From a scorching pace of sales growth in the recent past, the rural consumption story has suddenly soured thanks to a combination of natural and policy-made causes
Farmer Ravidas Varma in Madhya Pradesh’s Amar Pathan village cannot rebuild his crumbling house. Unseasonal rains in March ruined his chana (Bengal gram) crop and damaged the house further. As for his wheat crop of over 100 quintals, the rollback of bonus (₹150) on the minimum support price will leave him poorer by ₹20,000. He will suffer a similar loss on paddy later this year as the government has declared it will not buy crops that have been procured after paying a bonus to farmers. “Acche nahi, burey din aa gaye hain (Not good, but bad days are here),” says Varma, staring at his dilapidated house.
In Rajasthan’s Khinwsar village, Bhanwar Das is mourning the loss of his jeera (cumin) and sarson(mustard) crop after the untimely rains. “Suna tha muavza milega. Kuch nahi mila hai,” he says, lamenting the absence of any relief measures from the government. For now, he has abandoned plans to send his daughter to Nagaur for higher education as he can’t afford the fees. Also on the backburner is the family’s dream of owning an LCD television. “I am not sure if we will have enough to eat this year,” he says.
In the past few years, rural areas witnessed a scorching pace of sales growth. That rural consumption story has suddenly soured, buffeted by erratic rainfall, withdrawal of bonus on MSP, reduced allocation for the rural employment guarantee scheme MGNREGA, a slowdown in the construction sector, and the threat of a below-normal monsoon this year.
To begin with, incomes have fallen as rural wages grew a meagre 3.8 per cent in November — the lowest since July 2005, according to data from the Labour Bureau.
“Rural wages have not been rising fast enough; that is the phenomenon of 2014-15 and it is continuing this year,” says Dharmakirti Joshi, chief economist at Crisil.
In the past, as MNREGA provided assured employment, rural labourers were unwilling to take up other activities, leading to rising wages. That effect, however, is waning, primarily due to the declining allocation to MNREGA in the last few years — for instance, from ₹34,000 crore in 2014-15 to ₹31,000 crore in the revised estimates. In March this year, Finance Minister Arun Jaitley nominally hiked the allocation, from ₹34,000 crore to ₹34,699 crore. The highest allocation was in 2010-11, at ₹40,100 crore.
The impact of this is directly felt by companies operating in rural India. “There has been a general sluggishness in consumption in rural areas,” says Ullas Kamath, joint managing director at FMCG company Jyothy Laboratories.
As his company sells basic necessities such as detergents and mosquito coils among other items, it has not faced a drastic fall in demand. “But in a slowdown, the shift is from higher SKUs (stock keeping unit) to a lower SKU.” So, from buying 1kg of detergent, a customer now buys a half-kg pack, while another moves from half-kg to 250gm. Kamath cautions that if the following monsoon too turns out to be poor, “we will see a shift from bigger brands to lower-level brands.”
Already, discretionary products like shampoos, skincare items and deodorants are selling less in rural areas. FMCG growth in rural India has fallen to 8 per cent from the 9-15 per cent witnessed over the last few years. “The pace of market recovery is dependent on how the rural areas fare,” Sanjiv Mehta, chief executive of Hindustan Unilever, had said while announcing the company’s results this month.
Pradeep Lokhande, CEO of Rural Relations, a rural consumer relations organisation, says the reduced MSP and unwanted rains almost every month in various parts of the country, coupled with the poor monsoon last year, have shaved off a significant part of rural income. “The result is that if a user was buying three soaps in a month, she now buys only two; shampoo is used sparingly and buying decisions are postponed,” he says.
More than any other item, tractors best mirror the economic sentiment in rural areas. Sales were down 8.3 per cent in the first nine months of FY15, according to ratings agency ICRA. Decline in crop output and weakening prices have negatively impacted farm sentiment, with a likely dip in farm incomes.
The farm equipment division of Mahindra & Mahindra, the largest player in the segment, has been reporting a decline in tractor sales for the past few months, with a 31 per cent slide at 12,254 units in March. M&M, however, declined to comment on this.
This slide is mirrored by the two-wheeler segment too. Rural markets buy half of the bikes sold in India. Dinakar Singh, a dealer in Uttar Pradesh’s Hardoi, says April and May usually see good sales as it is the marriage season. From 25 vehicles a month two years ago, he now sells only seven to eight. “People are not buying this year,” he says resignedly, hoping for an improved festive season ahead.
According to research firm Nomura, a revival appears unlikely over the next two months: “We expect the two-wheeler industry’s volume growth to slow to 5.6 per cent in FY16 (instead of 11 per cent) from around 8 per cent in FY15.” And the caveat: “If the monsoon turns out to be poor this year, then there could be some downside risks to our growth estimates.”
Devendra Kumar Pant, chief economist and senior director (head — public finance) at India Ratings & Research, says the demand slowdown in rural areas is due to slower growth in incomes and high inflation. “While inflation has now come down significantly, consumers will open their purses only when they are sure that the decline is permanent,” he says.
Hero MotoCorp, the world’s largest manufacturer of two-wheelers, is feeling the pinch. Its April sales declined for the fourth straight month by 7 per cent to 533,305 units, compared to 571,054 sold the same month a year ago.
The missing jobs
However, while farmers and other consumers are vocal about their disillusionment with the Modi government and the decrease in their income, the corporate sector is more circumspect. Despite dwindling sales and a shrinking rural market, companies are not willing to admit to a slowdown.
Economists, however, believe that the government’s policies are aimed at creating a more balanced economy, moving away from consumption- to investment-driven growth. Crisil’s Joshi believes that MNREGA should be linked to productivity to help create income-generating assets. Regarding factors such as MSP, he believes these are adverse incentives and need to be corrected. “Eventually, the agri sector needs better irrigation and farm practices. They have to be hastened,” he says.
Jyothy Labs’ Kamath agrees: “The entire problem is one of unemployment. A family cannot depend on one piece of land. As long as they don’t get jobs, this problem will continue.” Back in the ’90s, people migrated to cities. That has slowed as urban India has become very expensive. They are better off staying back in villages than spending more on surviving in cities. “Make in India has to reach villages in a big way; jobs have to be created. Only then can a long-term rural growth story be scripted,” Kamath says.
For now, the eyes of farmers, companies and analysts are collectively focused on the monsoons. The India Meteorological Department has forecast below-normal monsoon at 93 per cent of the long-period average (LPA) owing to the El Nino phenomenon. “But if it is below that, then there will be difficulty in rural India and it will be a very bad phase,” says Kamath.
Farmers like Varma and Das have turned to the rain gods now. Varma has promised his village deity a grand feast if it rains well this year. With a government that is gradually pulling its hand away from rural India, farmers will probably need heavenly intervention to survive the slowdown.