Rural consumption to drive India's GDP growth this fiscal year, economists say

Rural consumption is poised to remain a bright spot in the Indian economy, supporting growth in the ongoing fiscal year, economists said after fourth-quarter GDP growth beat estimates.

India's economic growth rose to a one-year high of 7.4% in the January-to-March quarter, higher than forecast, data showed on Friday. Personal consumption grew 6% during the three months after an 8.1% rise in the previous quarter.

For the fiscal year ending March, inflation-adjusted consumption growth of 7.1% outpaced broader economic expansion of 6.5%, reflecting a rural consumption recovery, Citibank said in a note on Friday.


"High frequency data indicates rural demand is faring better even as urban demand is patchy," said A. Prasanna, head of research at ICICI Securities Primary Dealership.

"Given rural consumption is a bigger part of overall consumption pie compared to urban consumption and was generally hurting from Covid shock in last few years, it is likely consumption growth will stay resilient."

Above-average monsoon rains this year and the resultant rise in farm incomes are likely to boost rural demand as will easing inflation, economists said.

Tractor and two-wheeler sales, the bellwether of demand in rural India, have been rising in recent quarters while sales of fast-moving consumer goods have been robust.

Rural wage growth, adjusted for inflation, is at its highest in four years, data from ICICI Securities Primary Dealership showed, with demand for jobs under a rural jobs scheme has fallen in recent months, as per a recent JP Morgan report.

Over the last two fiscal years, consumption growth in India has risen while investment growth has eased, and the trend may continue, Dhiraj Nim, an economist at ANZ, told Trading India on Monday.

"For consumption, to be honest, rural demand can be a source of hope... I think consumption growth can beat GDP growth, but not by a large gap."

India's central bank sees economic growth at 6.5% this fiscal year.

Growth risks

Even as the rural economy hums along, global uncertainties could hold back wider momentum at a time when trade wars and geopolitical tensions threaten global growth and financial flows.

"While India is a domestically-oriented economy, it will not be entirely insulated from a global growth slowdown," said Aastha Gudwani, chief India economist at Barclays.

"Given the Indian economy's domestic orientation, where private consumption accounts for more than 55% of GDP, domestic demand is indeed the key driver," she said.

India's corporate capex is likely to remain tentative amid heightened uncertainty created by U.S. tariffs and the uncertainty on urban consumption outlook, Gaura Sen Gupta, chief economist at IDFC First Bank, said.

Good monsoon rains, along with a pickup in government spending and rate cuts by the central bank could offset some of this hit to growth, economists said.