After recording a higher-than-average (i.e. >3.2%) growth rate in three of the last four years (FY11-14), rural economic growth stepped off the pedal in FY15 and rural consumption looks increasingly likely to remain subdued through FY16 with: a) government measures to curb inflation by lowering wages growth and crop MSPs (minimum support prices); and b) unseasonal heavy rainfall in early 2015 and forecasts of a consecutive year of weak monsoon further clouding the outlook.
State of the Agricultural households: Agriculture sector GDP grew at a tepid 1.1% in FY15, as per initial government estimates. With monsoon rainfall coming in 12% below average in 2014 and unseasonal rainfall in early 2015 causing crop damage on up to 8-10mn hectares of cultivation (4-5% of total cropped area in India), rural consumption will likely remain weak in the medium term. Our analysis of NSSO survey data on the state of rural agriculture households over the past decade reveals little structural progress has been achieved – although income (12% CAGR) and fixed capital spending (15% CAGR) have increased impressively, structural issues persist because monsoon-dependent farming remains the principal source of income, improvement in institutional credit penetration has been weak and a lack of awareness of modern agricultural practices is pervasive. Legislative agenda progressing:
The government repromulgated the contentious land ordinance bill last month, but with opposition unlikely to let up, the fate of the bill looks tenuous. The GST bill is progressing on schedule, with the introduction of the bill in lower house recently. Among other policy developments, the RBI this month revised priority sector lending (PSL) guidelines and the government published a draft framework for revival and rehabilitation of MSME (medium, small and micro enterprises).
Data points to macro improvement with positive impact on consumption sectors: The top-down data continues to move positively with 4QFY15 data on consumer confidence and household inflation expectations reflecting the economy’s improved outlook. Auto volumes (2W, PV, M&HCVs) continue to improve and retail loan growth remains robust. There are also early signs of recovery in IIP and the overall manufacturing sector. On capex, implementation delays appear to have peaked and new project announcements are trickling in; however, we continue to believe that the investment cycle recovery will follow an improvement in capacity utilization.
Markets not expensive but earnings downgrades cause concern: With the recent correction in markets (3m NIFTY returns at -8%), we think market valuations have turned reasonable with both one-year forward P/E and our MIGR curve within one standard deviation of their longer term average. However, with a muted start to earnings season, earnings downgrades remain a concern.