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MOSL: INDIA STRATEGY | Rural India-Back on the saddle-Set for a comeback after three years of hibernation

​India strategy | Rural India: Back on the saddle; Set for a comeback after three years of hibernation

Rural consumption decelerated over 2014-17

India’s rural consumption story was stalled for last three years owing to combination of two back to back draughts in 2014 and 2015 coupled with anemic growth in Minimum Support Prices for crops . This resulted in sub-par growth for rural dependent sectors viz. FMCG, Two-Wheelers, Tractors, Rural oriented NBFCs, Seed companies. Hopes of rural recovery gathered steam in 2016 as country witnessed normal monsoon after two consecutive droughts. However, disruptive event like Demonetization overweighed on broader consumption backdrop with rural India being disproportionately impacted given higher dependence on cash.

Rural India about to make a comeback after a deep slumber; multiple catalysts on the anvil

Indian Meteorological Department has predicted normal monsoons for CY17 at 98% of LPA. This will be a second consecutive year of normal monsoons and has significant positive implications for rural consumption. Government has announced a five year high MSP (Minimum Support Price) hike for Kharif crops. Separately, various state governments have announced Farm Loan Waivers totaling INR 1000 b, equivalent to 0.6% of GDP, which is expected to aid rural consumption going forward. Central government is also using Direct Benefit Transfer (DBT) as a tool to improvise the efficiency of money spent on subsidies. The amount of funds disbursed under DBT has increased year after year, with more than INR746b disbursed in FY17, up ~21% from INR618b disbursed in FY16. INR226b has already been disbursed in the first few months of FY18. Given the confluence of several positives like normal monsoon, higher MSPs, farm loan waivers and higher government spending in rural areas, we believe, rural consumption is poised to make a recovery after remaining in hibernation for last three years.