Rural demand is expected to pick up in the coming months primarily driven by the rise in kharif farm income, lower input prices and farm loan waivers, says a report.
"We had turned bullish on rural demand in July 2016 after being bearish since early 2012. While 2016 kharif farm income jumped 23.3 per cent, rural demand was hurt by the demonetisation shock. We see four compelling reasons for rural demand to turn up now," BofAML said in a report.
According to Bank of America Merrill Lynch (BofAML), kharif farm income is expected to jump by 5.3 per cent atop the 2016 spike, on the back of good monsoon.
The four major drivers for a pick up in rural demand cited by the report are - second bumper crop, farm loan waiver, lower input costs on lower oil prices and global prices bottoming.
"We expect almost all states to waive off about USD 40 billion of farm loans in the run up to the 2019 general elections," BofAML said.
The report comes against the backdrop of agitations being staged by farmers in various parts of the country, seeking higher support prices for their produce as well as waiver of loans.
Despite a bumper crop in the rabi season, farmers in many states are in distress because of sharp fall in prices in both domestic and global market.
Uttar Pradesh, Punjab, Maharasthra and Karnataka have already announced farm loan waiver so far.
The report said, lower input prices are likely to support farmer margins with lower oil prices reining in fertiliser and transportation costs, while global agro prices are bottoming out with farmers cutting down acreage.
"Raw cotton farmers will likely see an upswing in earnings (15 per cent vs 2016's 3 per cent drop) on a large crop. Wheat farmers have also seen their incomes (13 per cent vs 2016's 1 per cent drop) turn up in the on-going summer rabi harvest," BofAML said.
Other major drivers include lower rates and the 7th Pay Commission award.
"Taken together, we think this augurs well for discretionary rural demand in coming months," it said.
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