Opinion I What HUL and Bajaj Corp results say about the rural economy

A farmer channels water to irrigate his wheat field on the outskirts of Ahmedabad, India, December 15, 2015. India's Prime Minister Narendra Modi will recalibrate budget priorities in 2016 to focus on social initiatives, such as the country's first major crop insurance scheme, while capping previously prioritised infrastructure spending, officials say. Modi splurged on roads and railways this year in a strategy to spur economic growth. But it came partly at the expense of federal programmes for farmers and the poor, suffering through back-to-back drought years. Picture taken December 15, 2015. REUTERS/Amit Dave - GF10000266582

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It’s early days yet, but the June quarter earnings of consumer good companies indicate that the pick-up in rural demand seen in the March quarter is sustaining. But there is an element of caution with the management of some of these firms reluctant to call it a full blown recovery primarily because there are doubts about what’s driving rural demand. These good numbers also don’t square up with tales of rural distress.

In the June quarter, Hindustan Unilever reported volume sales growth of 12 percent from a year ago while Bajaj Corp’s growth was 13.9 percent. A good part of this growth can be attributed to buoyancy in rural spending. This comes on the back of 9.7 percent growth in rural consumption in March as estimated by research firm Nielsen.

Consumer goods are not the only sector where rural demand is showing signs of promise. In the June quarter, sales of motorcycles grew 20 percent, double the pace of scooters, and at the highest rate in five years. Similarly, tractors sales are also gaining in digits.

However, remember, that growth in nominal rural wages had slowed down in the March quarter, the latest for which data is available. Growth in average wages was just 3.3 percent in the March quarter compared to 4.4 percent in the December quarter and over 6 percent in the three months ended September.

Greater clarity on the sustainability of this pick-up will emerge once more rural wages data is available. In the absence of that data, the drivers for growth boil down to three factors:

One explanation for this surge is volumes is the low base of last year. The economy is recovering from the twin blows of demonetisation and the goods and service tax (GST) implementation. A reduction in GST rates in November could also partially explain the momentum in recent months.

Second, farm loan waivers have put more money in the hands of the farmer, or at least among the landed and the biggest cultivators. That could explain the increase in the purchase of consumer durables and motor vehicles, according to Abheek Barua and his team from HDFC Bank. Indeed, some economists such as Pranjul Bhandari from HSBC say that India might well have a two-speed rural economy with the landed (people with more than 1 hectare of land and access to bank credit) driving growth while the landless face the brunt of the rural distress.

Third, there has been a strong push in rural financing by non-banking financial companies. Bajaj Finance, for instance, has reported a 75 percent increase in its rural business assets in the June quarter.  Easy finance availability is another explanation for motor vehicle and white goods sales.

But if indeed, these are the key reasons for the strong showing of consumer goods and automobile firms, there are questions of sustainability in the rural recovery. The low base effect will peter out in the coming couple of quarters.

To be sure, the increase in minimum support prices (MSP) of crops, among the largest in recent years, is expected to add heft to rural demand. But much depends on how it is implemented. While  MSPs have been announced for as many as 23 crops, there is large and efficient procurement for only rice and wheat. Also, for many crops, the MSPs are lower than prevailing prices, as Himanshu, associate professor at Jawaharlal Nehru University wrote in a recent Mint column. There is a surplus in the production of many crops and prices have declined in the past two years. So it is not clear how much the MSP hike will add to farmer income.

In the end analysis, MSPs and loan waivers are just short-term solutions for the rural economy and agrarian distress. Farmers are facing adverse terms of trade, overproduction, and lack of opportunities outside agriculture. If these structural issues are not sorted, a sustained recovery in rural demand looks chimerical.