India’s rural economy is significant long-term driver of consumption. Roughly 70% of India’s population live in villages, accounting for c40% of FMCG consumption. In the last five years rural consumption has been buoyant for a variety of reasons. The minimum support prices (MSP) of essential crops have been rising about10% per year, rural wages have increased due to a minimum guarantee scheme run by the government, and easy credit was available to farmers through Kissan Credit Cards.
In terms of sales for many of the companies we cover, the rural growth rate has been more than twice that of urban growth, largely because of persistent inflation and a weak macro environment which limited growth in disposable income. Even in the last quarter most of the companies under coverage reported that rural growth was resilient and ahead of urban growth, although the gap had started narrowing.
The consistent message to come out of the 3Q results season was that demand remained weak – consumer sentiment was improving but this had yet to translate into consumer spending. For example, the sales of fast moving consumer goods (FMCGs) have slowed markedly in the last 12 months.
However, companies are starting to sound cautiously optimistic. For example, Dabur is planning a number of product launches across major part of its portfolio as management believes that the recovery in urban demand is imminent. Jubilant Foodworks, a fast food operator, thinks the worst is over and that same-store sales growth (SSSG) may reach high-single digits in next 3-6 quarters. Meanwhile, Titan says that consumer sentiment has improved relative to last year.