As Covid-19 reaches hinterland, is India's rural growth story getting over?

A recent report by Credit Suisse cautions that the spread of Covid-19 infections to Tier-III and -IV cities could stall the growth momentum

Nearly five-months into the Covid-19 pandemic, analysts have now started to question as to how far rural India will be able to pull the Indian economy out of the severe contraction it is in. A recent report by Neelkanth Mishra managing director, India Strategist and co-head of equity strategy for Asia Pacific at Credit Suisse cautions that with Covid-19 infections spreading to Tier 3 and Tier 4 cities, which some call the rural belt, could stall the growth momentum.

And the data does hint at this possibility of a rampant spread of the virus in the rural belt. With a daily increase of over 35,000 cases over the past week, India has added 256,734 cases — 21.5 per cent of its total tally — in the past 7 days alone. On Tuesday, July 21, the biggest 24-hour jump in active cases was seen in Andhra Pradesh (3,536), Karnataka (1,924), Uttar Pradesh (1,067), Maharashtra (902), and West Bengal (609), data show. Add to it, recent lockdowns in select districts of Bihar, Goa, Pune, West Bengal, Uttar Pradesh, and Karnataka hint at fanning virus cases in tier-II/tier-III cities, experts say.

The rise in rural infections, G Chokkalingam, founder and chief investment officer at Equinomics Research says, is a cause of concern as the rural economy constitutes a significant part of India’s total aggregate demand.

“Besides, India can’t bank on the rural economy as agriculture constitutes only about 18 per cent of the India's total gross domestic product (GDP). Thus, the demand contraction due to slowdown in urban areas can never be compensated by the rural economy,” he says.

An analysis of the rural economy by Credit Suisse shows that since the start of the pandemic, rural incomes were boosted by government fiscal support; and a bumper Rabi harvest. So far, Credit Suisse argues, the Centre has front-loaded packages in the form of direct cash transfers to women Jan Dhan account holders, more crop procurement, increase in MGNREGA wages, and support via the Pradhan Mantri Gareeb Kalyan Yojana. However, off-setting these cash inflows, Mishra says, are a sharp drop in agricultural credit, weak domestic remittances, and weak perishables output mostly in terms of volumes draining Rs 5,000-10,000 crore/month from rural incomes.

What could have led to a better rural performance over the past few months, Credit Suisse believes, is faster resumption in economic activities in districts that were less affected by the pandemic. “While agriculture is by definition rural, rural is no longer just about agriculture. Nearly two-thirds of rural GDP comes from non-agricultural sources like communication services and manufacturing activities (19 per cent each), construction (9 per cent), and public administration activities (9 per cent), where the per-worker income is much higher. This also explains the pick-up in discretionary demand,” the report said.

That said, Ambareesh Baliga, an independent market analyst, believes consumption patterns are vastly different between rural and urban economies. “Consumption in rural areas is very narrow and is limited to select few products or services. Therefore, a contraction in demand in the overall economy can’t be supported by rural India. While rural can manage to hold the economy, the urban consumption boom is the necessary alpha that is needed to come out of the slowdown,” Baliga says.
 

Investment strategy

Despite the rural economy under potential threat from Covid-19, analysts remain divided on how the theme as an investment strategy may pan out. Gaurang Shah, head- investment strategist at Geojit Financial Services, for instance, says that even though cases are rising in rural India, they aren’t as concentrated as seen in urban India. “The rise in Covid-19 cases will be overruled by recovery hope. We expect the vaccine to be available by the end of this year. Besides, the government is taking necessary precautions to stem the spread in the villages as well. Therefore, as long as the spread isn’t too fast, the economy should remain stable,” he says.

Most of the consumption-related stocks, according to Mishra, have outperformed the markets on a year-to-date (YTD) basis with more than half the stocks being up this year, and nearly every stock seeing an increase in its forward price-earnings (P/E) multiple, despite mostly seeing a cut in earnings.

Thus far in the calendar year 2020, the Nifty Consumption index has outperformed the benchmark Nifty50 index. While the consumption index gained 0.24 per cent till Tuesday, the Nifty index has declined 8 per cent, ACE Equity data show.

“We believe stocks like Hero MotoCorp, Britannia, and Shree Cement that are up CYTD, with a higher P/E due to ‘rural exposure’, could be at risk as data-points disappoint incrementally. Instead, stocks with greater urban / international exposure (Godrej Consumer Products, Tata Global Beverages), or those that have lagged CYTD (Godrej Consumer Products) may work better. Tractors (Escorts, Mahindra & Mahindra) are less at risk—these are driven by economics of and acreage under crops that need extensive cultivation,” the Credit Suisse note says.