Rural Economy

Driving Towards A W-Shaped Recovery

The automotive industry has seen a sharp recovery in June this year, driven by pent-up demand for vehicles and a relatively buffered rural economy, after near zero sales in April. Even as uncertainties around the potential recovery pathways remain, the agricultural sector has been relatively less impacted and is expected to drive the Indian recovery.

Record rabi crop production, higher government procurement prices for crops, the announcement of higher Minimum Support Prices leading to better realisation for the farmers, and the outlook of a normal monsoon has aided the consumer sentiments.

A quicker recovery in rural demand which will improve sales momentum for the automotive and the farm sectors is expected, while urban markets will take a little longer to regain normalcy in demand. The positive performance of the tractor industry in June can be seen as a barometer of rural sentiments.

With the rural economy remaining the silver lining, a sharper demand recovery in predominantly rural states like Bihar, Jharkhand, Madhya Pradesh, and Rajasthan, among others, especially for pickups and utility vehicles is expected.

It is also forecast that the recovery rate will be moderate in July and August, before seeing a further sales spike in September and October during the festive season; moving more like a W-shaped recovery curve in the next few months.

On the commercial vehicles side, the share of the 2 to 3.5 tons segment (pickups) is expected to increase to 72% of the sub-3.5 tons segment during May-June. The agricultural sector contributes to almost 45% of the demand for pickups.

With demand for agricultural commodities, raw materials and intermediate goods expected to remain positive in the near future, it is expected to provide growth momentum for freight demand and potential new vehicle sales.

With the cost of finance coming down by about 72bps (0.72%) since March 2020, it is expected to provide relief to customers in both rural and urban markets, especially first-time buyers. Some downside risks to demand remain due to localised lockdowns in different states and districts.


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