After remaining subdued for over two and a half years since the pandemic, private consumption seems to have got a push from rural demand. However, the strength and durability of this “revival in rural consumption”, as acknowledged by the Reserve Bank of India (RBI) in its August bulletin, is still to be gauged and verified. Certain data points like a sustained contraction in work demand under the national rural employment guarantee scheme (NREGA) in recent months, and even the relative stickiness of rural food inflation (demand) compared to the urban variety, which the optimism is based on, have frailties. For instance, the year-on-year decline in NREGA demand for nine months in a row to July may have something to do with the higher transfers (doles) from the Union and state governments during the prolonged election phase, besides the kharif sowing season.
The rural revival could well prove to be transient and fortuitous. In Q3 and Q4 of last fiscal, private final consumption expenditure (PFCE) grew by 4% each on year, compared with 1.8% and 1.5% respectively in the year-ago periods. This signifies that the broader consumption segment have seen a slow recovery since the second half last fiscal, but high-frequency indicators like sluggish passenger-car and fast-moving consumer goods sales may be already indicating a slowing of urban consumption. The “primary sector” comprising farming and mining grew at an anaemic rate of 1.1% in the second half of last fiscal. So, while rural demand recovery is feeble and could be short-lived, urban consumption may be about to show renewed weakness. It would be unrealistic to expect the rural demand to be strong and abiding, without ensuring that the terms of trade remain in favour of farmers for longer periods by addressing the structural issues of the economy that constrict the rural sector.
While the handlers of monetary policy would want more effective supply-side interventions to come to their aid and rein in the recalcitrant food inflation, government policies must keep the longer-term objective of balancing the interests of farmers and consumers. Export restrictions on raw and processed food including many rice varieties where India is an influential global supplier are out of sync with the larger economic goals, as it undermines the rural purchasing power. The share of PFCE in the GDP declined from 58.1% in 2021-2022 to just 55.8% in 2023-24. The structural shift of demand towards the high-income and urban segments needs to be reversed via fiscal and other policies, for consumption to regain its lost share in the economy.
FE reported recently that corporate India’s inventory levels are yet to reach pre-pandemic levels. Inventory-to-sales ratio rose to 65.4% in Q4FY24, even higher than the year-ago level of 64.1%. This is surely not a sign of buoyant demand. Policymakers ought not delude themselves into believing that the medium-term economic trajectory is assuring for the country. Even a 6% growth might not be sustainable, unless profits are allowed to be widely dispersed, and income stagnation among larger sections of population is resolved. This is especially true since foreign trade is not adding to domestic value creation given the uncertain external world. Micro, small and medium enterprises in export-oriented, job-intensive industries are bearing the brunt of this. The RBI staff’s optimism that “high capacity utilisation, healthy corporate balance sheets, and sustained credit demand” would stimulate private corporate investments doesn’t look fully justified at this juncture.