Mumbai: While favourable monsoon will be vital for rural recovery, the trend in commodity prices and recovery in construction activities also hold equal importance, domestic rating agency Icra said.
The earnings of rural households over the last few years have been impacted by modest hikes in Minimum Support Prices (MSPs) and a decline in commodity prices, which has mainly been influenced by global factors, Icra said.
For instance, domestic cotton prices weakened by 20 percent from their peak in FY14 to FY16, due to the change in China's procurement policy and the declining competitiveness against PSF due to lower crude oil prices, it said.
Similarly, liquidity of farmers in the sugarcane producing belts was affected by weak financial performance of sugar mills, which were operating in an environment of surplus production (in the domestic market) over the past 5-6 years and subdued international prices.
"While agriculture plays an important role in the rural economy, it employs 64 percent of rural manpower. The rest is contributed by sectors like construction (11 percent), manufacturing (9 percent), trade and transport (9 percent) and others.
"Thus, revival in some of the key sectors will also be important for rural demand recovery," Icra Ratings Senior GVP Subrata Ray said.
With the government's focus on reviving infrastructure projects, a gradual improvement has been visible, especially in the execution of roads and highway projects since second half of 2015-16.
The number of households getting employment under the MNREGA scheme also increased in 2015-16 by 38 percent to 176 million.
However, what still remains a challenge is the subdued pick-up in industrial capex and the real estate markets, which are also an important source of rural employment.
"Apart from the central government, many of the state governments have also allocated a greater proportion of their annual budgets towards sectors that have a direct influence on the rural economy.
"The other positives for the rural economy and consumption-driven sectors at large include the implementation of the Seventh Pay Commission recommendations in FY17 and the recent roll-out of the One-Rank-One-Pension scheme for the defence personnel," Ray said.
In contrast to the trends in rural economy, demand from urban markets has been on a recovery trend over the past 4-6 quarters, led by lower inflationary pressures, softening interest rates and improving consumer sentiments, Icra said.
"In addition to these factors, we believe that aggressive promotional strategies, discounts and other initiatives by companies have also supported demand recovery to a great extent across sectors," it added.