India’s strong rural growth story may have shown some signs of slowdown in recent times, but that has not altered projections that the ongoing slowdown is a temporary blip and the momentum would revive quickly as the longer-term story (over the next 2-3 years) appears to have strong drivers.

There is a possibility that the government will make a strong attempt to boost rural spending, and traditional sectors such as non-banking finance companies, two-wheeler manufacturers, fast moving consumer goods companies and other related industries will thrive, going ahead.

“We believe the government has the firepower and political compulsion to start and sustain more income transfer schemes, which will incrementally put money in the hands of consumers in rural India,” brokerage Kotak Securities said in a report.

The recent moderation in rural growth can be attributed to a drop in government spending under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), which has been a raging success in recent years and has helped boost rural consumption.

Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance, said: “In this financial year (2011-12), government spending through the NREGA has fallen to around Rs 19,000 crore from Rs 30,000 crore in the previous financial year, which has somewhat impacted growth in rural consumption. Also, with inflation remaining high for a better part of last year, there was a shift in demand for non-discretionary goods from discretionary items.”

NREGA apart, other boosters such as subsidies on food, fuel and fertiliser, higher land prices and various development schemes have also resulted in more funds transfers to the rural belt.

With the steady rise in agriculture income in recent years due to the government’s initiative to hike minimum support prices for several agriculture items such as wheat and sugar, FMCG companies have expanded their distribution channels and increased retail outlets to push products.

According to the Kotak Securities report, Hindustan Unilever added 5 lakh new outlets over the past two years and is likely to add another 5 lakh over the next two years.

Dabur intends to roll out its new rural distribution strategy in the ongoing quarter, and sees an opportunity to double its rural reach over the next few years. Marico, maker of Parachute oil, has seen its sales improve 32 per cent in July-September (2011-12) from 27 per cent a year earlier, the report said.

Paint companies, which once focused on cities to drive sales, too have realised the importance of rural market and launched low-cost emulsions against distempers used earlier. Companies like Asian Paints have seen sales mix in urban and rural areas grow equally, indicating an improvement in rural areas.

Godrej Consumer, which is present in hair colour, soaps, toiletries and liquid detergent segments, has seen the gap between urban and rural markets reduce considerably on the sales front, which signifies its growing penetration in the rural market.

Non-banking finance companies, too, have been enjoying better growth prospects, especially in financing vehicles. Sundaram Finance and Shriram Transport Finance, two NBFCs based in the southern region, have seen a jump in business in recent years as rise in agriculture income has resulted in better demand for commercial vehicles and passenger cars.

“The vehicle financing business has been gaining prominence in the rural space. These companies are wooing rural consumers as they realise that there has been a sharp rise in rural income over the past few years and the dependence on agriculture has come down,” said G Chokkalingam, executive director and CIO at Centrum Wealth Management.

Automobile companies such as Hero Motocorp, Bajaj Auto, Mahindra & Mahindra and Maruti Suzuki, too, have emerged strong players with a strong focus on rural markets.

“Cash sales in two-wheeler purchases have risen to 70 per cent over the past three years from 50 per cent, indicating increasing prosperity among rural customers. We believe the role of NBFCs and banks would be crucial in helping rural customers avail finances at lower rates,” the Kotak Securities report said.

According to the management of Maruti Suzuki, aspirations of rural customers are similar to those of urban customers and, hence, companies need to be careful in marketing high-quality products to rural India. Marketing techniques may differ between rural and urban customers, but companies believe rural customers are willing to spend like their urban counterparts for quality products.

Farmers are buying tractors, with higher horsepower to enhance mechanisation on farms and for haulage applications, to increase incomes. This indicates rural prosperity is increasing and automobile manufacturers should target farmers, teachers, government employees and small business owners to sell vehicles, the report said.

”We believe companies like Hero Motorcorp, Bajaj Auto, Maruti Suzuki and Mahindra & Mahindra will be key beneficiaries of this rural growth as new players will take time to establish their presence,” the report said.

prasannadeshpande@mydigitalfc.com