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Growth in urban spending hit five-quarter low

* An analysis of 12 proxy indicators suggests that rural spending declined for the third successive quarter in 1QFY25, though the pace of contraction was slower. Rural spending contracted 0.6% YoY in 1QFY25, following a decline of 2.4% YoY in 4QFY24 and a growth of 1.5% in 1QFY24. The contraction in rural spending was mainly led by a third successive contraction in fiscal real rural spending, a continuous deterioration in reservoir levels, the seventh successive contraction in farm exports, and declining fertilizer sales, along with muted rural wage growth. These factors were partly offset by improvements in farm terms of trade and real farm credit, robust growth in two-wheeler sales and an expected growth in rail passenger traffic. Even MGNREGA data suggests some improvements in the rural sector, as employment demand fell in 1QFY25 (though it was much higher in Jun’24), compared with the previous quarters.

* Urban spending – estimated by compiling nine proxy indicators – grew at a five-quarter slowest pace of 6.0% YoY in 1QFY25 vs. 10.0%/6.4% in 4Q/1QFY24. The deceleration in growth was mainly led by nine-quarter slowest growth in PV sales, 14- quarter slowest growth in real salary & wages, and an expected slowdown in non-farm real GVA growth. These factors were partly offset by an expected improvement in consumer durables production, decent growth in personal credit and petrol sales. A detailed analysis of the nine indicators used in urban consumption confirms that five indicators witnessed deceleration in growth in 1QFY25 vs. 1QFY24 as well as 4QFY24, another three variables witnessed deceleration in 1QFY25 vs. 4QFY24 but improved in comparison to 1QFY24, and only one variable witnessed acceleration in growth in 1QFY25 vs. both 1QFY24 and 4QFY24.

* Overall, it is evident that the growth in rural spending, especially in the agricultural sector, remained subdued in 1QFY25, though the pace of contraction moderated. This was the thirteenth consecutive quarter when urban spending growth outpaced rural spending growth; however, the spread between rural and urban sector growth eased to the lowest in three quarters.

* A simple average of the slower contraction in rural spending and the deceleration in urban sector indicates further slowdown in real private final consumption expenditure (PFCE) in 1QFY25. Against this backdrop, we expect real private consumption growth at 3.5-4.0% in 1QFY25, compared to 4.0%/5.5% in 4Q/1QFY24.

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