Rural consumption rose just 0.5% on year in Q2FY24, the slowest pace in eight quarters, according to an analysis by Motilal Oswal Financial Services (MOFSL).
Urban consumption, however, grew 7.4% in July-September 2023, the sharpest pace in four quarters.
The tepid consumption scenario in rural areas was mainly led by sharply deteriorating reservoir level, the first fall in two-wheeler sales in six quarters, and first contraction in fertilizer sales in seven quarters, it added.
Besides, tractor sales shrank for the second successive quarter and that too, at a faster pace, and real farm exports fell for the fourth consecutive quarter in Q2 FY24, said MOFSL in a report.
“Our analysis is also supported by the MGNREGA (Mahatma Gandhi Rural Employment Guarantee Act) data. Employment demand by households under MGNREGA was much higher in the first seven months of FY24 compared with FY23 and FY18-20 average,” the agency said.
MGNREGA is a key indicator to assess stress in rural areas. High work demand under the scheme reflects more stress. Around 22 million people demanded employment under MGNREGA each in September and October, 10-18% higher than in the corresponding months of FY23, and 26-31% higher than the pre-COVID period, said the report.
HDFC Bank’s Economist Swati Arora said that uneven monsoon led to crop damage, which weighed on rural consumption. “To add to the woes, higher inflation also weighed on discretionary spending,” she said.
In the south-west monsoon period, which ended in September, rainfall has been particularly weak in east and north-east India, followed by south India. The total rainfall received in June to September was 94.4% of the bench mark – long-period average (LPA), or ‘below normal’.
In Q2 FY24, CPI rural inflation averaged 6.7%, which higher than 6.1% average of CPI urban inflation. The overall CPI inflation averaged 6.4% during the quarter.
The strong growth in urban consumption is aided by robust growth in salary & wage bill of BSE-500 companies, passenger vehicle sales, real personal credit growth, and the first growth in five quarters in IIP of consumer durable goods. Further, real house prices grew for the second consecutive quarter in Q2 FY24, after falling for more than five years, said MOFSL.
July-September marked the tenth consecutive quarter when urban consumption growth outpaced rural consumption.
Going forward, HDFC Bank’s Arora says that pre-election revenue spending (such as LPG Price cut, fertiliser and LPG subsidy, and extension of free food grain program) bodes well for rural consumption. “The gap between rural and urban demand is likely to reduce in Q3 FY24,” she added.
MOFSL’s Chief Economist Nikhil Gupta said, “with five state assemblies going into elections over the next month and general elections scheduled in May 2024, the hope of a revival in the rural sector is alive.”