The Economy Observer : Rural spending worsens in 1QFY26; grows at a three-quarter low by Motilal Oswal Financial Services Ltd
Rural spending worsens in 1QFY26; grows at a three-quarter low
…while urban spending improves
* An analysis of 12 proxy indicators suggests that the rural sector’s spending grew at a three-quarter low in 1QFY26. Rural spending increased 4.2% YoY in 1QFY26, following a growth of 6.5% YoY in 4QFY25 and a decline of 0.3% in 1QFY25. The deceleration in rural spending growth in 1QFY26 was led by a contraction in two-wheeler sales, real fiscal spending, fertilizer sales, and terms of trade. At the same time, tractor sales growth decelerated to 8.7% in 1QFY26 from 20.7% in 4QFY25. Real agriculture GVA decelerated to a four-quarter low of 3.7% in 1QFY26 from 5.4% in 4QFY25. On the other hand, real agri (the highest growth in 31 quarters) and non-agri wages (the highest in 26 quarters) have shown significant improvements. A detailed analysis of key indicators used suggests that four out of the 12 proxy indicators used for assessing rural spending trends grew at a slower pace in 1QFY26, compared to 1QFY25 as well as 4QFY25. The other three indicators grew at a slower pace compared to 4QFY25, but at a higher pace compared to 1QFY25.
* Urban consumption—estimated by compiling nine proxy indicators—grew at a five-quarter high pace of 6.2% YoY in 1QFY26 (vs. 6.1% each in 4QFY25/1QFY25). Acceleration in urban spending was mainly led by an increase in real S&W of BSE500 companies, real house prices, and real non-farm consumer imports. Urban consumption growth decelerated to a six-quarter low of 5.2% in 2QFY25. A simple average of the nine indicators used to analyze urban spending trends suggests that urban spending grew at a four-year low pace of 5.9% in FY25, compared to 8.5%/8.6% growth in FY24/FY23. A detailed analysis of the nine indicators used in urban consumption confirms that six out of nine indicators witnessed an acceleration in growth in 1QFY26 vs. 4QFY25. Out of these six, four indicators—non-farm GVA, non-food inflation, real house prices, and real nonfarm consumer imports—witnessed an acceleration in growth vis-à-vis 1QFY25 as well. On the other hand, IIP consumer durable goods, domestic PV sales, and real personal credit decelerated in 1QFY26 vis-à-vis 4QFY25 and 1QFY25.
* Private Final Consumption Expenditure (PFCE) grew 7.1% in 1QFY26, highlighting resilient demand at the aggregate level; however, the divergence between rural and urban consumption persists. While rising agricultural and non-agricultural wages have lifted rural incomes, spending patterns suggest a lag in translating this into higher consumption. This disconnect can be attributed to inflationary pressures on essentials that have eroded real purchasing power, a shift in household priorities toward healthcare, education, and debt repayment, and uneven wage gains across regions. Additionally, employment volatility in agriculture and informal non-farm sectors has kept rural households cautious, while a high base of post-pandemic demand also weighs on the current growth trend. Together, these factors explain why rural consumption remains subdued despite improving wages, underscoring the importance of a rural revival for broad-based and sustainable consumption growth.
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