India Inc's big bet on Bharat saving the day

Patidar is familiar with the inherent risks in farming. He has seen bountiful harvests razed to the ground after a night’s freak hailstorm, and the winding queue of vehicles outside wholesale markets—farmers would spend sleepless nights on top of their tractor-trolleys laden with harvest, desperate to sell their garlic and onion despite making a heavy loss. Patidar has learnt to take life as it comes—not to be elated when things fall in place or be crushed by a disaster.

At a time when agriculture offers the only ray of hope for a ravaged economy forecast to shrink by at least 5% in 2020-21 due to the ongoing covid-19 pandemic, it is farmers like Patidar who are expected to do some heavy lifting. After all, the winter harvest of grains and pulses was robust this year and government procurement at support prices is at a record high.

As urban India witnesses large job losses and declining incomes, businesses are looking at rural consumers of Bharat to rise to the occasion. Farmers not only have to supply the country with essential food items, but are also expected to spend their earnings to help rebuild the economy.

A wide range of businesses, from manufacturers of tractors and two-wheelers to those selling fast moving consumer goods like biscuits, beverages and soaps, are pinning their hopes on rural India. Patidar, however, is cautious about spending. “One good season is not enough to cover years of losses, so one has to be careful," he said.

India’s farm sector, which sustains over half of its population of 1.3 billion, is expected to clock a growth rate upwards of 2.5% in 2020-21. The question is, will this sole “bright spot" in the economy be enough to spur consumer spending? Will millions of migrant workers who lost their jobs during the pandemic and trekked back to villages have money left after spending on essentials? Can government interventions targeted at rural India help revive incomes and demand?

The good tidings

Agriculture grew by 4% in 2019-20, thanks to a record production of food grains supported by ample rains, and a recovery in prices of non-perishables. A major factor that contributed to the growth in agriculture, which was only a shade slower than the overall GDP growth rate of 4.2%, was a record winter harvest. Farmers, for instance, produced 107 million tonnes of wheat, the highest ever. And despite a slow start, federal procurement of wheat at minimum support prices (MSP) is at an all-time high of 38 million tonnes.

Unlike in cities, farming and other economic activities in rural areas did not see a total shutdown and has therefore witnessed a sharp pickup as the economy opened up, said Arshad Perwez, an analyst with JM Financial who closely tracks rural India. “A reversal of the deflationary phase in food prices which began in September last year together with the record winter harvest and MSP-based procurement will provide a tailwind of support for rural consumption," he added.

According to Perwez, rural consumption, however, is likely to be focused on essential staples, farm inputs and machinery. Across India, consumption of discretionary items such as personal and home-care products are at 50-60% of their normal levels. In rural areas, a drab marriage season in May-June has meant sharply lower purchases of items such as jewellery, watches, and apparel.

In early June, when the lockdown was lifted, more consumers shopped for undergarments than say, children’s party wear. Biscuits bucked the trend, as purchases by households and migrants on the move pushed sales (by over 20% for Britannia Industries in April-May). “Results from the March quarter (2019-20) showed how a week of lockdown (beginning 25 March) severely impacted the volume growth of consumer products (which fell by 15% year-on-year for Godrej Consumer Products and 7% for HUL)," Arshad said.

July will be a critical month to monitor the progress and distribution of the monsoon, and its impact on the Kharif crop, said Dharmakirti Joshi, chief economist at Crisil. “It’s not that we can expect a boom in the farm sector but the suffering there is likely to be lesser than the non-farm and urban economy which is shrinking. So relatively speaking, businesses will be looking at rural India for some support."

As of now, purchases made by farmers are showing signs of a revival. Sales of key inputs like fertilizers were 74% higher year-on-year in April and May. While a part of this could be explained by ahead-of-date purchase fearing supply disruptions due to the lockdown, the numbers also indicate more cash in hands of farmers prompting intensive use of inputs.

Data on domestic sales of tractors showed a rebound in May when tractor sales grew by 4% year-on-year, compared to a sharp 79% contraction in April. However, showroom sales of motorcycles and scooters (widely used in rural areas) fell by 89% year-on-year in May, indicating how households are prioritizing purchases.

“April was a washout but we witnessed over 18% rise in year-on-year sales in May which was driven by higher MSP-based procurement, a normal monsoon forecast and improved rural lending," said Raman Mittal, executive director at Sonalika International Tractors. Mittal is hoping the return of migrant labour back to villages may actually lead to more private investments in farming.

The downsides

Like tractor manufacturers, FMCG brands are also hoping rural sales will save the day. According to Crisil research, FMCG revenues are likely to de-grow by 2-3% in 2020-21 which is a drastic reduction from the growth estimate of 8-10% made before the pandemic struck.

