Economy

Demonetisation crushes green shoots in rural India

Rashmi Pratap Mumbai | Updated on January 16, 2018 Published on December 04, 2016

The demand for two-wheelers and tractors has dipped in rural India

Rabi sowing down; sales of tractors and two-wheelers dip

The demonetisation of high-value currency notes seems to have crushed the tender green shoots of economic recovery in rural India by choking off life-sustaining money supply and impeding the wheels of commerce from spinning.

From FMCG firms to two-wheelers to tractor makers, companies had been looking forward to an increase in rural demand in the wake of an adequate monsoon after two years of sub-normal rains. But just as things were beginning to look up, the withdrawal of ₹500 and ₹1,000 notes has hit rural India hard.

Unlike metros, rural areas do not have adequate numbers of ATMs or digital payment options. Given the cash dependence, and the fact that even small-denomination notes are not in active circulation, the demand recovery in rural areas has been badly affected.

“The agriculture sector will bear the brunt of demonetisation,” said Dharmakirti Joshi, Crisil Chief Economist. “Farmers are finding it tough to sell their produce in the APMC markets. Therefore, despite a good harvest, there is unlikely to be a commensurate improvement in rural demand.”

The cash crunch is also adversely impacting the rabi sowing season. According to research firm Edelweiss, about half the rabi sowing season is over, but as on November 25, sowing was down by about 7.5 per cent compared to the normal.

Sales of two-wheelers and tractors, a barometer of sentiment in rural India, also dipped in November, the month of the demonetisation announcement. Rural India accounts for over 50 per cent of two-wheeler sales, which were down 12.8 per cent year-on-year for Hero MotoCorp and 13 per cent for Bajaj Auto. Both companies are strong players in the rural markets.

For Mahindra & Mahindra, domestic tractor sales declined 24 per cent year-on-year to 15,918 units in November. “In my view, there will be a 25 to 35 per cent further reduction in demand from rural areas in December and January,” said Abdul Majeed, Partner at PwC India.

This will impact the sales of not only two-wheeler and tractors, but also of SUVs, which are typically bought in cash by rural customers.

“The general sentiment is down. Many farmers have been forced to dump their produce as trucks are not operating. And those who have the money are postponing purchases owing to the uncertainty. All this will impact demand in the auto sector,” Majeed added.

Consumer durables hit

The consumer durables segment, which normally sees good demand from rural areas, is also bearing the brunt of the currency crunch.

Storeking, an assisted e-commerce player focussed on rural areas, has seen a dip in demand for brown goods. It has kiosks at retail outlets, where shopkeepers assist customers in selecting products from its online shopping platform and get them delivered to the shop within 48 hours.

“People are buying necessities, but not home appliances, TVs, refrigerators and mobiles. Discretionary purchases have taken a beating,” said Sridhar Gundaiah, Storeking founder and CEO.

According to Dhananjay Sinha, Head of Institutional Research at Emkay Global Financial Services, the demonetisation shock is expected to nip the budding recovery as it will have an adverse impact on demand, corporate performance and the labour market, and have a ripple effect on various other fronts.

“The cumulative impact will vary depending on the time it takes for the economy to remonetise and on the quantum of notes extinguished,” he added.

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Published on December 04, 2016
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