Rural India Loses Steam as Cities Chug Ahead

FALL IN INCOME, INFLATION HIT COUNTRYSIDE

Sales growth of tractors, agri machinery slumps

 In 2007, 27-year-old Kaushalendra from Bihar shunned the placement frenzy, which would see many of his colleagues earn fat salaries, in favour of a more homespun alternative: Selling fresh vegetables on a push cart to residents of his hometown Nalanda. Putting together whatever money he had, Kaushalendra began the venture in 2008 and soon started doing well. 

People didn't mind paying a little more if they saw value in it and despite the global financial crisis, the rural economy was doing well. Four years on, it is a different story. 
"Forget about the premium products, people have stopped buying our fresh vegetables and are happy with cheaper goods," he says. 
Far away in Nashik, Maharashtra, transport operator Faruk Pathan is ruing his misfortune as he contemplates his now-depleted line of trucks. Last year, he used to do 80 trips a month carrying vegetables to Gujarat. That number has now come down to 18-20. "I had to cancel my plan of purchasing two new trucks and instead sold four trucks as they were just standing idle. I had to prepay my debt," Faruk says. 
As the United Progressive Alliance (UPA) government prepares to present the most crucial budget of its second tenure, it is facing a slowdown across vast parts of rural India. Falling prices may be a boon for consumers, but it can mean lower income and less money to spend on the local theatre, eatery and nearby bazaar for farmers, agri labourers and others dependent on agriculture. 
In the past three months, prices of many agricultural products have crashed, forcing families to cut back on expenditure. 
ET on Tuesday featured a story on retail firms doing well due to a sudden pick-up in demand in cities, but the picture in rural India appears to be getting bleaker. 
Worried companies, aware of the danger this can pose to their profitability, are now going back to the drawing board to figure a way out. So are finance ministry mandarins. Distress Signs of Rural Slowdown are Everywhere 
In 2009, as the global financial crisis threatened to overwhelm India Inc and drown their P&Ls in red, it was rural demand that kept the economy buoyant. A protracted rural slowdown can hamper all recovery efforts and spell trouble for the overall economy next year. The signs are everywhere. Agricultural output growth is expected to decline to 2.5% in FY12 from 7% in FY11, according to the advanced estimates released by the Central Statistical Organisation, or CSO, the government's official statistician. Sales of tractors and agri machinery have slowed in the past three months and so have consumer products. Entrepreneurs, small traders and shop owners are increasingly finding conditions tough. "How can the market grow when farmer earnings are declining?" says S Sridhar, CEO of Escorts Agri Machinery. "The constant drop in food inflation for the past four months mirrors slowed demand for tractors," he adds. Maruti Suzuki India, which sells every fifth car in villages and small towns across India, acknowledges growth has come down. "Growth has been slowing in the current fiscal with demand in rural markets impacted by several macroeconomic factors like availability of finance and higher interest rates on auto loans," says Shashank Srivastava, Maruti Suzuki India chief GM (marketing). 
Emami, which gets 50% of its sales from rural markets, says sales growth is down almost 10%, the first time in two years. "We struggled to meet targets in some pockets," says Krishna Mohan, CEO, sales, supply chain and HR. "There is pressure due to food inflation, election fatigue in the north and fall in government funding for projects like NREGA (National Rural Employment Guarantee Act) in some states." Consumer durables maker Samsung India says rural markets slumped significantly in December but recovered a little towards end-January, especially for refrigerators and television. "There is a huge focus on strengthening distribution in rural markets. This will counter any effects of slowdown in sales," says Samsung India Vice-President (home appliances) Mahesh Krishnan. Rival Panasonic is also hopeful, adding that a few categories have pulled down the entire market. Manish Sharma, Panasonic India director marketing and sales, says in tier-II and tier-III markets, sales have fallen 10-15% since November with the worst affected being direct cool refrigerators, small-screen LCD television and window air-conditioners. 
Some industry captains like Sunil Duggal of Dabur don't believe there is a slowdown. "We have not felt any impact of a rural slowdown. We don't foresee any signs of a slowdown in rural markets in categories we operate in." 
PRICE FALL 
But figures from the mandis and Agricultural Produce Market Committee (APMC) markets in many parts of the country tell a story of steep price declines and falling income. "While rural spending may be plateauing, the focus on 'inclusive growth' and lower rates may offset this," says Rohini Malkani, India economist of Citigroup. 
In households like Govindbhai Patel's in Madhapar in Gujarat, the change is quite painful. The 61-year-old wanted to buy a two-wheeler but has been forced to put off all plans now due to increase in the cost of living. "I will save for next few months. That will help me in supporting my home than spending," he says. He is helping his brother in his insurance agency to earn a few extra bucks but even that may not be enough, he feels. 
The cost of living index for agri labourers increased 6.7% in December 11 compared with 6.5% for industrial workers, RBI data shows. In three of the preceding four years, the agri labour index has risen faster than its industrial counterpart. 
Estimates by brokerage Emkay Research shows a sharp fall in prices of crops from their highs in 2009-11. Prices of nearly 90% of agri items tracked by the WPI data have declined with pulses and vegetables showing the sharpest fall of 30% and 40%, respectively. In times like this, a high minimum support price and government buying in the case of foodgrain provide a cushion but that may not happen now. 
"This is because due to large buffer stocks, procurement agencies are unable to procure aggressively. In addition, the lagged impact of price escalation results in significant supply responses. Consequently, the realised price is largely determined by market prices than procurement prices. In the current context, both these factors are resulting in broadbased oversupply conditions," the brokerage says in the report dated December 26. 
CURRENCY SLOWDOWN 
Growth of currency in circulation, a key indicator of buoyancy as most spending in rural areas tends to be in the form of cash, has also slowed dramatically this year to 9.5% in the year through January 13 compared with a 16.5% growth in the year-ago period. Coming at a time elections are being held in most parts of northern India, this is unusual. Normally, election spending tends to have the opposite effect. 
"This could probably be reflective of lower cash transactions in rural areas where household spends typically take place in cash," said Madan Sabnavis, chief economist, CARE Ratings. 
The other reason behind this could be the fall in spending under the NREGA. The government spent Rs 39,377 crore on the scheme in 2010-11, a big jump from Rs 8,823 crore in 2006-07. In 2011-12, the budget is flat at Rs 40,000 crore as allegations of misuse, corruption and leakage forced the government to hunker down and find a solution. 
(with inputs from Tapash Talukdar in Mumbai, Jayashree Bhosale in Pune, Ratna Bhushan in Gurgaon and Writanker Mukherjee in Kolkata)