Signs Of Green Shoots In Rural Economy

After a subdued rural consumption in the last three years, there are now increasing signs of an all-round pick-up in demand in India’s hinterland. Two successive years of normal monsoon means robust increase in farm output and to boot, the centre has hiked the minimum support price for rabi crops and some state governments have announced a waiver of farm loans. All of these measures have begun to drive up disposable incomes in rural areas and consequently an increase in consumption in sectors like FMCG (fast-moving consumer goods), automobiles and consumer durables. Gold buying in rural areas, which makes up two-thirds of the demand for gold in India, is expected to pick up on festivals and weddings.

At ‘Kisan’, India’s largest agriculture five-day show, which concluded in Pune on 17 December, dealers of tractors and agriculture equipment witnessed higher footfalls compared with previous years. A good kharif crop has given farmers the much-needed confidence to purchase their dream machines. Increased footfalls at dealerships signal higher sales of tractors eventually. Analysts now say that the demand for tractors is expected to witness a double-digit growth this year. In 2014-15 and 2015-16, the tractor market contracted 13 per cent and 10 per cent, respectively, as the rural economy floundered on deficient monsoon rains. The situation improved last crop year (July 2016 to June 2017) when good rains meant an 18 per cent growth in tractor sales, though the growth was on a lower base. This year’s monsoon rains have been at similar levels (5 per cent below the long-term average) and coupled with structural demand drivers like increasing farm mechanisation and farm income, analysts expect tractor sales volumes to grow at a compound annual growth rate of 10 per cent over the next three fiscal years, according to analysts at brokerage Prabhudas Liladhar.

Analysts at brokerage Elara Capital said, in a note to clients after visiting ‘Kisan’, that kharif realisations should anyway see a gradual uptick. They said Maharashtra farmers cultivating sugarcane, coarse cereals, pulses and horticulture crops are likely to report a 10-15 per cent increase in realisation this year, aided by a good monsoon and uptick in prices. This improved realisation bodes well for recovery in rural demand, which has been adversely hit first due to demonetisation and then due to a sharp decline in food prices on supply glut. For most of last year, the prices of pulses remained below the minimum support prices due to excess supply. Likewise, the slump in demand post-demonetisation had dragged horticulture products, leading to a sharp fall in realisation for farmers. Improvement in rural realisation amid the government’s continued spending on rural economy is expected to support recovery in consumption.

Signs of an uptick in rural demand are already visible – the sale of shampoo, soap, namkeen sachets and hair oil is rising in India’s hinterland. Analysts at brokerage Motilal Oswal said in a note to clients last month that quite a few FMCG companies now see rural growth outpacing or at least matching urban growth this fiscal. Take Dabur, a top FMCG company which sells nearly 50 per cent of its product portfolio in rural India. Dabur’s rural sales grew 11 per cent in the September quarter against 10 per cent year-on-year growth in urban sales. Hindustan Unilever, another FMCG giant, sells about 48 per cent of its product portfolio in the hinterland and analysts at Prabhudas Liladhar have estimated a margin expansion of 110 basis points (1.1 per cent) in fiscal years 2018 and 2019 for this company. Britannia, which already has leadership in processed foods, small packs of Good Day, Treat and Bourbon sell well in small towns and rural India. This company is additionally expanding distribution in rural India and the Hindi heartland. Prabhudas Liladhar analysts say Britannia will achieve double-digit sales growth and sustained margin expansion, which will enable a 21 per cent annual increase in its bottomline over FY17-20. All these robust growth forecasts for FMCG companies would not have been possible had rural consumption remained lacklustre.

Automobile companies like HeroMotoCorp, M&M and Escorts are also reporting rural growth recovery. The robust demand growth projection for tractor sales mentioned earlier is getting mirrored in other durables as well and the trend in rural sales growth will be better in the second half of the current fiscal year compared with the first half. Motilal Oswal analysts said for Hero, urban market growth was faster than rural in the June quarter of this fiscal, but the two markets grew at an equal pace in the second quarter. Mahindra & Mahindra, the country’s largest tractor maker, expects 12-14 per cent industry sales growth in the current fiscal against a guidance of 10-12 per cent earlier. Over April-October 2017, the domestic tractor industry grew 15.5 per cent. For Maruti Suzuki India, rural sales grew a robust 21 per cent in the first half of the fiscal year. The World Gold Council India chief P R Somasundaram told Reuters last month that gold consumption in rural India would be more robust in the December quarter, given the number of festivals and the wedding season.

Not just higher farm output, a hike in minimum support prices for kharif and rabi crops are also encouraging the rural consumption growth story. Motilal analysts said that the minimum support price for rabi crops, on a simple average basis, are higher this year by 8.3 per cent. “Although this is lower than the 11.3 per cent hike given in fiscal 2017, it is much better than the average hike of 7.1 per cent seen during the last five years. Importantly, the support price for wheat, which is the most-procured Rabi crop, has been increased by 6.8 per cent this year ­– the highest in six years.”

Possible spoilers to the rural consumption story could be, according to analysts at Prabhudas Liladhar, actual benefits from farm loan waivers and rising input costs for farmers. These analysts found that farm loan waivers were still a work in progress, as benefits were yet to reach the beneficiaries. Besides, rising input costs are a concern as output prices are not increasing in linear proportion. While some concerns remain, there is no doubt about a heartening recovery in rural consumption this year.