Some improvement in agriculture, but clear recovery not in sight yet

India’s manufacturing Purchasing Managers’ Index or PMI for February declined to 54.5 per cent from 55.3 per cent in January.
At a time when rising concerns over coronavirus have impacted Indian equity markets, a few recent data points indicate a revival in rural sentiment. One such was the Central Statistics Office’s gross domestic product or GDP print for the December 2019 quarter, which showed good improvement in agricultural activities, mainly aided by inflation. Another was domestic tractor sales of major players were up 16-21 per cent year-on-year in February.

Though these data points offer some comfort, given the importance of rural-led consumption for India’s economy and its equity market, it would be early to conclude that rural consumption has bottomed out.

Deepak Jasani, head, retail research at HDFC Securities, believes most of the other high-frequency economic indicators are still not showing positive signals. “While rural recovery is a key determinant for the equity market, we need to wait until a majority of other key indicators such as non-food credit growth of banks, rural real wage growth, etc. also show structural recovery.”

Even India’s manufacturing Purchasing Managers’ Index or PMI for February declined to 54.5 per cent from 55.3 per cent in January. Though a PMI over 50 indicates an expansion in activity, the rapid spread of coronavirus is casting doubts over its near-term sustainability. For instance, the automobile sector could see a big impact on its supply chain, even as demand remains weak.

This apart, some also believe that the agricultural gross value added (GVA) may not be an accurate reflector of farmers’ incomes, which is key to improve rural demand. “While agricultural production would remain strong in the near future, it does not necessarily indicate good improvement in farmers’ income levels,” says Madan Sabnavis, chief economist at CARE Ratings.

While the expected good Rabi crop would aide farmers, a meaningful increase in their income level demands strong and sustained pricing improvement in agricultural prices, which looks difficult in the current environment. Even if agricultural income remains stable, as Sabnavis believes, it needs to get converted into demand to actually spur overall rural consumption, which looks difficult at least for a few more quarters.

That said, a few others seem hopeful. Dhananjay Sinha, director and head of institutional research at Systematix group says, “The recent few economic indicators show that one part of rural India, i.e. farm, is doing well. Besides good agricultural output and allocation of government’s welfare schemes should improve overall rural consumption hereon.” However, the jury is out on this.

Thus, investors should wait for more data that confirms a recovery in rural growth, which would then augur well for stocks such as fast-moving consumer goods, automobiles, agricultural/rural lenders, among others. For now, investors are recommended to stick to quality stocks. 

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