Two consecutive years of drought have taken a toll on rural household incomes. But an ‘above normal’ monsoon, as predicted by India Meteorological Department (IMD), could boost rural demand. This, in turn, could have a cascading effect on overall economy.

If the rural economy grows by one percentage point, it could potentially boost overall gross domestic product (GDP) growth by up to 70 basis points over two quarters, says a new report by Goldman Sachs. The report, which was released on Monday, has pegged India’s GDP growth at 7.9 per cent in the current financial year and at 8.1 per cent in FY18.

According to the report, while “the direct impact of an increase in rural growth is between 45 and 50 basis points, the higher impact (70 basis points) suggests positive spillover effects via the urban economy.”

These effects operate through several channels – “increased purchasing power of rural consumers raising demand for urban-produced goods, ample food supply for urban areas and increased agricultural exports,” says the report.

As data on the rural economy is rather sketchy, the study looks at eight indicators to get a sense of rural growth. These are two-wheeler sales, household kerosene consumption, tractor sales, agriculture loans, power demand, yarn production, agriculture exports and government expenditure on rural areas. The study expects a “cyclical upturn in the rural economy during FY17.”

Other analysts also expect consumption to grow steadily once the proceeds of the Pay Commission and the effects of good monsoon play out. The report also finds that higher rural growth could also potentially decrease headline inflation by 40 basis points, presumably due to easing of supply constraints. Though in the interim inflation may edge upwards owing to demand pressures.

But sounding a note of caution, the report says while an above-normal monsoon could boost rural growth, the key to sustained growth lies in boosting rural investments. To this end, the report identifies a three-pronged approach that relies on boosting agricultural productivity, diversifying sources of rural income and urbanising rural areas.