Rural demand surges past urban—will it push the RBI to rethink interest rates?

The consumer goods industry has been grappling with poor demand in rural areas. With the monsoon season now nearing its end, the country’s consumer goods manufacturers and economists are increasingly placing their bets on a revival. As a prolonged slowdown in consumption of goods and services in the hinterlands hurt the leading fast-moving consumer goods (FMCG) firms and, consequently, the overall economy, demand revival has been on top of most people’s minds. Consumption had slowed down beginning in 2021 due to steep inflation that impacted the fragile purchasing power of rural households. With indications of an uptick in demand, industry veterans are banking on a good monsoon for a sustained revival in the second half of FY25.

After a double-digit deficit in rainfall (of 11%) in June and July in multiple states in the Indo-Gangetic plains—considered the food bowl of India—the monsoon seems to have picked up. There was 28% excess rainfall in August, lifting the cumulative figure since June 1 to an excess of 6% compared with the long-period average. This augurs well for the rural market that comprises nearly a third of overall sales.

According to Sanjiv Puri, CMD of diversified conglomerate ITC, the situation is expected to get better. “One of the reasons why rural was impacted was the weather was unkind and the rural economy is indexed to the weather. We have witnessed favourable conditions for the current crop season and expect to see better conditions that augur well for consumption,” he says.

Dabur India Chief Executive Officer Mohit Malhotra says he now expects an improvement in the company’s top-line growth and margins in FY25. “We are targeting mid- to high single-digit growth for the consolidated business, and aiming to grow faster in most categories, thereby gaining market share.” Malhotra believes factors like a normal monsoon, backed by the government’s initiatives like increased allocation to the rural jobs scheme, and boosting agricultural output will help the industry and the economy overall. “Now, with normal monsoon and volume growth, we will see a gradual uptick of business,” he says.

For most of the past three years, urban consumption has outpaced rural. Data from market research firm Nielsen IQ shows that while volume offtake in the rural market remained muted till March 2023, it has started showing signs of revival. From 4% last July, rural volumes grew by 5.8% in December (6.9% urban) and at a relatively fair rate of 7.6% in the March quarter (Q4FY24). In fact, in that quarter, volume growth in the rural market outpaced urban growth (5.7%). Overall, the sector witnessed a value growth of 6.6%.

According to Saugata Gupta, MD & CEO of Mumbai-based FMCG player Marico, a gradual improvement in rural demand continued in the June quarter as rural growth outpaced urban again. However, the distribution of rainfall and food inflation levels would be crucial.

Apart from benefitting consumer goods manufacturers, a good monsoon can also play a role in changing the stance of the Reserve Bank of India (RBI) in terms of monetary policy, which could in turn have an impact on economic activity in the next fiscal year. 

According to Dharmakirti Joshi, Chief Economist at credit rating agency CRISIL, a well distributed, normal monsoon may trigger a round of rate cuts by the RBI. “I expect the RBI to begin cutting rates in October at the earliest and have pencilled in two rate cuts this fiscal. By then, there will be clarity on food inflation as the monsoon would have played out. Good progress on rains and sowing so far offer hope,” Joshi says.

With the signs indicating a return of the rural economy, consumer goods firms will hope that it will sustain this time around.    
     
@arndutt