Rural India revs up, neutral for rest of country

Mon, 2 Dec Pre-Open

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Rural India is booming. The favourable monsoons this year have helped alot. With tractor sales being at their highest in recent times - especially at a time when interest rates have not been at desired levels - gives a good indication about the same. Also, if one goes by what some of India's FMCG companies have to say, growth is coming in from rural India. In fact, select companies are of the view that growth is multiple times faster than the growth being witnessed in urban India.

Rural India has been a big part of India's consumption story. After all, more than 60% of India's population resides in these regions, contributing to more than half of the country's income, nearly two-third of the expenditure and about one-third of India's savings.

But here's the thing. It is difficult to say whether this trend will remain firm going forward, as sadly, the dependency on monsoons is still high. While, things are improving, there's still a long time to go before this goes away. Last year was an example. Having said that, the fact that the distribution networks are being improved, thereby helping companies to offer their products to newer regions and markets. This will continue to keep the momentum going. Not to mention, the government's employment programs that are allowing more people to earn more, and therefore spend more.

While the momentum seems to be going well in the hinterland, the rest of the country continues to face uncertain times. As per an article by Firstpost, while the rural economy may be reviving, it would not be enough to pull up the economy. The reason is simple. The non-rural economy contributes to a much larger share of the GDP.

The slowdown continues to prevail; and is expected to continue for a while as no respite seems in sight! With high inflation levels (thereby leading to higher interest rates) and a lot of uncertainty, there are doubts on whether the Indian economy would be able to clock the growth rate of 5% which has been estimated by the government. Business confidence levels are low, which means that companies are not investing as much as envisaged. Maybe everyone is waiting to the cloud to settle in terms of which party will be leading the country in the future.

So what can investors do till then?

Well, we are of the view that stocks riding on India's consumption story seem to be quite expensive. And therefore, the risk reward ratio is skewed in favour of the former. We believe invertors can take this time out - a time when very few buying opportunities seem available - to read up on companies and learn about their businesses and try and identify their long term sustainable advantages. Once you have done your background check on companies that you like, all one needs to do is be patients for the price to reach comfort levels.