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Manufacturers think the impact of Covid-19’s ravages on rural India will abate if seasonal rains are good.
Economists and analysts do not share the auto firms’ optimism
Covid-19 has ravaged rural India, sapping its once rising purchasing power, but auto companies with high dependence on the region, including Hero MotoCorp, Mahindra & Mahindra (M&M) and Maruti, don’t see such a bumpy road ahead. Each of these companies draw over a third of their sales from the rural markets. They are banking on the forecast of a good monsoon and a bumper summer crop plus sustained government support to help rural India bounce back as soon as the pandemic recedes.
Some like two-wheeler market leader Hero MotoCorp claimed it is already seeing some green shoots as the number of Covid-19 cases fall in the hinterland. “There are indicators that suggest a faster rural recovery. We have already started witnessing customer’s purchase intention through our various innovative digital platforms such as e-Shop, Virtual Showroom, and WhatsApp business,” said a company spokesperson.
Maruti, which derives 40 per cent of its sales from rural India, is optimistically cautious. The fear factor in rural India is a lot more pronounced this time, said Shashank Srivastava, executive director, Maruti Suzuki India, which saw retail sales drop 8 per cent over last year. “Sentiments are a lot worse and the element of uncertainty is very high,” he said.
But he, too, sees an upside. “Consumer sentiment can be very transient and all the negativity can get converted into irrational exuberance in as little as two weeks.”
Economists and analysts do not share the auto firms’ optimism. In their analysis, households, particularly the ones that draw their livelihood from non-agricultural jobs, have seen a sharp contraction in incomes and are more concerned about health expenditure. They are likely to cut down on non-essentials.
“Even if agricultural output/income remains intact, there is a strong likelihood that the expenditure behaviour/pattern of rural households will be different,” wrote Sunil Kumar Sinha, economist and director public finance at India Ratings. The slowdown in non-agricultural activities and in turn on non-agricultural income will have a serious impact on rural demand, since non-agricultural income constitutes nearly two-third of the rural income, he added.
Sinha said a sharp contraction in rural wages in FY22 is also likely to weigh in on rural demand/expenditure. Unlike what most believe, the largest chunk of the rural population consists of daily wage earners and not farmers. “Rural wage growth both for agricultural and non-agricultural activities have declined lately,” he wrote.
Average agricultural wage growth during November 2020-March 2021 declined to 2.9 per cent from 8.5 per cent during April-August 2020. Similarly, wage growth for non-agricultural activities during November 2020-March 2021 declined to 5.2 per cent from 9.1 per cent during April-August 2020 (November 2019-March 2020: 4.3 per cent).
But Hero, which sells one in every two models in rural India, remains unflustered. “All the fundamentals and demand drivers in rural areas remain robust and Hero does not expect a major impact on its rural sales,” a spokesperson insisted. With the expansion of the vaccination drive and a sharp decline in the number of Covid-19-positive cases, markets across the country are expected to open up gradually. This will aid in the swift recovery of businesses in the coming weeks, according to the company.
More than cars and bikes, however, the question mark hovers over sales of tractors, an almost entirely rural-facing market. Here, too, economists and manufacturers’ outlook remain at variance. Despite the forecast of a normal monsoon and other positives, rating agencies have pared their growth projections for tractor sales in India, one of the largest tractor markets globally.
“Growth in domestic tractor sales volume will be limited to 3-5 per cent this fiscal, given the strong second wave of Covid-19 infections and rising cases in hinterland, apart from high-base effect of last fiscal,” Crisil said in a report last month. ICRA also cut its growth outlook for tractors to 1-4 per cent this fiscal against 4-6 per cent earlier.
Graduated lockdowns in states in the face of the second wave saw tractor sales drop eight per cent year-on-year last month. But the previous fiscal year, in fact, saw record sales of 900,000 units in FY21, a 27 per cent year-on-year jump, according to Crisil.
“After having witnessed 10 per cent CAGR in the past 15+ years, we believe that tractors’ growth will moderate to 5-6 per cent over the next decade,” wrote Aditya Makharia, vice-president, HDFC Securities. Additionally, during this period, tractor penetration in the country increased to 45-50 tractors per 1,000 hectares, which is higher than the world average (of less than 30), he wrote.
In fact, M&M, India’s largest tractor maker, has also pared its outlook for the segment to low single digits but is confident of a strong demand resurgence. “The sharp fall in the number of Covid cases is leading to a sharp improvement in farmer sentiments, and green shoots of recovery are visible as farmers start preparing their land for the upcoming kharif crop season,” said Hemant Sikka, president farm and equipment sector, M&M. “A bumper rabi harvest, record procurement, food prices holding up, gradual opening up of mandis and expectations of a normal monsoon will pave the way for growth in the upcoming season.”
Escorts Agri Machinery, the fourth-largest tractor maker by sales, said in a statement, “The ground situation has eased in the last few days of the month,” and it expects return to normalcy soon. Like most others, Escorts, too, is banking on strong rural sentiments in the medium term, on account of all positive macroeconomic factors, it said in the monthly sales release on June 1.
It flagged unabated inflation as a cause of worry, however. Tractor makers have seen cost of operations escalate as the price of the primary raw material, steel, which accounts for 75-80 per cent of the total cost, has appreciated sharply.
If the rains are timely, we will pass the hump,” Makharia said. So the industry is now in wait-and-watch mode. “If the sowing season goes well, buyers will come back as sentiment will improve and customers will want to purchase autos for personal mobility,” said Makharia.
Sales during the June-August period is seasonally weak because of the rainy season and the recovery is likely to gain momentum from September onwards, he hopes.