Will the slump in rural consumption set the tone for 2019 poll rhetoric?

While FMCG products are doing well, auto sales receded in recent quarters, and the verdict on tractor sales was mixed

The Lok Sabha elections are nearing, and the political rhetoric is most likely to have high decibel rural tones, given the fact that India is still a predominantly village economy. In fact, the narrative will date has largely been centred around rural development: roads to connect all villages, power and toilets to all rural homes, health insurance cover to all poor and under-privileged in villages.

However, the rural sector's contribution to India's GDP nearly equals that of the urban set-up. Apart from key components such as agriculture, construction and investments in ancillary industries, another major driver of the economy is consumption by the rural populace. And it is this very metric that has taken a bit of a beating in recent months, various reports have shown.

The inventories of motorcycles and cars available with auto dealers are at the highest levels in the past five to six years. Villages are still ahead of cities in terms of growth in sales of fast-moving consumer goods (FMCG), but the gap between the two has reduced from what it was four years ago, analysts say. While tractor sales of one farm sector major are growing decently, another major player is facing tepid growth in sales. These indicators have been taken as representative of rural consumption.

Experts say this is surprising to the extent that in some sectors, the slowdown in consumption is starker than in the aftermath of demonetisation. However, sector experts are still trying to understand the dynamics of the spending behaviour of the rural folk.

Take, for example, two-wheelers lying unsold with auto dealers: on average in India, dealers held inventories equivalent to two months of sales in January 2019, according to data maintained by the Federation of Automobile Dealers Associations (FADA). This has been the highest ever in the last five to six years, said Saharsh Damani, the Federation's CEO. Thirty days' stock is considered healthy inventory.

During the last festive season (2018), the registration of new two-wheelers and small cars, sedans and compact SUVs at regional transport offices was down more than 13 per cent, the highest fall in recent years. Rise in fuel prices did deter people from buying cars and two-wheelers to some extent, but the indirect reasons were more prominent, industry observers say.

“The last festive season (2018) has been the worst auto dealers faced in past six years. Apart from rise in fuel prices, the NBFC crisis that hit the financial markets last year constricted finance flows to auto dealers, since inventory funding to dealers happens majorly through NBFCs. In addition the high interest rate regime hurt the sector in terms of costlier bank loans,” said Damani of FADA.

But a stronger factor could be the mandatory five-year insurance requirement for all vehicles, he adds. Besides, sowing of rabi crops has fallen by four per cent in 2018-10 season, from the previous. This, coupled with depressed wholesale farm prices, has put pressure on spending.

This claim, using independent data, corroborates the findings of a recent report by Nomura. It showed that sale of passenger vehicles contracted for seven months in a row from July 2018 to January 2019 (See chart). Surprisingly, this was preceded by one of the highest quarterly growth rates clocked post 2014, at 21 per cent in April–June 2018, the Nomura report said.

For two-wheelers, growth went into negative territory for the second time since 2016, and for the first time since demonetisation. Even diesel consumption remained almost stagnant in December 2018. Part of the reason for this could be that agricultural wages have grown the slowest since 2016, the report showed.

“Consumption indicators are emblematic of the wider economic slowdown, with sharp declines in domestic passenger vehicle sales, diesel consumption, cellular subscribers and the paring of consumer credit,” the report said.

“Sharp contraction in recent commercial vehicles sales trends and a slowdown in transport indicators,” it added.

The rural sector contributes nearly half of India's two-wheeler sales, and a third of passenger vehicle sales, a Crisil report has noted. But tractor sales, which are a clearer indicator of rural consumption, have delivered a mixed verdict.

Tractors manufactured and marketed by Escorts grew 12 per cent in January and February 2019. But those marketed by Mahindra grew by just one per cent in January, and worse, contracted by eight per cent in February. Mahindra is the largest tractor maker in India with a market share of more than 40 per cent.

Villages have fared better than cities in terms of growth in consumption of FMCG products. A report by Kotak Institutional Equities finds most companies in the consumer staples category were positive on rural consumption in January and February. Asian Paints, GSK, Godrej and HUL were the top brands among them.

However, this needs to be put into a perspective of the last five years. A senior executive at one of the companies mentioned above said that currently, the growth in rural FMCG consumption is 1.2 to 1.3 times that in cities, which might give an impression that the sector is faring well in the villages.

“Four years ago, the differential was larger. Rural consumption grew 1.7-1.8 times faster back then. If FMCG sales in cities were growing at 10 per cent, they were growing at 18 per cent in villages,” he told Business Standard on condition of anonymity.

While most experts clearly admit the slowdown in rural consumption in the first place, they also positively think that the election season and upcoming direct transfer income support schemes would revive rural consumption.  

“The consumption in the rural has been on the sluggish side in the last few months, but it is set to revive with the rural focus of the government policy, which includes the cash transfer which will effect in big changes in the spending patterns of the smallest of the farmers. It is likely that small ticket consumption items such as food products and other FMCG products lead the pack,” said D K Joshi, chief economist at Crisil.