Has Rural & Urban Consumption Become A Major Post-Budget Theme?

Rural Consumption…

How can a budget give a big boost to urban and rural consumption across the economy? The focus, obviously, needs to be on putting more money into the hands of people with the maximum propensity to consume. The budget comes under a specific economic backdrop. Firstly, the demonetization drive had caused a lot of practical hardships to the common people and hence the budget was expected to provide an antidote to that. Secondly, the farmers had faced a weak Rabi sowing season due to the cash crunch faced in the aftermath of the demonetization drive. Thirdly, rural India had finally seen agricultural growth recovering to 4.1% from 1.3% due to good monsoon and a record Kharif crop. These gains had to be consolidated on.…

Giving a boost to urban consumption…

The big theme of the budget was to put more money into the hands of the middle classes. Normally, exemptions and lower taxes are the easiest way of achieving this end. The government has cut the income tax rate at the lowest taxable bracket of (Rs.2.50 lakhs to Rs.5.00 lakhs) from 10% to 5%. This is likely to trigger off a major consumption boom as this segment has a high propensity to consume. Secondly, the government has cut tax rates for MSMEs from 30% to 25% and has rationalized tax rules for small businesses. This is likely to drive a major corporate consumption demand from small and medium sized businesses. Thirdly, affordable housing has been given Infrastructure Status and the definition has also been eased to bring more projects under the ambit of affordable housing. Considering the externalities of housing in generating secondary demand, this is also likely to be conducive to a consumption boom in the economy.

Giving a boost to rural consumption…

The budget has been high on spending for farmers and rural infrastructure. Both are likely to be positive for rural consumption. The government has already reached a daily target of 133 km of roads, nearly double the average target achieved in the last 5 years. The budget has allocated nearly Rs.39,000 crore for MNREGA and has also targeted taking the crop insurance coverage to 50% of crop area by next year. In addition there is an allocation of Rs.20,000 crore to irrigation with focus on drip irrigation and micro irrigation projects. This is likely to reduce the dependence of farmers on the vagaries of the monsoon. The government has also undertaken to build 1 crore houses for those who do not have homes or live in kucchha houses in rural areas. But the big boost could be the Rs.10 trillion allocation of bank credit for agriculture. This could not only temper the woes of farmers, but also encourage them to go for quality seeds and agrochemicals to improve yield. In addition, the government has also put focus on post-harvest infrastructure, which will substantially de-risk agriculture. This combination of better rural infrastructure, combined with rural housing and rural incomes will drive a big consumption boom for rural households.

Investment takeaways from the urban consumption theme…

What could be the key takeaways from the urban consumption theme? Let us look at two key trends! Firstly, sectors like entry level cars and FMCG are already facing weak top-line growth in urban areas due to restrictions on cash and weak consumption. With this boost to urban consumption, these metrics are likely to change. Automobile sector, consumer durables and FMCG companies could be some of the key beneficiaries of this trend. This is more so for consumption of two-wheelers, entry level cars, consumer durables etc. This is likely to be beneficial for companies like ITC, Havells, Maruti Suzuki, Hero Moto, Hindustan Unilever etc. Affordable housing could also be a major theme from an urban consumption theme perspective. The big boost to affordable housing could change the economics of housing companies and expand the arena for housing finance companies. We expect the budget to be positive for companies like Ashiana Housing and Kolte Patil, which are focused on the affordable housing segment. Among HFCs we expect LIC Housing Finance and Dewan Housing to benefit from this big thrust to affordable housing.

Investment takeaways from the rural consumption theme…

Ahead of the previous Union Budget, the heads of FMCG companies like Colgate, HUVR and Britannia were urging the FM to spend more on rural consumption. That is hardly surprising because many of India’s consumption stories are actually getting their incremental markets and profits from rural areas. These are less penetrated and there is a rapid migration of tastes happening. The big thrust to rural consumption could be beneficial to companies like HUVR, ITC, Bajaj Auto and TVS Motors. The rural demand for two-wheelers is quite strong and the demand for two-wheelers could directly benefit from a spurt in rural consumption. A thrust to rural consumption will also benefit companies that are into high-end variety of seeds, agrochemicals and drip irrigation beneficiaries. We see stocks like Rallis, UPL, Kaveri Seeds, Finolex Pipes and Jain Irrigation benefitting from the big thrust given to farmers.

Consumption, both in rural and urban India, is emerging as a major theme in the aftermath of the Union Budget. From an investment perspective, that could be the big theme to watch out for in the coming months.