Published on 10/04/2020 1:04:05 PM | Source: Motilal Oswal Financial Securities Ltd 

Lockdown an urban phenomenon, rural seeing staggered impact - Motilal Oswal

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Below is the Views On Lockdown an urban phenomenon, rural seeing staggered impact by Motilal Oswal

Rabi output could be healthy, but re-opening mandis could prove critical

In light of the current COVID-19 climate, we hosted a conference call with Mr Benjamin Mathew, Partner & Strategy Head, MART, an expert on the rural sector. He disclosed certain key insights, including: (a) the lockdown is more of an urban phenomenon, which is yet to percolate to the village level, (b) rural logistics are witnessing a staggered impact, (c) rabi has been a bumper crop, but re-opening the mandis (markets) is important, and (d) rural consumption has been impacted due to staggered supplies and locked payments, but overall demand has not been materially impacted as consumers tend to purchase in bulk.


Lockdown impact on rural

* The imposed lockdown is more of an urban phenomenon; it is yet to percolate to villages, where social restrictions are widespread.

* 8,000 towns and 5000 villages are near the larger towns / urban areas that have been under lockdown. These towns and village account for 1–2% share in the country’s total population.

* The staggered impact has affected logistics leading to supplies to rural areas getting delayed. Resources are held up or moving slowly as goods are being screened more thoroughly. For instance, at one toll naka, just 230 trucks have been moving, against 600 witnessed in a normal scenario.

* Urban migrant labor has returned to villages, but this is more of a corridor phenomenon. This labor would take three to six months to return to cities. This group may be able to engage in productive work in the rural areas depending on skills set and the type of work available, such as harvesting.


On rural economy

* Rural contributes 53% to India’s GDP. Agriculture/Services/Industry in rural areas contributes 29– 30%/52%/18%.

* The frequency of cash circulation has reduced in rural areas due to issues such as banks being far away (as far as 20 km, in some cases).

* Savings in rural areas have fallen YoY.

* Payouts in microfinance are likely to be impacted.

* Rural indebtedness is increasing, resolving which would require government intervention.


Impact on agriculture

* Agriculture would likely hold up, but services would suffer the greater impact of the lockdown.

* Rabi has been a bumper crop and grains are ready for harvesting. The harvesting season ends on 30th April. Although this is some time away, labor availability is a concern; mechanization may have limited benefit.

* Income from rabi alone would not lead to overall recovery.

* At present, it appears the kharif crop is unlikely to be affected and may see a normal season.


On rural consumption

* Consumption is driven more by the services sector than by agriculture.

* The supply of essential commodities has been impacted in some rural areas. The general impact is largely staggered, with supplies reaching the rural areas less frequently (every six days instead of every alternate day). However, as people are buying in bulk, overall demand may not be materially impacted.

* Payment and work are affecting purchasing power. In our view, consumption is likely to be impacted due to payments being locked.

* Once the lockdown ends, he expects staples to pick up first.


Other points

* The strategy that the government uses to tackle this concern remains to be seen. Following the lockdown, it would prove critical to keep even the remotest mandi open, and minimum support price (MSP) would have to be extended. The government could achieve this with proper structuring even when social distancing has to be maintained.

* Of the ~6.5L villages in India, Hindustan Unilever (HUL) has a reach in 1.5L villages. The company is likely to have reached out to almost all the large villages thus far.

* Rural areas have 497m mobile connections, 165m of which are smartphones with maximum data usage of 1GB. Thus, telephone expenses make up a small portion of the household expenses in rural areas.


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