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Rural consumption still strong in 1QFY22…

…and low base supported urban consumption

* The second COVID-19 wave was very severe in India. Although its economic impact was limited vis-à-vis the first wave, it is believed to have hurt the rural segment more adversely than the urban population of the society. In this note, we compare the adverse impact of the (national) lockdown during the first wave and that of the (localized) lockdowns in the second wave on rural and urban consumption. The penetration of the second COVID wave in the hinterland implies that more than three quarters of the new infections over May–Jul’21 have been in the rural districts of the country. However, this did not have a majorly adverse economic impact on rural society.

* Using various proxy indicators to analyze consumption trends, our analysis suggests rural consumption (using nine economic indicators) grew 6.6% YoY in 1QFY22 vis-à-vis growth of 16.4% YoY seen in 1QFY21. In contrast, urban consumption (using seven indicators) surged 27% YoY during the last quarter, primarily on a low base of -18% YoY in 1QFY21. In other words, despite the second COVID wave, rural consumption continued to grow in 1QFY22.

* Moreover, our in-house Economic Activity Index (EAI) indicates that while the Farm and Non-Farm sector GVA remained strong, the latter outperformed the former in 1QFY22 on account of a low base. This further indicates that real private consumption expenditure (PCE) is likely to come in stronger in 1QFY22. Data indicates that the turnaround in real PCE in 4QFY21 was also led by relatively better performances from both the rural and urban sectors in 4QFY21.

* On the contrary, natural factors such as southwest monsoon rainfall as a percentage of normal rainfall and kharif sowing as a percentage of normal sowing are performing worse this year vis-à-vis the previous year. Besides this, government support in terms of rural spending declined massively in 1QFY22, and farmers’ terms of trade (the difference between farmers’ input cost and output price) are unfavorable this time around. Therefore, natural factors are discouraging for the Farm sector within the rural sector.

* In conclusion: (1) It is clear that the rural sector did weaken a bit during the second wave, but the situation was not as bad as was feared. (2) The very high urban consumption in 1QFY22 does not necessarily imply a rebound in consumption demand as much of it was due to a very low base. (3) A weak Farm sector (due to frail government aid and worse natural factors) within the rural sector does not bode well for the rural economy. (4) Although the second wave has subsided, the fear of a potential third wave could derail economic growth once again. (5) Although we believe PCE may have seen a sharp rebound in 1QFY22, primarily on a low base, sustained growth in consumption in subsequent quarters would eventually matter for economic recovery as a whole.

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