A revival in rural demand is a central pillar in the argument in favour of buying FMCG stocks. The sector is holding on to an eye-watering price-to-earnings multiple of 41 times trailing 12-month earnings, compared to the broad market’s 23 times. A normal monsoon forecast is being seen as strengthening the case for a revival in rural demand.

This is where a divergent view emerges. The dominant investment view is that a normal monsoon translates to higher output, higher agricultural GDP growth (Crisil has forecast 3% growth in fiscal 2019) which means more disposable income, at least some of which will mean higher demand for packaged consumer goods. Forthcoming events such as elections (with the prospect of handouts) and a promised increase in minimum support prices are icing on the cake.

But on the other hand, there is also a view that India is facing rural distress. In a recent column in this newspaper, Himanshu, assistant professor at Jawaharlal Nehru University, said farmers are incurring losses even though output may be higher. Citing falling prices of agricultural commodities, from cereals, pulses, vegetables, spices and even livestock-produce, he argued that rural distress has caused a decline in the demand for food, in turn pushing prices down. He has called out overall deflation in the rural economy. Non-farm work has not been a support. Rural wage growth has declined.

So which is true? A reviving rural demand situation and a deflationary environment don’t sit well together.

Still, companies have been talking about an improving situation. Bajaj Corp Ltd’s management said after its March quarter results that they have seen demand from rural areas improve, compared to earlier quarters.

One explanation could be that demand is picking up from a low base. Compared to 2017, when the economy was in a bad shape, rural spending might be picking up, said Himanshu.

Another aspect could be the supply chain coming back to life.

Demonetization and the roll-out of the goods and services tax disrupted the wholesale distribution channel, which is critical for rural markets. The situation has been improving. Bajaj Corp’s rural retail reach for instance has increased by 8.7% as of April, while its urban reach rose by 4.1%. Other companies have also expanded rural reach, so better availability may also explain higher rural sales.

A third explanation could be that the effect of falling prices could vary depending on the crop grown and also the state farmers belong to. There could be pockets of improving incomes and therefore demand.

For an investor, what does this mean? As more companies announce results, management commentary will provide clarity on the strength of the revival. While FY19 should see better rural demand, it may taper subsequently if rural incomes don’t grow. An ideal situation is one where output and prices both increase, and of course rural wages too.

All of this matters even more because valuations are already expensive, factoring in a revival of growth in revenue and profits. Any risk to that outlook can have a telling effect.