By Ira Dugal
This was originally published in the India File newsletter, which is issued every Tuesday. Sign up here to get latest news from India and how it matters to the world.
Happy 2025!
The Indian consumer is changing. Spending is rising faster in the hinterlands than in cities and more of that spending is going to processed foods and non-food goods and services, government data shows. What are the policy implications? That’s the focus of our analysis this week.
In the markets, foreign exchange traders sense that the central bank is loosening its stranglehold on the rupee, after the currency dropped 1.25% against the dollar in December. Scroll down for more.
This week in asia
** Chinese exchanges ask big fund managers to restrict stock selling
** South Korea’s presidential security chief defies Yoon arrest bid as deadline looms
** Nippon Steel could face growth challenges after U.S. Steel purchase blocked
** Australia’s southeast braces for extreme fire danger amid intense heatwave
The year of the rural consumer
Rural India, home to nearly two-thirds of the country’s 1.4 billion people, is beginning to flex some economic muscle with faster consumer spending growth than in the urban areas, which for years led India’s rapid growth but are now losing momentum.
For a second year in a row the government’s annual Household Consumption Expenditure Survey, revived last year after more than a decade-long hiatus, showed a narrowing gap between rural and urban consumption which, while still a hefty 70%, has shrunk by 14 percentage points in 12 years.
That could encourage a shift in policy priorities towards lower-income and middle-class urban dwellers, whose penny pinching has become a source of worry for the world’s fastest growing major economy. The government is already considering tax cuts aimed at spurring consumption across urban households as it compiles the annual budget to be announced on Feb. 1.
The latest data will also enable the government to update the consumption basket for its consumer price index, which could mean less volatile inflation numbers in line with changing rural spending habits: less on food staples, whose prices often swing sharply, and more on processed foods, school fees and travel.
The survey, released late last month and covering August 2023-July 2024, shows 9.2% growth in rural spending per capita, to 4,122 Indian rupees ($48.10) per month, compared with an 8.3% rise in urban areas to 6,996 rupees.
That highlights the steadiness of rural spending, said Anitha Rangan, economist at brokerage Equirus Securities, in a report. While the rural figure for 2023-24 was in line with its 10-year compound annual growth rate, urban consumption growth fell slightly short of its rate of 8.5% for the decade.
Narrowing urban-rural divide
The narrowing gap between rural and urban economic conditions was also apparent in another recent government report showing an 11% drop in domestic migration – which is driven mainly by people moving from rural to urban areas – during the period from 2011 to 2023.
That suggests a decline in economic incentives for rural workers to migrate to urban areas, said Dhananjay Sinha, head of research at Systematix Group.
Sinha, in a separate report, said the rural-urban spending gap looked likely to continue narrowing, at least for the near term, due in part to income support schemes rolled out by several Indian states over the past year to bolster their popularity ahead of provincial elections. Urban consumption, in contrast, may remain weak due to slowing salary increases for white collar jobs, he said.
Also boosting the rural economy has been a build-out of rural infrastructure, as well as the national government’s shift to direct cash payouts to rural households from its traditional focus on subsidised purchases of gas cylinders, fertiliser and other basic goods, Soumya Kanti Ghosh, chief economist at India’s largest lender State Bank of India, said in a report.
Another key finding of the government survey was a drop in the share of food in household spending to less than half in both rural and urban areas. Cereals especially are taking a declining share while spending on vegetables, dairy products, fresh fruit and meat – as well as processed foods – has grown.
SBI’s Ghosh estimates that, based on the survey, the weight of major food items in the consumer price index would be revised to 43.4% in 2023-24 from 47.8%, the weighting in place since 2011-12. This would have meant a 50 basis-point lower inflation print in November when the rate came in at 5.5%, he said.
What are the implications of the narrowing rural-urban consumption divide? Write to me with your views at ira.dugal@thomsonreuters.com.
Quote of the week
“India-U.S economic ties benefit a lot from the technical expertise provided by skilled professionals, with both sides leveraging their strengths and competitive value.”
India foreign ministry spokesperson Randhir Jaiswal weighed in on the H-1B visa debate in the U.S. during a press conference last week in New Delhi.
President-elect Donald Trump and billionaire tech CEO Elon Musk backed the use of the H-1B visas, used commonly by Indian technology professionals, after far-right activists criticised the programme.
Market matters
The rupee’s decline gathered steam in the October-December quarter, with a 1.25% drop in December alone.
The central bank, which kept the rupee in a narrow band and curbed volatility for most of 2024, is loosening its stranglehold and allowing the currency to depreciate in line with its regional peers, traders say.
“It is possible that a bit more flexibility is allowed in currency fluctuations, going forward, as compared to the relatively tighter leash seen over the last one year and more,” Nomura said in a note in mid-December, soon after new central bank governor Sanjay Malhotra’s appointment was announced.
($1 = 85.6880 Indian rupees)
(By Ira Dugal; Editing by Edmund Klamann)
