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Rural consumption lackluster in FY22 due to the base effect

Expect rural to outperform urban consumption in FY23

* Our in-house estimate of rural consumption (using 12 indicators) suggests it grew by 4.7% YoY in 4QFY22, following a decline/weak growth in the preceding two quarters. Five indicators – real agricultural wages, real non-agricultural wages, farm terms of trade, tractor and two-wheeler sales – continued to contract, while farm exports and agricultural credit grew slower in 4Q vis-à-vis 3QFY22. The remaining five indicators grew faster. Consequently, rural consumption slowed to the lowest in six-years (1.5% YoY in FY22) as against a nine-year high of 8.6% YoY in FY21.

* On the other hand, urban consumption grew by 6.1% YoY in 4QFY22 as compared to 8.5%/4.2% YoY in 2Q/3QFY22. This was led by a decent growth in real salary and wages of listed corporates, personal credit, and non-farm consumer imports. However, three indicators – passenger vehicle sales, IIP for consumer durable goods, and real house prices – fell in 4QFY22. Strong growth in all four quarters suggests that urban consumption grew by 10.7% YoY in FY22, its first double-digit growth in 11 years, following a contraction of 2.4% in FY21.

* As mentioned in our previous report, the slowest growth in the rural sector in the last six-years and 11-year high growth in urban consumption must be analyzed in line with the base effect. A comparison of the actual growth in rural and urban consumption in FY21 and FY22 vis-à-vis the counterfactual trend rate (assuming similar growth in FY17-19) reveals that both are lower than the no-COVID trend growth, which confirms lower real consumption growth in India. While rural consumption in FY22 was 3% lower than the level suggested by no-COVID scenario, urban consumption is 12% lower than counterfactual levels.

* An analysis of the selected available data for Apr’22 suggests that both rural and urban consumption has grown better during the month. This is in line with our recently released report on India’s economic activity index (EAI), which suggests 8-9% YoY growth in Apr’22. Further, demand for work under MGNREGA in May’22 was surprisingly higher than a year ago and much higher than the pre-COVID trend. This reflects continued stress in India’s labor market.

* Although the rural sector massively underperformed the urban sector in FY22, the former has outperformed the latter during the past two years, once we adjust for the base effect. While overall consumption growth is weaker than the preCOVID trend rate, the shortfall in the rural consumption is much lower compared to the urban sector. As the monsoon is predicted to be normal for the second successive year in FY23 (with a good surplus in the preceding two years) and that commodity prices have peaked out, which should help reduce input cost for farmers, rural consumption is expected to outperform urban consumption this fiscal.

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