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Decoding consumption: Rural spending contracted yet again in 4QFY24

implying FY24 was its worst year in the past quarter of a century

* An analysis of 12 proxy indicators suggests that rural consumption spending declined for the third successive quarter in 4QFY24, marking the worst in 33 quarters. Rural spending contracted 3.1% YoY in 4QFY24 following a drop of 2.0% YoY in 3QFY24 and a growth of 2.6% YoY in 4QFY23. This was mainly due to a second consecutive contraction in fiscal real rural spending, continuous deterioration in reservoir levels, farm exports, and tractor sales, and the worst contraction in fertilizer sales since 1QFY14 along with muted rural wage growth. They outweighed improvements in two-wheeler sales, decent growth in farm terms of trade, and farm real credit. Consequently, rural spending contracted 1.3% YoY in FY24 – the worst decline since FY99 and its first contraction in eight years – compared to a growth of 4.8% YoY in FY23.

* Conversely, urban consumption – estimated by compiling nine proxy indicators – grew at a six-quarter fastest pace of 9.6% YoY in 4QFY24 vs. 9.0%/3.8% YoY in 3QFY24/4QFY23. A simple average of the nine indicators suggests that urban spending grew 7.9% YoY in FY24, slightly lower than 8.9%/10.0% YoY growth in FY23/FY22. It implies that urban spending grew at an average of ~9% during the past three years, following an average decline of 2% in the previous two years. A detailed analysis of the nine indicators used in urban consumption confirms that five indicators – domestic PV sales, petrol consumption, real personal credit, house prices, and IIP for consumer durable goods – witnessed an acceleration in growth, while salary & wages of BSE500 companies and real non-farm consumer imports decelerated in 4QFY24 (vs. 3QFY24).

* During the past three years (FY22-FY24), the growth in urban consumption has outpaced rural consumption in each quarter, which is in contrast to FY20-FY21, when the latter grew faster than the former. Within the rural sector, it is clear that agricultural activities have weakened more. Not surprisingly, then, real private consumption expenditure growth is likely to decelerate to 3-4% in FY24, the slowest in two decades (barring FY21).

* Will the rural sector see a sharp turnaround in FY25? Well, the FMCG companies are certainly more hopeful, and the predictions of a normal monsoon bode well for rural India’s recovery. However, MGNREGA data suggested that employment demand remained at elevated levels in Apr’24 (though lower than Apr’23), and government spending is budgeted to contract for the second consecutive year in FY25. All-in-all, while the hopes may be running high and the rural economy – based on our indicators – may not decline again this year, it may find it challenging to grow more than 5% in FY25, notwithstanding the favorable base.

Rural consumption declined for the third consecutive quarter in 4QFY24: An analysis of 12 proxy indicators suggests that the rural sector’s1 spending declined for the third successive quarter in 4QFY24, marking the worst in 33 quarters. Rural spending contracted 3.1% YoY in 4QFY24, following a decline of 2% YoY in 3QFY24 and a growth of 2.6% in 4QFY23 (Exhibit 1). This was mainly led by a second successive contraction in fiscal real rural spending, continuous deterioration in reservoir levels, farm exports, and tractor sales, and the worst contraction in fertilizer sales since 1QFY14 along with muted rural wage growth. They outweighed improvements in two-wheeler sales, decent growth in farm terms of trade, and farm real credit. Consequently, rural spending contracted 1.3% YoY in FY24 – the worst decline since FY99 and its first contraction in eight years – compared to a growth of 4.8% YoY in FY23 (Exhibit 2).

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