Covid surge: Rural auto, FMCG demand not as green as lush fields

Rural demand for discretionary products from non-essential consumer goods to automobiles is expected to remain muted this fiscal despite record agricultural produce and good monsoon prediction due to a steep surge in Covid-19 cases in India’s villages, a new report has said.

“Loss of impulse demand is expected to be more pronounced in rural areas than in urban India amid the second wave,” credit rating agency India Ratings & Research (Ind-Ra) said in a report on Friday.

Companies including Mahindra & Mahindra and Marico confirmed disruptions in rural demand amid a severe second wave of the pandemic. This may impact the country’s overall economic recovery as the revival from the lockdown-induced slump in the second half of last fiscal was mainly powered by the rural economy. Rural demand grew at twice the pace of cities in 2020.

“Demand for FMCG products (and) automobiles, especially tractors and two-wheelers, is expected to suffer,” SK Sinha, principal economist and director, public finance, at Ind-Ra, wrote in the report.

Ind-Ra, a Fitch Ratings company, said households in rural areas are spending more on health expenditure, and a decline in non-agricultural activities like construction, transport, and auto/tractor/cycle repair is impacting daily wages significantly.

It flagged a slowdown in non-agricultural activities to have a “serious impact” on rural demand since non-agricultural income constitute nearly two-thirds of rural earnings. “The largest chunk of the rural population consists of daily wage earners and not farmers,” the report said. “Rural wage growth, both for agricultural and non-agricultural activities, has declined lately.”

This will reverse the demand trend of last year when rural demand outpaced urban demand.

For the three months ended March, for example, value growth of fast-moving consumer goods in rural markets stood at 14.6% year on year. Metro cities (with over a million population) grew 2.2%, researcher Nielsen IQ had said in a report this month.

‘There are disruptions in (rural) demand as far as discretionary categories are concerned,” said Saugata Gupta, managing director and CEO of edible oils maker Marico. “These will take longer to normalise and will depend on the pace of economic recovery and other factors like monsoon and vaccination rates. In case of essentials, however, we expect that the disruptions will be temporary, and things will normalise next quarter.”

Marico derives about 33% of its sales from rural India.

The rural economy constitutes 45-46% of the total national income, out of this only one-third is dependent on agriculture. A bulk of rural income comes from industries and services sectors.