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India’s rural economy derives its incomes largely from agriculture. On the farm sector, low increase in rural wages and tractor sales have indicated continuation of demand weakness. However, other indicators such as growing 2- wheeler sales and improving rural consumer sentiment are indicating that there are other factors at play.

Corporate commentaries: Corporate commentaries from the consumer sector are also echoing rural consumer sentiment improvement, seeing improving growth in multiple cases. Snippets from analyst calls of large listed consumer companies:

* the worst is past us and from here onwards we do see gradual recovery in rural consumption and of course as we said the urban consumption has been more resilient especially at the premium end”

* the operating environment was largely in line with what has been in the preceding quarters, with some uptick in rural consumption, which grew ahead of urban for the first time in the last three years.”

Election impact: We are also in the midst of the General Election 2024. Elections at a national level tend to improve spends of different kinds, such as advertising, events, and lead to high demand for temporary jobs. In the past, elections seasons have tended to have a positive effect on consumption spends, especially on the rural segment. However, one must note that this impact is short-lived, and could fizzle out.

Monsoon to add to positive outlook: The IMD& has forecasted 2024 Monsoon to be a positive, with monsoon forecasted to be 106% of the Long Period Average (LPA) with a model error of ± 5%. This would put overall monsoon to be “above normal”, and bodes well for the upcoming Kharif and Rabi crops. A more detailed forecast on monsoon is expected by the end of May from IMD, known as the 2nd Long Range Forecast.

Low inflation frees up wallets: Decreasing headline inflation is also supportive of improved consumer sentiment, as it frees up the consumer wallet and allow higher real spends. India has been reporting inflation for India and rural consumer of less than 6% for more than 8 months, and could improve rural spends.

Rural is not just the farm sector: Increasingly, rural economy is becoming less dependent on the farm sector, with the rise in both manufacturing and services activities. Manufacturing sector could see higher growth in the rural sector, with easy availability of land and labour, and improving infrastructure and connectivity. In addition, improvement in skilling, access to technology, rise in share of tourism could increase services incomes in the rural economy.

A pick up in rural consumption bodes well for the overall Indian economy, especially the consumption theme. While consumption is supported by multiple factors such as rising per capita incomes, premiumisation, demographic dividend, formalisation and digitisation, rural consumption picking up could be a boost.

The consumer universe has fundamentally strong companies, with relatively lower risk and volatility in earnings growth on account of relatively low government intervention, relatively sticky demand in adverse economic cycles, and lower risk from global adverse events. One could therefore consider taking exposure to this theme via the HDFC Non- Cyclical Consumer Fund, an open-ended fund that invests minimum 80% of its net assets in equity and related instruments of the non-cyclical consumer theme.

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