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Robust rural demand has helped hold up consumption spends over the last decade, as any FMCG firm would tell you. Many of them now earn more than a third of their revenues from the hinterland, some like Hindustan Unilever, close to half. It’s not just consumer staples that discovered a big catchment, durables too have found a big market in rural geographies, as Maruti Suzuki’s revenue mix shows.
Just as managements were beginning to take the market for granted, however, sales in the hinterland are starting to lose steam. While aggregate rural consumption continues to outpace urban spends, there is a clear loss of momentum. Take two-wheelers. A record monsoon and harvest should logically have translated into good volumes but it hasn’t quite turned out that way. As for staples, Parle Products confirmed to FE recently that rural sales have fallen 5% across categories in the last few months. Dabur India, too, reported lacklustre volumes with a marginal drop in some segments in the past couple of quarters. HUL’s total volumes in Q3FY13 were up a disappointing 4% y-o-y.
So, what changed in the rural economy? JPMorgan points out that the big infrastructure push that began in 2004 created jobs and wealth which fuelled demand for products — the best part of the rural infra build-up was that it pushed up productivity, making the cycle more self-sustaining. Along with MNREGA wages above the then market-clearing wage, rural demand rose, sharply driving up wages. JPMorgan says real rural wages now are growing at a much moderated 3.5% from 13%, much of it thanks to a contraction in the fisc. As it observes, in any case, beyond a point, real wage growth must begin to come closer to and equal the average rise in productivity.
The government, however, is spending less in absolute terms on rural development, resulting in negative rates of growth compared to the boom period of 2004-2008.
Besides, the slowdown in the urban space, it notes, would mean a spillover to the rural economy in the form of lower remittances. As such, JPMorgan concludes that the days of surging rural growth and demand are probably over and that real rural wages should normalise, mirroring the improvement in productivity. The big concern, it says, is that if investments in roads and power taper off, productivity too would follow suit, driving down growth in real wages.