Rural consumption stays sluggish; weather poses risk to recovery

New Delhi: While India staged a double-digit rebound in household consumption in FY22 which is set to expand at over 7% this fiscal, experts point out that India’s consumption story has a weakness — rural folk tightening their belt in the face of inflation.

The silver lining is that the worst may be over, unless El Nino conditions disrupt the arrival of the rains and dampen a consumption revival, experts said.

Gross domestic product (GDP) estimates show that private final consumption expenditure, the biggest growth driver, rebounded by 11.2% in FY22 on an inflation adjusted basis from an over 5% contraction in the year before and is set to further grow by over 7% this fiscal as per the second advance estimate.

But factory output data, though narrower in its coverage, shows where the weakness lies.

Factory output of consumer non-durables has seen a contraction of 1.3% in the first three quarters of this fiscal, while that of consumer durables, largely items consumed by the higher income group, has seen a growth of 3.4% in the same time, implying weakness in the purchasing power of rural India.

Inflation that came in the way of a sustained pick-up of consumer non-durables, leading to consumption demand getting skewed in favour of goods and services consumed largely by the well-off, according to analysts.

If inflation doesn’t come down, then there is a bigger risk to consumption revival, according to them. Retail inflation measured by consumer price index was at 6.52% in January, a three-month high.

Chief economic advisor in the finance ministry Anantha Nageswaran explained at a briefing on Thursday that urban demand recovery is taking place at a faster pace than rural. “We have a recovery where urban recovery is proceeding at a faster pace than rural recovery, but you cannot say that rural recovery is not (happening),” said Nageswaran. Experts also pointed out that the factory output data may be revised upwards.

According to Aditi Nayar, chief economist at rating agency ICRA Ltd, consumption of services has recovered further, suggesting this segment has been prioritised over consumer durables. “The latter has been constrained by weaker export demand. Some income groups may not have been able to sustain growth in consumption of non-durables amid high inflation.”

Sachchidanand Shukla, chief economist, Mahindra Group, said there has been persistent weakness in demand especially in lower income groups, manifesting in a ‘K-shaped recovery’ — where some parts of the economy do well while others decline.

“However, the outlook for rural demand has improved over the last couple of months. Prospects of higher crop output and prevailing mandi (wholesale market) prices are higher than minimum support price for almost every crop. The outlook has begun to improve, but since IIP data comes with a lag and has some issues it may continue to reflect the pain on lower income and consumption segment,” he said.

He said once fresh farm output reaches markets, rural incomes and consumption will improve and worst of rural demand weakness may end.

However, the risk of inclement weather is there. “If predictions of warm temperatures for next couple of months and risk of El Nino causing erratic rains materialise, we may go back to square one in persistence of softer demand in rural pockets,” he said.

“We have to remain cognizant of the risks from weather and stay watchful of the mitigatory steps from the govt as far as outlook for the next six months is concerned,” explained Shukla.

Experts also said that while the government’s thrust on infrastructure spending is good, the choice of projects should form such a mix that it creates demand in short term, medium term and long term.

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