Agriculture growth likely to be 5% in 2013-14

Companies that have improved rural reach over the past few years to gain the most from the uptick in rural incomes

All eyes are on rural India, even as urban India combats a slowdown. Both consumption and savings are on the wane, as inflation burns a hole into pockets. Consumer companies are reeling under slowing demand, as discretionary spends are down sharply, but this is true for only urban India. Given that 70 per cent of India lives in rural areas, where the rains have been timely and good this year, analysts are expecting rural demand to come to the rescue of a sagging economy and consumer companies.

Economists are expecting agriculture to grow five per cent in FY14 from the two per cent seen in the previous financial year. According to CLSA, the area sown is up seven per cent year-on-year and foodgrain production could reach a record 259 million tonnes in FY14. The brokerage also expects agriculture GDP to rise from last year's two per cent to five per cent this year. Rural India accounts for 56 per cent of the country's total income and 33 per cent of India's savings. Both incomes and savings are likely to rise substantially as this year has seen one of its best monsoons in over a decade and a half. Analysts believe, with Indian companies increasing their reach in rural areas, rural prosperity will improve the fortunes of corporate India, too. Deutsche Bank Global Markets Research has analysed 24 years of monsoon data and concluded that years of above-average monsoon rainfall are marked by strong growth in agriculture GDP and correspondingly rising aggregate demand in the rural economy, evidenced by high growth in demand for tractors/two-wheelers and four wheelers.

Not surprising, then, that Maruti is increasing its reach in rural India from 45,000 villages last year to 100,000 this year. The passenger car maker derives 35 per cent of its revenues from rural India. Similarly, 70 per cent of HDFC Bank's new branches have been opened in semi-urban and rural areas. Shree Cements derives nearly half of its cement sales from rural India. Mahindra & Mahindra have already seen a sharp pick-up in tractor sales over the past few months and currently the company derives 65 per cent of sales from rural India. Analysts say companies that have been focused on growing their rural markets should do well and the festive season would be a good indicator of how strong aggregate demand will be this year, thanks to a pick-up in rural incomes. ITC, Dabur and Mahindra are CLSA's preferred picks to play the (rural) theme.