge relief to the economy and market participants, as an improving rural sector offset a weakening urban sector (based on another set of indicators).
In the last two quarters of 2024-25, India's rural sector posted a solid recovery. Based on various official macroeconomic indicators, our in-house analysis suggests a four-year high growth in India's rural sector during the period. This came as a huge relief to the economy and market participants, as an improving rural sector offset a weakening urban sector (based on another set of indicators).
This improvement in the second half of 2024-25 has fuelled expectations that the rural sector is on the mend and set to grow faster in 2025-26, supporting overall consumption growth.
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The early onset of the southwest monsoon in India and a 9% surplus in June rainfall have strengthened this optimism. With good rains so far, the live storage in 161 reservoirs was 36.4% of their total capacity at the end of June, compared to 20.3% a year earlier and almost 50% higher than the long-term average (i.e. 10-year period) by end-June. In fact, the current reservoir levels are the highest at the end of June for any year in the 21st century.
More importantly, agricultural real wages grew at a six-year high of 3.4% from a year earlier in the fourth quarter of 2024-25, following an average decline of 0.3% in the previous three years. This pick-up continued in April as well, which recorded a seven-and-a-half-year-high real growth of 4.8%. Although non-agricultural rural wages have also increased in recent quarters, their improvement is not as strong as in agricultural wages.
Can rural wages maintain this momentum for at least a few more quarters? Wages under the National Rural Employment Guarantee Act (NREGA)—which seem to be one of the leading indicators of agricultural wages—are already growing at a slower pace. Real wages under NREGA grew 6.6% year-on-year in the fourth quarter of 2024-25, marking the fastest growth in a decade. This growth has slowed to 5.6% in the first quarter of 2025-26, which is still strong but a concern.
We had seen this pattern of inverted V-shaped growth in NREGA real wages during the pandemic and then in early 2023-24, but it petered out quickly in both instances. It remains to be seen if this time will be different.
There is no doubt that an improvement in rural wages is a highly welcome and very encouraging indicator. The good news, however, ends there.
There are at least five other indicators that suggest fading rural strength in the country.
First, farming's terms-of-trade, which compares output price inflation with input inflation (excluding labour) for the agricultural sector estimated from the wholesale price index and thus gives us an idea of profit margins, declined for the second consecutive month in May. Agricultural input inflation started rising beginning February, while output inflation started declining from April, leading to a fall in the farm sector's terms-of-trade in the last two months. Notably, it improved for 22 consecutive months before that. What wages are for farm workers, terms-of-trade represent for agricultural producers.
Second, the sale or availability of fertilizer (production plus imports) also contracted for the second consecutive month in May, marking the worst contraction of 14.3% year-on-year in 15 months, and that too on a weak base. Fertilizer sales fell 10% year-on-year during the first two months of fiscal 2025-26, after declining 0.6% in the corresponding period last year.
Third, rural spending of the central government—including by the Union ministries of agriculture and farmers' welfare, rural development, panchayati raj and drinking water and sanitation—fell 13.9% year-on-year in real terms during April-May, following contractions in the previous two years (2023-24 and 2024-25). Excluding the fertilizer subsidy, it declined faster in the first two months of 2025-26.
Fourth, two-wheeler sales declined 7.6% year-on-year in April-May, the fourth decline in seven months after 30 consecutive months of growth. Recent data suggests that these sales remained weak in June as well.
Lastly, after rising in January and March when compared with the year-ago levels, work demanded under NREGA—an indicator of financial stress in rural India—fell in April. This was a relief because NREGA work demand had declined during the January-March period in each of the last three years. However, it grew by 1.1% year-on-year in May 2025 and then 3.7% in June. This rise has come notwithstanding excess rainfall and an early onset of this year's monsoon. Not surprisingly then, the central government has already released ₹ 37,500 crore in the first quarter of 2025-26, accounting for 44% of its annual target of ₹ 86,000 crore for NREGA spending.
What does all this mean? The purpose of this argument is to caution investors on the rural sector's strength. Better wage growth and a plentiful monsoon are definitely positive for the sector. However, there are several other pieces of economic data pointing to a fading of the recovery in India's rural economy.
Therefore, it is still early days and a firm conclusion on the health of India's rural sector can be drawn only after a few months.
The author is India economist and executive director at CLSA India and the author of 'The Eight Per Cent Solution'. Topics You May Be Interested In