>TIGHTEN THE SEAT BELTS (CLSA)

ON THE ROAD

In our April On the road report we had said that we came back incrementally more positive and it was not all ‘gloom and doom’. Last week we travelled through parts of Haryana, Uttar Pradesh and Rajasthan to gauge the mood of small town and rural India and we came back incrementally more negative than positive. Admittedly the feedback is still fairly mixed, but the signs of stress are unmistakable. Huge government spending, land buying in select pockets (like along the Taj Expressway) and some diversification in income streams are masking the distress for a cross section of people. Make no mistake – rural income and consumption will hit the speed breakers. Further the festive season in Kerala and Maharashtra is off to a poor start as per feedback received by us. And increased government spending will come at a price for the economy as a whole. Tighten your seat belts.

Challenging near term outlook…
■ The impact of poor monsoons is worse than expected as government plays down the bad news.

■ Rural and small town India will see slow down in consumption and consumer demand and initial signs of the same are visible.

■ Tighten your seat belts. The news is likely to get worse before it gets better.

…but some mitigating factors
■ Government spending through schemes like NREGS, higher minimum support prices (MSP), and investments in infrastructure helping.

■ Diversifications of farm incomes as families engage in other activities, primarily services and also crop diversification is helping. But likely limited to the better off farmers and not the small ones.

■ Land acquisitions for infrastructure projects bring in money into rural/ small town.

■ Sixth Pay Commission wage arrears likely to be paid out in September.

■ Late monsoons likely to mitigate concerns on Rabi crop as ground water level rises.

Some long term trends
■ Increasing income diversity thanks to the opening up of the economy and resultant opportunities. But part of this is still linked to agri-incomes and growth.

■ Rapid privatization of the education sector.

■ Good infrastructure – roads and telecom – giving new opportunities.

■ Corruption and leakages in government schemes remain a big concern.

To see full report: MARKET STRATEGY