Rural stimulus for consumer companies

Investors may once again have to go back to defensive consumer companies that have a substantial stake in rural India. That seems to be the key implication from Budget 2009's continued focus on rural spending and agricultural credit, even as salaried taxpayers have been fobbed off with marginal concessions.

More money in consumers' hands could help FMCGs

FMCG makers such as Hindustan Unilever, Dabur, Colgate Palmolive, ITC and Godrej Consumer, which derive a substantial portion of their revenues from rural centres, and two-wheeler companies such as Hero Honda and TVS Motors, that have done well in catering to the value segment, may be the key beneficiaries of the latest Budget, though their urban-centric rivals may not have much to look forward to. Among the automobile makers, Maruti Suzuki and M&M have a relatively higher exposure to the semi-urban/rural consumers.

Trickle-down effect

Rural buying of FMCG products, consumer durables and two-wheelers has remained buoyant over the past year, even amid the slowdown, on the back of easier credit, increased sources of non-farm income in rural areas and stepped-up public spending on infrastructure and employment schemes such as the NREGS.

Budget proposals will propel India to higher growth: Mukesh Ambani

With the Budget announcing a massive Rs 3,25,000-crore target for agricultural credit, a Rs 39,100-crore allocation for the NREGS (up 144 per cent over last year) and liberal increases on rural infrastructure schemes such as Accelerated Irrigation Benefit Programme (75 per cent increase) and Bharat Nirman (45 per cent increase) for 2009-10, rural consumption may continue to benefit from the trickle-down effect of all this largesse.

That, combined with spiralling prices of agri-produce, may well make up for any dent to consumption from a deficient monsoon this year.

I-T exemptions

As against this, the marginal increases in basic exemption limits on personal income-tax, announced in this Budget, may add only small sums to the annual disposable income of individual taxpayers. This appears quite unlikely to deliver a consumption boost.

'Markets expected too much from the Budget'

Though the Budget has not made significant cuts in personal income-tax, it needs to be remembered that consumer sectors may continue to derive benefits from the stimulus measures announced over the last six months.

Big ticket purchases of consumer durables and vehicles will receive support from the residual Sixth Pay Commission arrears (more than half is due this year) as well as from the rapid-fire cuts in lending rates over the past six months that are only now being transmitted to consumer, car and home loans.

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The deep correction in input costs and the resulting price cuts in FMCGs may aid volume growth for these goods, if inflation remains within check.

The lift to consumer confidence from a reviving manufacturing sector and any "wealth effect" from the stock market recovery too could aid an improvement in consumer spending.

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