In past couple of months a number of research reports have expressed concerns over the rural demand in the wake intense second wave of pandemic and subsequent lockdown of economic activities. Some consumer facing corporates have also expressed similar sentiment in their interaction with analysts and investors. The popular views seems to be that unlike last summer, when the rural demand remained resilient despite a wider and stringent lockdown, this year the demand may not show similar resilience. Wider and deeper spread of infection this time is one of the primary reasons behind these concerns. Rising stress in household and unorganized sector is also expected the discretionary spending in check.
In this context, there are few points that need to be noted by
investors before forming a negative view on consumption theme.
Record production in crop year 2020-2021
Firstly, as per the third advance estimates for the 2020-2021
crop year, the agriculture ministry has expected record foodgrain production
for 5th consecutive year. India's foodgrain production is estimated
to rise 2.66 per cent to a new record of 305.43 million tonnes in the current
crop year 2020-21, on better output of rice, wheat and pulses amid good monsoon
rains last year.
In the non-foodgrain category, the production of oilseeds is
estimated at 36.56 million tonnes in 2020-21 as against 33.21 million tonnes in
the previous year. Sugarcane production is pegged at 392.79 million tonnes from
370.50 million tonnes in the previous year, while cotton output is expected to
be higher at 36.49 million bales (170 kg each) from 36.07 million bales in the
previous year.
Given the remunerative pricing and higher volume of crop
conventionally augur well for the overall rural income.
Normal monsoon forecast
for 2021
The India Meteorological Department (IMD) has forecasted a
normal monsoon for 2021. As per IMD’s latest forecast, Southwest monsoon,
starting in June, is expected to be normal at 98 per cent of the Long Period
Average (LPA).
This week, the widely-respected Australian Bureau of Meteorology
(BOM) has also ruled out the likelihood of the rain-disrupting El Nino
phenomenon over the next six months. Meteorologists say that a low probability
of El Nino is certainly good news for the monsoon, although the complex weather
system depends on many other factors.
A good monsoon usually means another year of good bumper farm
production and consequent positive impact on the rural economy and consumption
demand.
Second wave weakening
and economy unlocking
In past one week, the second wave of pandemic has shown a clear
tendency to decline. Further improvement is expected over next couple of weeks.
It is likely that the mobility restrictions may begin to ease as the Kharif
sowing season approaches. It is therefore likely that the income loss and
spending curbs (due to mobility restrictions, health concerns, curtailed
marriage spending etc.) seen in 1QFY22 may not spill over fully to the next
quarter.
Indubitably, full reopening of economy and normalization of
household spending may take at least 3 to 4 more quarter, till a significant
proportion of the population is inoculated. Consequently, the economic growth
for FY22 earlier projected to be in the range of 11-12%, may get constricted to
7-8%. This implies that Indian economy will attain the FY20 level of economic
activity only in 2F2022 only.
My personal assessment of the rural and some semi urban areas in
UP, MP, Punjab, Haryana, and Chhattisgarh is as follows:
·
Household finances have been damaged across the
state, especially in the lower income group families. Lower income and medical
expenses have eaten up savings and overall debt level has risen (most of it
informal or friendly). The expenses on education and health have risen for a
common household. For 5% households these trends may be structural due to loss
of life or permanent employment. Lenders (formal or informal) will have to
share some burden of this in near term.
·
The consumer confidence for discretionary
spending is materially lower. However, two wheeler and smart phone/tablet may
not be discretionary in most cases. Clothing, jewellery, home renovation,
wedding, etc are some of the discretionary items that may cut material cuts.
Down-trading in staples, personal care, shoes, home appliances, personal
vehicles is also clearly visible.
·
The credit worthiness of an average household
has diminished. The personal loan segment has been witnessing maximum growth in
past few years. A slowdown in this segment may be inevitable.
·
The demand for farm input remains robust. Farm
credit disbursement however may have slowed. The worst impact is from
contraction in farm credit from informal sources. How efficiently this
conundrum is resolved, may have material impact on the growth of rural economy.
Implementation of farm laws in letter and spirit would be critical in resolving
this situation.
·
The loss of life is unfortunate in any case and
under any circumstance. In rural area, the Covid fatality rate is materially
more in second wave as compared to the first wave. However, given the disguised
unemployment and underemployment, the economic impact may not be as severe as
many analysts might be anticipating. Not more than 5% households in rural areas
have borrowed money to get treated at private facility in towns.
·
Pandemic has actually resulted in upgrade of
healthcare facilities in many tier2/3 towns and villages. Hopefully much of
this improvement will stay post pandemic also which will be a major positive
for rural economy of India.
·
In rural and semi urban areas there is
resistance to vaccines. Much of this resistance is result of misleading
propaganda by ignorant, mischievous and/or malevolent elements. So far the
institutional effort to counter this misinformation campaign in grossly
inadequate. Recover would largely depend on how fast we convince people to get
vaccinated and actually vaccinate them.
Based on my assessment I would not be too worried about consumer
staples beyond couple of quarters. A material correction post 1QFY22 results
could actually be a good entry opportunity. I would be extremely cautious about
retail lenders, especially unsecured loans, and sale of premium vehicles.
Appliances sales may miss this summer season, but might see a near normal
festival season post monsoon.
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