Planning To Build A Rural-Focused Portfolio? You May Want To Wait

India's farm distress is holding back rural growth. And now recent weakness in the non-farm sector suggests that the rural recovery may take longer than expected.

“Non-farm income has been supportive earlier but we could clearly observe a weakening of economic activity across regions,” according to JM Financial's Rural Safari report. “While there were issues of lower farm prices in some regions, we believe multiple reasons have been at play causing the soft trajectory of non-farm income.”

The team at JM Financial Research travelled to rural areas across 13 states for their bi-annual Rural Safari. Their key takeaway: rural consumption growth may see a temporary spurt after general elections, but a sustained recovery will be more gradual than anticipated.

Non-farm sources like dairy, wage-based work, sand mining, tractor rental and small businesses contribute about 40 percent of the total agri-household income, according to JM Financial.

“There are four factors that have led to a slowdown in demand: slowdown in the informal sector, lower crop prices, impact of lower financing on small enterprises and pre-election postponement of demand,” Suhas Hariharan, managing director at JM Financial, told BloombergQuint. “What we are expecting is that there will be burst of growth for a month or two. But after that it will depend on how fast the financing for the informal sector and the broader informal activity revives.”

The liquidity crunch among India's lenders, Hariharan said, played a key role in putting non-farm income on a weak trajectory. “These things have been happening for the last two years. What probably acted as a catalyst is the slowdown in financing to the SME sector since September or October,” he said. “Maybe these businesses were being held up by the financing coming from NBFCs (non-bank financial companies) and others. But now that has been pulled out. So there's a loss of income.”

But not all was gloomy in JM Financial's road trip.

One of the success stories in Indian agriculture, it said, was the resilience of crop yields. “It has increased all these years despite poor monsoon season,” Hariharan said.

But crop prices are lower because procurement hasn't been adequate, he said. “There was an expectation that procurement would be very good on the ground. But that has faltered to deceive. Procurement is still quite lacking.”

That's why JM Financial said now may not be the right time to build a rural portfolio.

Here Are Sectoral Findings From JM Financial's Road Trip:

Consumer Goods

Patchy monsoon and lower crop realisation have hit consumer demand in the rural economy. “That apart, an extended winter also meant that demand for products that picks up with rising heat took a beating,” JM Financial said.

Automobiles

For auto sales there were no issues with the availability of finance, JM Financial said. “The message we are getting is that it is over-funded,” Hariharan said.

Dealers in Uttar Pradesh are expecting a recovery in the upcoming festive period, while those in southern India expect a gradual recovery after the elections.

Financials

Disbursement growth has picked up since November 2018 after the industry's liquidity crisis. Non-bank lenders have tightened yields and stepped up collection efforts, JM Financial said, adding these moves have translated in to stable-to-improving trends in asset quality.

Agri-Inputs

There was a wide disparity in brand awareness and decision-making among farmers with regard to pesticide purchases, JM Financial said. “The use of spurious pesticides (based on dealers' recommendations) is still high in many states and this has impacted quality of agricultural produce to a large extent.”

Watch the full interview