The deadly second wave of the pandemic did not cause a major dent in rural demand as was feared when the number of infections surged in India’s villages.
Data analysed by Motilal Oswal Financial Services showed rural consumption moderated in the June quarter when the second wave peaked but was still strong compared to pre-pandemic levels. Urban consumption surged during the period, benefiting from a low base.
According to nine economic indicators, rural consumption grew 6.6% from a year ago in the June quarter, compared with a 16.4% growth in the same period last year. That compared with an average growth of 3.7% in the June quarters of seven fiscal years prior to the pandemic.
The indicators used for the analysis were real agricultural wages, real non-agricultural wages, farmer terms of trade, agriculture exports, fertilizer sales, agriculture credit, Index of Industrial Production (IIP) food products, reservoir levels and rural fiscal spending.
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“A simple average of 13 indicators used to estimate rural consumption on a yearly basis up to FY21 shows growth was weak at an average of 3.1% year-on-year (y-o-y) in the initial five years of the century, followed by an average 9.9% y-o-y growth over the next 10 years," said Nikhil Gupta and Yaswi Agarwal, analysts at Motilal Oswal Financial Services. Rural consumption weakened in FY15–17 to average growth of 2.2% before recovering to a 4.9% growth during FY18–20.
However, the pandemic, which started in fiscal 2021, slowed rural consumption growth to just 2% during the year, data showed. Gupta and Agarwal said this was caused by indicators like negligible railway passenger traffic, a drop in IIP-food products, a second consecutive contraction in two-wheeler sales, lower gross value added from the agriculture sector and weak fertilizer sales.
While rural consumption is continuing to grow despite the covid blow, natural factors such as the progress of the southwest monsoon and kharif sowing are weak compared to last year. The government’s rural spending has also declined in the fiscal first quarter, and farmers’ terms of trade are exceedingly unfavourable this time around, Gupta and Agarwal said in a note.
“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. Although the second wave has subsided, the fear of a potential third wave could derail economic growth once again," the analysts said.
Meanwhile, urban consumption, based on analyses of seven economic indicators, grew 27% from a year ago in the fiscal first quarter, primarily due to the low base of the year-earlier quarter when it fell 18%. Seven economic indicators used for urban consumption analysis are employee cost of BSE500 companies, Consumer Price Index (CPI) non-food inflation, personal credit, IIP consumer durable goods, petrol consumption and real house prices and non-farm consumer imports.
Data indicators used to estimate urban consumption on a yearly basis showed it was very strong in the first decade of this century, with an average growth of 14.7% in FY2000-09. Growth moderated to an average of 9.5% in FY10-19.
In FY20, urban consumption contracted 0.3% due to weak performances in all 10 indicators covered in the Motilal Oswal analysis. Indicators such as passenger vehicle sales, IIP consumer durable goods, airline passenger traffic, real personal consumption expenditures grew 2.7% from a year ago in the fourth quarter of fiscal 2021, rebounding from a 13.1% decline in the first nine months of the year.
The recovery was led by a 16.4% growth in rural consumption and an 11.7% rise in urban consumption during the quarter, data showed.
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