Decoding consumption trends: Rural income and profitability remain weak By Motilal Oswal Financial Services
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Decoding consumption trends: Rural income and profitability remain weak
Urban growth likely to ease in coming quarters
* An analysis of 12 indicators of rural consumption suggests that the sector grew 6.1% YoY in 1HFY23 as compared to 1.7% YoY in 1HFY22. Moreover, rural consumption grew 5.4% YoY in 2QFY23 as against 7.8%/-2.7% YoY in 1QFY23/2QFY22. Besides a favorable base, a strong growth in the fiscal spending supported the rural economy in 2QFY23.
* Urban consumption (using nine indicators) grew a strong 12.7% YoY in 1HFY23, following a 20.4% YoY growth in 1HFY22. It is estimated to have increased by 8.9 % YoY in 2QFY23 as against a 17.2%/7.8% growth in 1QFY23/2QFY22. Salary and wages of listed companies grew at double-digits for the first time in about four years. House prices also increased for the first time in five years.
* A close look at the farm sector suggests a mixed bag. While rainfall and fiscal spending seem to be favorable, wages of farmers continue to lag. As the southwest monsoon ended in surplus, and given the decent post-monsoon rainfall, both Kharif sowing and the on-going Rabi sowing has been good so far. On the contrary, farm terms of trade continue to deteriorate as the inflation in input prices outpaces output inflation, leading to lower income and profitability.
* Overall, the growth in urban spending growth has outpaced that of rural spending for the sixth consecutive quarter in 2QFY23, following seven quarters of outperformance in rural spending. Higher inflation seems to have hurt savings more than consumption, as reflected by the continued strong growth in urban spending and a widening current account deficit (CAD). Without a growth in farm income and profitability, the rural economy may continue to grow around mid-single digits. At the same time, urban growth is likely to come off in coming quarters.
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