Mumbai: India’s rural consumers, darlings of the nation’s stock market during the past five years, are losing their appeal to equity investors as Prime Minister Narendra Modi shifts funding from farm subsidies to urban infrastructure.

The S&P BSE FMCG Index, which outperformed India’s benchmark equity gauge by 163 percentage points in the five years through September 2013 as Modi’s predecessor funnelled state funds to rural households, has since lagged behind while mortgage lenders and developers surged. Maruti Suzuki India Ltd, India’s largest carmaker, jumped 172% since Modi won his party’s nomination, versus 53% for Mahindra and Mahindra Ltd, the biggest tractor producer.

Modi’s nine-month-old administration has scrapped diesel subsidies and slowed increases in government-guaranteed crop prices to rein in a subsidy bill that surged fivefold during the past decade. At the same time, he’s pledged more than $24 billion to unclog choked transport links and build more cities. Urban consumers will gain more than village dwellers as the Reserve Bank of India’s (RBI) first interest rate cut in two years in January leads to lower mortgage costs, according to JPMorgan Chase and Co.

“The growth rate will likely be higher in the urban areas as the government stimulates city infrastructure development and the services sector," said Jonathan Bell, the London-based head of emerging-market equities at Nomura Asset Management, which oversees about $200 billion globally.

Budget boost

Investors will get further details on Modi’s plans to improve infrastructure, boost manufacturing and pare back subsidies when finance minister Arun Jaitley unveils the Bharatiya Janata Party’s (BJP) first full-year budget on 28 February. Speculation that Modi’s policies will boost growth in Asia’s third-largest economy has propelled the S&P BSE Sensex to a 47% gain since September 2013.

LIC Housing Finance Ltd, the nation’s second-biggest mortgage lender by market value, has soared more than 162% during that period, while Oberoi Realty Ltd, a Mumbai-based developer, climbed 82%. Jain Irrigation Systems Ltd, the farm-equipment maker that posted a loss for the December quarter due to weak rural demand, lagged behind with a 26% gain. Kolkata-based ITC Ltd, which gets 70% of sales from its tobacco and agriculture businesses, has advanced 21%.

Days after Modi took power in the biggest election victory in three decades last May, he announced a plan to build 20 million homes over the next seven years. In his first budget in July, the government allocated ₹ 50,000 crore to improve urban infrastructure and ₹ 52,300 crore to build roads. Three months later he eased curbs on overseas investment in property development and construction.

Food subsidies

Modi’s administration ended diesel-price caps in October and raised the minimum price offered to farmers for wheat by just 3.6%, versus an average 7.8% increase in the preceding three years. The previous government more than doubled guaranteed prices for wheat and rice in the decade through last May to boost rural wages.

Modi is freeing up funds for roads, bridges, highways and ports to spur an economy in which private investment as a share of gross domestic product (GDP) has fallen to the lowest level in at least a decade. Food, fuel and fertilizer subsidies rose to 15% of total spending in the budget for the year ending in March 2015 from 10% a decade earlier, according to the government’s budget documents.

“There’s definitely a degree of larger benefits for urban consumers than those in rural areas," Adrian Mowat, the chief Asian and emerging market equity strategist at JPMorgan Chase in Hong Kong, said in an interview on 3 February.

Urban confidence

Not all investors agree that urban consumers will benefit more than their rural counterparts. Modi’s policies to boost growth will spur consumer demand in India’s villages, Deven Choksey, managing director at KR Choksey Shares and Securities Pvt. in Mumbai, said by phone on Wednesday.

“It’s not necessarily an urban-versus-rural divide," he said. “Infrastructure projects will benefit rural masses more than urban since these projects will criss-cross rural land, giving more employment to masses in the rural areas."

About 70% of city dwellers are confident about India’s economic growth and their earnings prospects, more than double the proportion from a year ago, according to a survey of 1,500 people by Mumbai-based brokerage Religare Capital Markets Ltd released on 27 January.

Lower rates

Falling borrowing costs are boosting the spending power of urban consumers, who tend to take on more debt to pay for homes and cars than their rural counterparts. RBI governor Raghuram Rajan cut the benchmark interest rate last month in an unscheduled move and has linked further reductions to an improvement in public finances and slower inflation.

That’s making mortgage lenders, car makers and holiday operators, including Mumbai-based Cox and Kings Ltd, top picks at Auerbach Grayson Co., a New York-based brokerage operating in more than 129 markets worldwide. HDFC Securities Ltd, controlled by India’s biggest lender by market value, has buy recommendations on real-estate companies, including Oberoi Realty and Brigade Enterprises Ltd

“The previous government was more pro-rural," Mahesh Patil, the co-chief investment officer at Birla Sun Life Asset Management Co., India’s fourth-biggest money manager with $17.5 billion in assets, said in an interview in Mumbai. “This time, the driver for growth will come from the urban parts." Bloomberg

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