Published on 16/10/2020 9:17:38 AM | Source: Motilal Oswal Financial Services Ltd

Rural sector definitely the silver lining… - Motilal Oswal

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Rural sector definitely the silver lining…

…but urban consumption a serious laggard

* It is a well-known fact that the agricultural sector has performed much better than the non-farm sector during the past 6-7 months. This means that the rural sector, in general, has outperformed the urban sector. Ironically, there are no official statistics on rural and urban consumption, which could help us better understand these dynamics. In this note, we have updated our in-house indicators for rural and urban consumption*, which suggests that while rural consumption recovered strongly during Jul-Aug’20 (v/s 1QFY21), urban consumption remains very weak.

* Real private consumption expenditure (PCE) declined 26.7% YoY in 1QFY21. Based on 17 monthly indicators, our estimates suggest that while urban consumption (with 7 proxy indicators) contracted 34% YoY in the quarter, rural consumption (based on 10 proxy indicators) shrank only 4% YoY in 1QFY21. In the first two months of 2QFY21, while urban consumption declined 18% YoY, rural consumption was almost flat (+0.1% YoY).

* During the past two decades, there have been only two episodes when rural consumption growth has outpaced urban consumption growth – (a) FY09-12 (immediately post the Global Financial Crisis), and (b) the current period beginning 2QFY20. The primary difference, however, is that while real PCE growth was robust in the first episode (averaging 8% during the four years), it has weakened considerably currently.

* Both the episodes, interestingly, are marred by higher inflation. Food items account for ~40% of the consumer price index (CPI) basket and are an important source of growth for the farm/rural sector. Thus, it is not surprising that when rural consumption outgrew urban consumption during FY09-12, headline inflation touched double-digits for the first time since the early-2000s. However, notwithstanding weak PCE, a pick-up in inflation recently – from 3.5% in FY19 to ~7% in 1HFY21 – could be attributed to either supply disruption or an indirect support to farmers.

* Also, it is important to note that while the rural sector has outperformed urban consumption, the fall in the latter is seriously worrying. From an average growth of 8% during FY17-19, urban consumption declined for the first time in two decades in FY20 before collapsing by more than a quarter during Apr-Aug’20. Rural consumption, on the other hand, grew at an average of 6% during FY17-19 before easing to 3.4% in FY20 and shrinking ~4% YoY in YTDFY21.

* With urban consumption witnessing its worst period during the past two decades, the situation is truly unprecedented. A revival in PCE is unlikely without a recovery in urban consumption. Moreover, if the rural sector does the heavy lifting, it could be highly inflationary. It is apparent that COVID-19 has affected the urban sector disproportionately. However, in the absence of any major support (via job/income guarantee) to this segment, strong recovery in PCE, and thus, real GDP growth, seems far-fetched.


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