Rural consumption to drive India's GDP growth this fiscal year, economists say
MUMBAI, June 2 (Reuters) - 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.
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.
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Still, there is some ambiguity around key elements of the deal, including rare earth export licenses and details of the tariffs. JPMorgan's U.S. economists calculate that, all told, the total effective U.S. tariff rate will be around 14%. When levied on $3.1 trillion of imported goods, that equates to a tax on U.S. businesses and consumers of over $400 billion. It remains to be seen how that is split, but history shows consumers bear most of the burden, they note. "The stagflationary impulse from higher tariffs has lowered our GDP growth outlook for this year (4Q/4Q) from 2.0% at the start of the year to 1.3% currently," they wrote on Thursday. On the other hand, economists at Oxford Economics on Thursday raised their 2025 U.S. GDP forecast to 1.5% from 1.3% and said the likelihood of recession has fallen. You pay your money, you take your choice. Is the Fed still in a "good place"? At the Federal Open Market Committee meeting next week, investors will scrutinize all communications for any sign that the recent softening in U.S. inflation could be enough to nudge policymakers closer to cutting interest rates. Current economic data might be leaning in that direction, but policy out of Washington could well keep Chair Jerome Powell and colleagues in 'wait and see' mode. No one expects the Fed to cut rates next week, but businesses, households and investors should get a better sense of policymakers' future plans from the revised quarterly Staff Economic Projections and Powell's press conference. Powell was very clear in his post-meeting press conference last month that the Fed is prepared to take its time assessing the incoming economic data, particularly the impact of tariffs, before deciding on its next step. He told reporters no less than eight times that policy is in a "good place" and said four times that the Fed is "well positioned" to face the challenges ahead. Will he change his tune next Wednesday? Annual PCE inflation in April was 2.1%, the lowest in four years and virtually at the Fed's 2% target, while CPI inflation in May was also lower than expected. The labor market is softening, economic activity is slowing, and recent red-hot consumer inflation expectations are now starting to come down. In that light, it may be surprising that markets are not fully pricing in a quarter-point rate cut until October. "The upcoming meeting offers an opportunity (for Fed officials) to signal that the recent mix of tamer inflation and softer consumption growth warrant a careful 'recalibration' of rates lower, while remaining very cautious about what comes next," economist Phil Suttle wrote on Wednesday. But there are two well-known barriers that could keep the Fed from quickly re-joining the ranks of rate-cutting central banks: tariffs and the U.S. fiscal outlook. Tariffs have yet to show up in consumer prices, especially in goods, and no one knows how inflationary they will be. They could simply result in a one-off price hit, they could trigger longer-lasting price spikes, or the inflationary impact could end up being limited if companies absorb a lot of the price increases. In other words, everything is on the table. Equity investors appear to be pretty sanguine about it all, hauling the S&P 500 back near its all-time high. But Powell and colleagues may be slower to lower their guard, and for good reason. Although import duties on goods from China will be lower than feared a few months ago and Washington is expected to seal more trade deals in the coming weeks, overall tariffs will still end up being significantly higher than they were at the end of last year, probably the highest since the 1930s. Economists at Goldman Sachs reckon U.S. inflation will rise to near 4% later this year, with tariffs accounting for around half of that. This makes the U.S. an "important exception" among industrialized economies, the OECD said last week. The other major concern is the U.S. public finances. President Trump's 'big beautiful bill' being debated in congress is expected to add $2.4 trillion to the federal debt over the next decade, and many economists expect the budget deficit will hover around 7% of GDP for years. With fiscal policy so loose, Fed officials may be reluctant to signal a readiness to loosen monetary policy, especially if there is no pressing need to do so. FOMC members in December last changed their median forecasts for the central bank's policy rate, hiking it this year and next year by a hefty 50 basis points to 3.9% and 3.4%, respectively. They left projections unchanged in March amid the tariff fog. That implies 50 basis points of rate cuts this year and another 50 bps next year, which is pretty much in line with rates futures markets right now. So perhaps Fed policy is still in a "good place", but with economic expectations changing quickly, it's unclear how long that will be the case. What could move markets tomorrow? Want to receive Trading Day in your inbox every weekday morning? Sign up for my newsletter here. Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, opens new tab, is committed to integrity, independence, and freedom from bias.
