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Bright spot: Rural consumption to pick up on wage rise and lower inflation, say economists

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Bright spot: Rural consumption to pick up on wage rise and lower inflation, say economists

Synopsis
Economists said high-frequency data also points at a revival of rural consumption. However, experts cautioned that monsoon could play a spoilsport.

An increase in real rural wages backed by moderation in rural inflation and a pick-up in non-agricultural incomes may bridge the divergent recovery in consumption, witnessed with the easing of Covid-19, in this financial year, according to economists.

Rural inflation has declined sharply in the past few months compared to urban inflation. In May, rural inflation, at 4.17%, was lower than 4.27% in urban areas.

According to a note by India Ratings and Research lower-income households may witness an increase in real wages.

“This may help revive broad-based consumption demand, which is highly skewed in favour of goods and services consumed by the households belonging to the upper-income bracket,” said Paras Jasrai, senior economic analyst at Ind-Ra, indicating that the K-shaped recovery may start getting corrected.

According to experts, a percentage rise in rural wages is expected to increase consumption by at least 20-30 basis points.

A basis point is a hundredth of a percentage point.

Economists said high-frequency data also points at a revival of rural consumption. “Rural demand has taken time to recover, with FMCG (fast-moving consumer goods) sales growth turning positive only in Q4FY23. The improvement in rural demand is also indicated by other indicators such as two-wheeler sales, diesel consumption and continued growth in railway passenger traffic,” said Gaura Sengupta, India Economist, IDFC First Bank.

Sengupta said the improvement in rural demand has been supported by an increase in rural wage growth since the second half of 2022-23, averaging nearly 6% compared to 4.8% in the first half of the previous fiscal.

While agricultural income rose 1% in 2022-23 after two years of contraction, non-agricultural income in rural areas contracted 1.3% during the period.

“The real rural wage in agriculture is expected to chart a 1-2% growth in FY24,” said Jasrai.

The real wage growth in the flagship rural jobs schemes under Mahatma Gandhi National Rural Employment Guarantee Act in May this year was 8%.

“In FY24, there would be a better improvement in non-agricultural wages,” said Jasrai.

However, experts cautioned that monsoon could play a spoilsport. “Monsoon performance will be key to ensure durability of rural demand recovery with distribution remaining uneven,” Sengupta said.

 

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