The latest Economic Survey, released by the Ministry of Finance ahead of the announcement of Union Budget 2023, posits that India is staging a full recovery following the pandemic. The data suggests that India is positioning itself to ascend to its pre-pandemic growth path during 2023-24.
This is essentially underpinned by the domestic catalyst to growth observed in the rebound of private consumption supported by a strong release of the “pent-up” demand. The near-universal vaccination coverage has served as a healthy stimulant to lift consumer sentiments, prolong the recovery in consumption and contact-intensive services such as trade, hotels, and transport, and thereby, strengthen the growth of the Indian economy.
However, what makes this economic growth disputable is the nature of this recovery. A closer look at the data reveals India’s growth in the post-COVID phase to be more skewed and unequal, even as the aggregate figures indicate positive development. This uneven and lopsided recovery is fueled by a rural-urban divergence, since it is India’s urban consumption that is driving the overall recovery from the pandemic.
There is a sharp difference in the economic revival course between the two segments. With the reopening of the economy since the latter half of 2021-22, the urban consumption index climbed above the pre-COVID levels with a 9.6 percent jump in February 2022. By contrast, rural consumption continues to taper, with the rural consumption index remaining nearly 6 percent below the pre-COVID levels. India’s rural economy notably lost steam after the second wave, thereby signifying a sharp deviation in the breadth of recovery.
In order to analyze the economy’s post-pandemic health across the rural and urban sections of the population, we track the high-frequency demand indicators of automobile sales, vehicle loans, household credit and Fast Moving Consumer Goods (FMCG) consumption. Since automobile sales provide a signal of consumer confidence in the economy, the movements in the overall domestic sales of two-wheelers and passenger cars in India can serve as a stand-in for the economic health of rural and urban areas. Two-wheelers are ubiquitous in rural India, with rural consumption constituting more than two-thirds of overall domestic sales of two-wheelers. Two-wheeler sales thus provide an assessment of the rural economy’s demand, whereas trends in passenger car sales are considered a proxy for the purchasing power of the urban population in India.
We use data from the Society of Indian Automobile Manufacturers (SIAM) to evaluate the annual volume shares for each category in total domestic sales so as to examine if the growth is volume-led, rather than price-led. The trends from domestic sales indicate that the volume shares of two-wheelers and passenger cars exhibited a sharp reversal and turnaround during the post-pandemic period, even though the two were moving broadly in tandem before COVID-19 struck.
Although the two-wheeler segment witnessed a significant 24 percent growth during November 2022 on account of the short-term retail pickup owing to the festive sales and wedding season, it was still lower by 0.9 percent when compared to November 2019, before the pandemic hit. Also, the assessment from past months underlines that despite the adrenaline rush around festive season, two-wheeler sales went into a lull after almost clawing back to its pre-pandemic levels, which consequently dragged total auto sales into negative growth rates during December 2022 to February 2023. Rural markets are yet to pick up fully compared to pre-pandemic levels, since the high cost of ownership, lower disposable incomes, and poor rural sentiments have kept customers at bay.
By contrast, passenger cars exhibited remarkable growth and record sales in the post-pandemic period, which is essentially driven by the robust demand for new models, sedans, and utility vehicles. However, entry-level cars have witnessed a significant cutback in purchases despite discounts, potentially signaling a tapering demand from customers at the bottom of the pyramid.
This is also corroborated by the diverging movements in vehicle loans to the rural and urban population groups, which suggest that subdued rural demand signifies pressures on discretionary household spending, whereas urban consumption is lifted by pent-up demand. Urban spending has expanded from essential commodities and services toward discretionary items, thereby attesting to a buoyant momentum in economic recovery.
This disparity is also reflected in the data on all personal loans sanctioned to rural and urban population groups. Increased growth in loans for consumer durables, credit cards, and other personal loans signified a surge in spending for urban households with the receding pandemic. By contrast, the slow expansion in such loans for the rural population points to a continuing slump in non-compulsory spending.
Faltering consumption in rural markets is also reinforced by the data of FMCG companies, as Indian villages contribute more than 35 percent to the overall annual FMCG sales. Rural consumption recorded a volume decline of 3.6 percent in September 2022 for the fifth straight quarter, as compared to the decline of 2.4 percent in June 2022. Although the FMCG sector was hit hard by higher inflation levels, leading to successive price increases, urban demand still propelled a revival in consumption growth during 2022-23. However, rural consumption continues to cope with persistent deceleration that is further exacerbated by product price hikes, especially in discretionary categories.
These trends, therefore, underline that while the urban sector maintained steady momentum in the face of inflationary pressures, rural households remained cautious with their discretionary spending. This implies that rural households are crippled by income losses resulting from the COVID-19 crisis.
As rural demand has consistently lagged behind urban demand in the post-pandemic years, this trend widens the gap in recovery paths for the two segments of the population. As rural consumption slows down, it suppresses the multiplier effects on the economy since rural areas in India have far greater expenditure elasticity for all foods, clothing, cosmetics, transport, communications and health, as compared to urban areas. This consequently narrows the growth of consumer markets, drags down overall consumption growth, and leads to reduced investments, thereby dampening the job creation and the scale of growth prospects.
This not only poses formidable downside risks to the prospects of economic recovery, but also renders this growth path unsustainable in the long run period. Economic recovery that benefits only a few will exhaust itself in a short time.