1. Rural demand loses pace as farm incomes slow down

Rural demand loses pace as farm incomes slow down

For those who believe that consumer demand, at least in urban India, is back because car sales in April rose...

By: and | Mumbai | Updated: May 18, 2015 1:06 AM
Rural demand

Although half of India’s rich live in rural India, the farm economy has lost momentum partly because of the slower growth in rural wages. (Reuters)

For those who believe that consumer demand, at least in urban India, is back because car sales in April rose a smart 18%, Maruti Suzuki chairman RC Bhargava has some words of caution. Bhargava observes that one reason volumes perked up in April was that inventories in March had dropped to their lowest in a year. More pertinent, he points out, the volumes reported are the wholesale numbers, not retail purchases. Even as the comeback of the consumer in urban markets is yet to be confirmed, rural households aren’t loosening their purse strings just yet.  From tractors to two-wheelers and talcum powder, volumes are running thin and CEOs are keeping their fingers crossed the monsoon will be a good one.

Last week, Mayank Pareek, president, Tata Motors, confirmed on a television channel that there was  ‘some resistance’ from the rural customer. Earlier, Sunil Duggal, CEO and MD, Dabur India, had told analysts that business in the hinterland could be slightly duller this year. “I would expect rural growth to trend down a little bit from 12% to somewhere in the region of 10%,” Duggal observed in an analyst call post Dabur India results.

While companies like Hindustan Unilever earn a big chunk of their revenues from rural markets, others like Dabur have made a concerted effort to grow their reach. For instance, coverage under Project Double increased from 14,000 to 40,000 villages in the last three years. Maruti was able to reach around 1,25,000 villages in FY15 compared to 94,000 in FY14 and 44,000 FY13.

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Although half of India’s rich live in rural India, the farm economy has lost momentum partly because of the slower growth in rural wages. Moreover, analysts point out that the allocations to the Mahatma Gandhi National Rural Employment Gurantee Act (MNREGA) scheme too have been flat while increases in the minimum support price (MSP) for cereals haven’t seen too much of a rise. Meanwhile, food prices remain soft globally.

“Subdued rural wage growth and lower or delayed realisations on rabi crops have weighed on consumer sentiments in rural regions. Furthermore, unseasonal rains in north and central India and consequent crop damage have negatively impacted rural demand. This primarily impacts the two-wheeler demand given a higher volume share from rural markets,” Axis Capital wrote recently.

Nevertheless, the rate of growth in spends in the hinterland will continue to be higher than in urban catchments, given the lower base. That might not be much consolation for makers of consumer goods, but the good news is that analysts are expecting demand to normalise in the second half of FY16 before picking up in FY17.

“Subdued rural wage growth and lower or delayed realisations on rabi crops have weighed on consumer sentiments in rural regions. Furthermore, unseasonal rains in north and central India and consequent crop damage have negatively impacted rural demand. This primarily impacts the two-wheeler demand given a higher volume share from rural markets,” Axis Capital wrote recently.

Nevertheless, the rate of growth in spend in the hinterland will continue to be higher than in urban catchments, given the lower base. That might not be much consolation for makers of consumer goods, but the good news is, analysts expect demand to normalise in the second half of FY16 before picking up in FY17.

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