India's private consumption rebound points to pick-up in rural demand

Most economist attributed the pick up in private consumption to easing inflation.

Even as India’s GDP growth expectedly slowed to a five-quarter low of 6.7 percent in April-June, a pick up in private consumption revealed visible signs of a rebound in rural demand, economists' noted.

Private final consumption expenditure or PFCE, accelerated to a seven-quarter high of 7.4 percent in Q1 FY25 from 4.0 percent in Q4 FY24.

"We had expected a recovery in private consumption based on a pickup in rural demand manifested through high frequency indicators such as two-wheeler sales but the extent is higher than our expectations at 7.4 percent YoY," says Suman Chowdhury, Executive Director and Chief Economist, Acuité Ratings & Research.

According to Dharmakirti Joshi, Chief Economist, CRISIL, although overall private consumption shows mixed trends in the first quarter, initial signs of pick up in rural consumption are visible.

"We expect private consumption demand to improve this year over an anemic growth of 4 percent in fiscal 2024," Joshi added.

However, ICRA's chief economist Aditi Nayar termed the sharp rise in PFCE "surprising", given the moderation in urban consumer sentiments and the impact of heatwave in parts which affected footfalls in certain retail-focused sectors such as sales of passenger vehicles, hotel occupancy rates, among others.

"Notwithstanding some green shoots, rural demand is expected to have remained uneven in the quarter, amidst the spillovers of the impact of the poor monsoon in the preceding year," Nayar flagged.

Most economists attributed the pick up in private consumption to easing inflation.

India’s headline retail inflation declined to a 59-month low of 3.5 percent in July compared with 5.1 percent in the previous month.

"With inflation easing, we are seeing some recovery in consumption spending, especially in the rural economy. The potential for increased spending in the festive seasons, bolstered by falling inflation, better farm income, and a stable policy outlook, is a reason for optimism," according to Rumki Majumdar, Economist, Deloitte India.

Joshi too said that low-base effect apart, improvement in agricultural growth and lower food inflation will augur well for private consumption, particularly in rural areas.

Agriculture grew 2 percent in Q1 as compared with 0.6 percent in the last quarter of FY24.

A majority of economists see agriculture growing further in the subsequent quarter with government capital expenditure and pent-up rural demand supporting growth prospects going ahead.

The Indian economy is widely expected to grow over 7 percent in FY25 for the fourth consecutive year in a row.

Moody's Ratings, on August 29, raised India's growth estimate upward to 7.2 percent for 2024 compared with 6.8 percent earlier.