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A sharp rise in rural incomes and farm wages on the back of a record monsoon and bumper kharif harvest is perhaps a ray of hope for India Inc, otherwise staring at an uncertain economic situation.
A clutch of companies ranging from tractor and farm equipment makers, fertiliser and seed players, to consumer goods companies, two-wheeler brands and mobile handset makers are in a race to capture the incremental consumption spend from rural India.
A recent analysis done by the Commission for Agricultural Costs and Prices (CACP) shows a five per cent increase in agriculture growth in 2013-14 will translate into a 15-20 per cent rise in nominal rural incomes. This does not include income of agriculture labourers.
Wages of farm labourers have been rising by around 20 per cent yearly in the last three years and if the trend is maintained in 2013-14, economists expect rural incomes to increase by at least 20 per cent. The agriculture sector did not grow much in the first quarter of this financial year. The sector, with allied activities, expanded just 2.7 per cent in the April-June quarter against 2.9 per cent in the corresponding period of the previous financial year, while overall gross domestic product expanded by a less-than-expected 4.4 per cent. However, economists peg agriculture growth at five-seven per cent for the entire 2013-14, as the effect of good monsoon will be felt in the coming quarters.
Horticulture crops are also expected to benefit immensely from the copious southwest monsoon. Usually, horticulture crops give three-four times higher returns than cereals, so if nominal rural incomes rise by 15-20 per cent in 2013-14, it will be much more in the case of farmers who cultivate these.
With almost 49 per cent of household expenditure in rural India going for food items, a surge in demand for food products is expected to come from the rural side. “This is perhaps the biggest turnaround story the Indian economy has been waiting for long,” says Ashok Gulati, chairman, Commission for Agricultural Costs and Prices.
India’s southwest monsoon has been 11 per cent more than normal till August 30. The rains, vital for agriculture, as just 40 per cent of the total arable land is under irrigation, have not only been quantitatively more this year, but their distribution also been rather uniform. The bountiful monsoon has already led to a heady spurt in tractor sales. According to the Tractor Manufacturers Association, sales were up 22.9 per cent in the April-June quarter, compared with the year-ago period. Analysts tracking the sector expect the industry to clock volume growth of 10 per cent for the full financial year against volume decline of three per cent in FY13. Market leader Mahindra & Mahindra reported a 25 per cent jump in sales in the quarter.
Similarly, companies in the seed, fertiliser and pesticide business are seeing an uptick in demand over the last two-three months.
Consumer goods companies – especially those in the fast-moving consumer goods (FMCG) space – are sprucing up their last-mile connect to rural India. Currently, around 40 per cent of FMCG sales are accounted for by rural markets. Given the sluggish demand sentiment in urban centres, the coming months will put to test the efficacy of rural distribution and sales channels of consumer goods companies. Most of these have been investing heavily in strengthening their rural outreach operations after the 2008 slowdown shock.
Dabur India, for instance, put in place an initiative in 2012 to increase its distribution footprint in rural India. “We have doubled our rural reach and established direct reach to villages of 3,000 population,” says George Angelo, executive director-sales, Dabur India.
This has led to demand coming from hinterland for products such as packaged juices, including exotic variants like plum, peach and apricot, and for fairness bleaches, from the interior markets of Punjab, Maharashtra, Uttar Pradesh, Bihar and even northeast, say company executives. Rural markets accounted for almost 50 per cent of Dabur India top line of Rs 6,146 crore in FY13.
Similarly, the country’s biggest FMCG player, Hindustan Unilever Ltd has tripled its reach in the rural markets since 2009. The company’s stated objective is to push the share of rural markets in terms of contribution to total sales from around 40 per cent to over 50 per cent, say analysts tracking the company.
The year 2013 would put to test HUL’s rural strategy in leveraging the demand spurt.
Two-wheeler players, too, are getting their act in place in rural markets. Most expect retail demand to spur this festive season post-harvest in the October-December months.
Typically, the festive season in October-November sees a surge in sales volumes, after the slow monsoon months. Players who have strong rural distribution and sales network are most buoyant. For instance, around 46 per cent of total sales of Hero MotoCorp come from rural markets. "We are well-placed to take advantage of the good monsoon and the resultant demand boost,” says Anil Dua, senior vice-president (marketing and sales), Hero MotoCorp.
The company covers over 100,000 villages under its ‘Har Gaon, Har Aangan’ rural initiative. Loan fairs, exchange camps are conducted regularly in upcountry and rural markets. Special service camps are held under the Service Har Jagah scheme in village locations, with 1,100 specially designed motorcycles fitted with customised boxes offering servicing facilities in remote areas, says Dua.
Mobile phone handset players, too, have been increasing their presence in rural markets. Mobile tele-density in rural areas has grown from 1.9 per cent in 2005 to around 38 per cent in 2012. As per a research of mobile phone usage in rural markets in Bihar and Punjab, 75 per cent of mobile phone usage during agricultural cycle is related to crop planning, planting and inputs.
Untapped potential
Economists point out considering that 60 per cent of India still stays in rural areas, this scenario of bountiful monsoon, coupled with growing rural income in an election year, could offer an unexpected bonanza for India Inc in exploring the hidden untapped economic potential of rural India.
