Bharat to India Inc's rescue: Green shoots in villages lead demand recharge

A major indicator of farm mood is manifest in tractor sales for the month of May

Bharat is coming to the aid of India Inc. With large parts of major urban consumption centres under curbs to contain the spread of the Covid-19 pandemic, rural India is paving the way for an initial economic recovery after the standstill witnessed in April.

The semblance of revival in demand over May and June was on account of activities restarting, a bumper crop, higher allocation under MGNREGA and normal monsoon.

A major indicator of farm mood is manifest in domestic tractor sales, which saw an increase of around 5 per cent at 61,000 units, according to data from the industry. In the same month last year, domestic tractor sales were about 58,000. The primary reason for the rise is a good crop production.

“Farmers have disposable cash that they have received from both the Centre and states,” said a senior executive of a major tractor manufacturing unit. India’s foodgrain production is estimated at a record 291.95 million tonnes (mt) in the 2019-20 crop year (July-June), against the target of 291 mt. The bumper production is spurring demand for rural equipment.

Construction fuels demand

Srei Equipment Finance, for instance, has recovered about 40 per cent of normal business in May as construction activities in rural areas showed signs of growth. Business was almost nil in the previous month due to the nationwide lockdown.

D K Vyas, MD of Srei Equipment Finance, said: “By July, construction activity will pick up further and will be much higher after the monsoon in September.”

Since the relaxations to the lockdown came much earlier in rural India, construction activity restarted, fuelling demand for steel and cement.

In steel, for instance, if demand has recovered by 30-35 per cent, at least half of this is estimated to have come from rural.

Ranjan Dhar, chief marketing officer, AM/NS India (ArcelorMittal Nippon Steel India), said steel demand in rural areas has shown considerable improvement from construction and farm equipment sectors in May.

“Pre-monsoon activities like roofing, building sheds, silos have gathered momentum, resulting in better steel demand. Normally these activities commence from March. But this year the activities came to a complete standstill due to the lockdown. With the easing of the lockdown, these activities have commenced again,” he added.

Cement companies are in the same position. Nilesh Narwekar, chief executive officer, JSW Cement, said growth in rural India has been led primarily by individual house builders who are completing their projects that got stuck because of the lockdown and the government spending on infrastructure projects.

“I think it is going to be rural India which will drive demand and growth in the coming few months,” said Mahendra Singhi, CEO at Dalmia Cement, and chairman of the Cement Manufacturers’ Association. There is some recovery in rural India since April-end but it’s not been the case in urban centres, he added.

Consumption trend

After the lockdown was announced, hundreds of thousands of migrants went back to their home states. Companies feel this could lead to a spurt in consumption. An ITC spokesperson said rural demand, while receiving a welcome boost from the reforms, will also be influenced in the short to medium term by the dynamics of reverse migration, performance of crops and the gradual opening up of retail markets across the country.

For Dabur, rural sales have continued to outperform urban sales, and demand from rural India grew even during the lockdown period, the company said. To reap dividends from the trend, Dabur, in the last financial year, had grown its rural network from 44,000 villages to a little over 52,000 villages. “With the lockdown easing, we plan to restart the expansion of our rural footprint and take it up to 60,000 villages by the end of 2020-21,” Mohit Malhotra, CEO, Dabur India, said.

Micro finance institutions (MFIs), that have resumed operations this month, are seeing a significant number of rural borrowers starting to repay loans.

Much of this is on account of the essential nature of rural occupations, rendering continuity of livelihoods, said Udaya Kumar Hebbar, MD & CEO, CreditAccess Grameen, one of the country’s biggest MFIs.

A survey done by the MFI indicated 70 per cent of borrowers, all from rural areas, were willing to repay. In contrast, the 10 per cent urban borrowers sought an extension in moratorium.

Too little, too early

The country’s major consumption centres, however, continue to be in urban areas, and as Dhar said, the improvement in steel demand in rural areas would not be enough. “There should be revival in urban centres as well, since bulk consumption happens in urban construction, infra and auto sectors.”

Parle Products was also seeing stronger demand from rural India than urban, but sounded a word of caution. “While demand from rural areas is more for value-conscious products, that from urban locations is more for premium products,” said Mayank Shah, category head at Parle Products.

According to Parle, in terms of value, rural India accounts for 35 per cent of the demand while in volume terms, it is 45 per cent of the demand.

However, the growth rate in rural locations is expected to be in double digits, against the pre-lockdown level of 2-3 per cent, while in urban centres, it is expected to remain stagnant at the pre-lockdown level of 7-8 per cent.

It is largely viewed that the pandemic is an urban phenomenon. H M Bangur, MD at Shree Cement, said it brought demand from metros and cities to its knees. “In rural locations, which have mostly been shielded from the Covid-19 spread so far, demand has been healthy, albeit at a lower level.”