`Good rains to boost rural demand; Kharif farm income to rise`

New Delhi: Rural demand is likely to turn up in the coming months largely driven by better rains, and Kharif farm income is expected to jump 12.3 percent this year, says a report.

According to global financial services major Bank of America Merrill Lynch (BofA-ML), the revival in rural income growth along with the payment of 7th Pay Commission arrears this month implies a consumption driven recovery for the country rather than an investment driven one.

The global brokerage expects rural demand to start picking up from October as the fresh harvest starts coming in.

"We forecast that Kharif farm income will jump 12.3 percent in contrast to contractions of 2 percent in 2015 and 5.9 percent in 2014," BofA-ML said in a research note adding that its proprietary BofA-ML India Rural Activity Coincident Tracker (ACT) also continues to show improvement in the rural economy in recent months.

The report further noted that while pulses farmers should benefit from a higher volume growth this year on better rains, raw cotton farmers are likely to benefit from rising pricing power and oilseed farmers would benefit from both a better production and a higher inflation driven by increasing global palm oil price.

The rise in real rural wage growth, real cash demand and real credit growth in the agricultural sector in August is partly driven by the drop in rural CPI inflation to 5.9 per cent from 6.7 percent in July - thereby increasing the real purchasing power of rural India, the report said.

Additionally, motorcycle, moped and tractor sales continue to pick up on the back of better rains this year, the report added.

The only near-term headwind to BofA-ML's consumption call remains a potential postponement of discretionary consumption in expectation of a GST-driven price cut in consumer durables such as passenger vehicles and household goods.

"We think there could be some postponement, especially as prices of consumer durables, such as cars, are slated to slip 2-5 percent. Our analysts expect companies to pass on up to 50 percent of the benefits from the reduction in tax rates after GST is adopted. Nonetheless, this will lead to a bunching up of discretionary spend in the June quarter, if the GST is implemented from April 1," the report noted.