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111Betting On Rural RecoveryOct-23-2020

Betting On Rural Recovery

Blog by – Mr. Dhruv Ajmera

Domestic stocks have been in great touch in last few weeks and online equity trading activities have been highly profitable. The benchmark Nifty 50 index hit eight month high above 12000 in the middle of October 2020, extending a rally after the deep slide in March-April this year. People also continue to invest in SIP online and signs of economic recovery are visible across various parameters not just in India but globally too. Will this rally in markets continue and how to individual investors approach their online market trading in coming months? Let us try to understand the structure of the current rally in markets and try to back it up with evidence on the economic front in order to assess the overall scenario.  

While the major economic activities were under a throttle over last six months, agriculture and farm related activities continued nearly at a normal pace, cushioning the negative impact on rural region. One of the major reasons why the recovery in rural economy will extend over the long term is the structural changes taking place at the ground level. The government recently cleared three major agricultural market reforms Bills which include new framework for contract farming, private markets in addition to APMCs and key amendments to Essential Commodities Act. This will certainly percolate into a sustainable and wide spread growth in hinterland and will also have a substantial impact on trading in Indian equity markets too. 

Here are five investing themes directly backed up by rural economy and agricultural growth. 

Food processing: Businesses engaged into food processing will see good prospects for growth over coming years. The whole farm mechanization process is undergoing a major shift and demand for food processing will likely benefit a lot due to consistent focus on building good agri infra like warehouses and cold storages.  In June this year, the government launched the PM Formalization of Micro Food Processing Enterprises (PM FME) scheme which would generate total investment of Rs 35,000 crore.  The unorganized food processing sector comprising nearly 25 lakh units contribute to 74% of employment in food processing sector, thereby offering a vast potential in the space. 

Two Wheelers: Two wheelers market is likely to be in a good nick after an overall subdued performance in the entire auto sector over last year or so. In rural areas, two wheelers have been in great demand due to affordability and convenience. With the interest rates at rock bottom levels, the domestic banks and NBFCs are likely to come up with plenty of offers in coming festive season to attract customers. Already the two wheeler sales have shown signs of a pick after relaxations in the extended lockdown. 

Tractors: A continued spurt in foodgrains output and opening up of opportunities in the farming space after the passage of recent landmark bills, demand for tractors will likely shoot up over coming quarters. 

Affordable housing: Affordable housing is an exciting segment that can likely lead to recovery in domestic real estate market. Rural and semi urban areas offer a great potential for this space. Interest rates are at near about a decade low and the government has put in a lot of effort in improving basic infrastructure like roads, electricity and other necessities to set up a conducive environment for wide spread revolution in affordable housing. While the urban residential real estate may still take some time to recover due to stressed income levels, the prospects are good for rural and tier-2 cities when it comes to housing. The RBI has recently noted that it will rationalise risk weights and link them to loan-to-value (LTV) ratios for all new housing loans up to March 2022. 

Microfinance: Microfinance has managed to carve a good niche in the rural economy and will likely perform well given the incessant focus on boosting farmers’ incomes. While the build-up of stress following Covid-19 and a high level loans under moratorium could act as near term challenges, the overall low penetration and increasing financial inclusion augur well for the sector. 

Conclusion: 

While the economy has been unlocked in a substantial manner and much of the major business activities have resumed partially or fully, the still elevated Covid-19 cases count, restrictions due to social distancing and lack of consumer spending is likely to weigh on a lot of sectors. In such a scenario, the investing themes linked to rural economy are likely to turn out quite effective. In fact, India’s Q1FY21 GDP data concurs with the same as agricultural was the only sector showing a growth amongst the components. Local equity markets will likely factor in these facts going ahead after the massive rally in benchmark indices. 

Also Read: Equity Investing In Times Of Economic Stress

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