While the pandemic is responsible for both supply and demand shocks, the ratings agency said that “rural India should fare better than urban areas because of higher proportion of essential products consumed, government doles, eased restrictions on agriculture activities, and the likelihood of a normal monsoon."

The trend of higher growth in rural markets over urban is going to continue this year, said Lalit Malik, chief financial officer at Dabur India Ltd, a leading FMCG company. “Since rural is a big opportunity, we have invested ahead of the curve and increased our direct distribution network to over 60,000 villages. Our focus is on smaller unit packs and essential healthcare and hygiene products," Malik added.

Companies which sell packaged staples are also banking on non-urban markets. “Roughly 52% of our sales are from towns with less than 100,000 population. While household incomes in urban areas are under pressure, we are expecting a faster bounce back in rural markets aided by direct income transfers by the government," said Angshu Mallick, deputy chief executive officer at Adani Wilmar. In May, urban markets witnessed a de-growth (year-on-year) but the rural segment held on to its volumes, Mallick added.

For the current year, the forecast of a normal southwest monsoon is a key positive. The June-to-September monsoon season which waters over half of India’s crop growing areas is forecast at 102% of the long period or 50-year-average. So far, June has seen rainfall at 24% above normal and planting of rain-fed Kharif crops are 21% more than five-year averages, driven by higher sowing of oilseeds, cotton and coarse grains.

There are downsides of course: ratings agency Crisil expects farm growth to be at 2.5% in 2020-21 with “risks tilted to the downside due to a hit to horticulture and any likely impact of locust attacks." While the non-perishables growers could manage to stock produce and sell at a later date, small growers across India resorted to distress sales of fruits and vegetables due to a lockdown-induced supply disruption. Dairy farmers were also hit due to a sharp fall in demand for milk and milk products.

A high incidence of attacks by trans-boundary locust swarms is an added risk, as the UN’s Food and Agriculture Organization has forecast locust attacks in July—it remains to be seen if states like Rajasthan and Gujarat are able to effectively contain these incursions to districts along the international border with Pakistan.

Lost incomes

While rural is often equated to agriculture, 57% of the income of farm households came from non-farm sources such as wages and earnings from the services sector, showed a 2016-17 survey by the apex rural bank Nabard. Wage labour constituted 34% of the income of agricultural households, and a higher 54% for non-farm households. These are key variables which determine rural spending—the income loss due to 30 million migrant workers returning home is a significant hit to household finances.

In a bid to fix this, the Centre increased spending under the rural jobs scheme to ₹1 trillion, the highest ever, and doubled food subsidy entitlement for enrolled families for three months. While work generation under the jobs scheme rose 53% year-on-year in May, higher allocation of food grains is expected to leave households with more disposable income.

However, these measures are just enough to support basic survival for landless households and unlikely to spur discretionary spending. More so, since rural households were cutting down on consumption before the pandemic hit: late last year, a leaked government survey (which it later junked) showed household spending, including on staples, fell by a significant 9% between 2011-12 and 2017-18.

“For households dependent on earnings of migrant workers, the pandemic is a huge hit for at least 4-5 months. In traditional disasters like floods and droughts, source regions usually see a higher inflow of money but this has reversed during the covid outbreak. In fact, when workers return to cities, they will need financial support from families back home for a few months," said Chinmay Tumbe, who teaches at the Indian Institute of Management Ahmedabad.

Previous research by Tumbe shows how remittances augment rural incomes. Way back in 2007-08, migration data from the National Sample Survey showed an estimated $10-billion remittance market in India, of which 80% was directed towards rural households. The size of the remittances would have more than doubled by 2020-21— a large income shortfall due to the pandemic induced job losses and reverse migration.

The increased funding under rural schemes following the pandemic will not cover the income loss for rural households, said Himanshu, associate professor at Jawaharlal Nehru University, Delhi. “Agriculture and government spending are the only sectors which grew during the pandemic. We cannot expect the farm sector to make up for the contraction in manufacturing and services. At this stage the only way to revive demand is by providing at least ₹1 trillion in additional funds for rural schemes."

According to Himanshu, the federal government, wary of containing the fiscal deficit, is unlikely to extend the additional food subsidy it provided to rural households for three months (April to June). This is despite the fact that it will be sitting on a massive 90 million stock of food grains by early July. The large public stocks will likely keep cereal prices high and leave less disposable income for landless households.

Finally, the pandemic has deeply impacted an already bruised consumer psyche. Rural families, including well-to-do farmers like Dilip Patidar, are wary of discretionary spending much like their urban counterparts. “When the roof leaks, you don’t spend on a new television or a motorcycle. You buy a tin sheet."