India is rolling in cash: What it tells about the economy

Economic Times

2 days ago

India is awash with cash -- both the lending mechanism and the real economy. Pointing at a liquidity tide, banking system funds in liquid demand deposits, such as current and savings accounts, more than doubled to Rs 3.79 lakh crore at the end of the June quarter. Not just the banks, people too are rolling in cash. Currency with the public surged to Rs 91,000 crore from Rs 31,000 crore, the latest Reserve Bank of India (RBI) data shows.This rise reflects the impact of policy measures such as liquidity easing by the central bank, a pickup in rural activity that is largely cash-driven, and possibly higher disposable incomes due to tax sops.
But the cash splash is more about rising action in the rural economy. "The rise in currency leakage was seen since Q4FY'25 onward, which coincided with a rise in rural consumption," said Gaura Sengupta, chief economist, IDFC First Bank, as quoted in an ET report. "The pickup in deposits reflects substantial liquidity infusion by the Reserve Bank via Open Market Operations-OMO purchases. Banking system liquidity has turned positive from April 2025 onwards."
"The significant increase in currency in circulation points to a strong recovery in rural economic activity" Dilip Modi, founder and CEO, Spice Money, was quoted as saying in the ET report. "This growth is fueled by multiple factors, including improved agricultural output, higher wages from employment schemes like MGNREGA, and government subsidies being delivered directly to Jan Dhan accounts." Additionally, the easing of inflation in essential goods has enhanced rural purchasing power, leading to greater cash flow and consumption. While cash is still widely used in rural India, digital payments like UPI are becoming more popular, Modi said.
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.
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 last month in a note. "High frequency data indicates rural demand is faring better even as urban demand is patchy," A. Prasanna, head of research at ICICI Securities Primary Dealership, had told Reuters. "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 well as easing inflation, as per economists. 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 last month. "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." The RBI sees economic growth at 6.5% this fiscal year.
India's unemployment rate remained steady at 5.6% in June, unchanged from May, but an improvement in rural areas offset a rise in urban joblessness, official data shows. Rural unemployment declined to 4.9% in June from 5.1% in May, while urban unemployment increased to 7.1% from 6.9%."The decrease in the unemployment rate for rural areas for both males and females can be attributed to an increase in the share of own-account workers (self-employed) in June compared to May, along with a reduction in the number of unemployed persons," the statistics ministry said in a statement. "The rise in own-account work during this period may be driven by seasonal factors, prompting individuals to engage in small-scale or self-initiated activities (e.g., petty trade, repair work, or services)," it added.Tractor sales, a barometer of economic activity in India's rural markets, are expected to touch record levels in this financial year on the back of a favourable southwest monsoon, higher minimum support prices for key crops and increased government spending on development programmes in the country's villages, company executives told ET in May. The industry estimates FY26 sales will cross the 1 million mark for the first time, beating the record 945,311 units sold in FY23. That's against 867,597 units sold in FY24 and 939,713 units in FY25. Among other factors, healthy reservoir levels and a strong rabi crop are expected to bolster sentiment among buyers, spurring sales in rural areas. The decline in interest rates is also expected to push salesRural India is undergoing a quiet revolution. Once heavily dependent on agriculture, the rural economy is now being rapidly reshaped by the services sector. A report by HDFC Securities reveals that 112 rural districts, home to 291 million people, have surpassed the $2,000 per capita income threshold—a milestone that signals growing prosperity and consumer potential.The report, titled "Rural India – Shifting Economic Foundations," offers a bottom-up analysis of 250 districts across eight major states, accounting for 72% of India's rural GDP (Rs 109 lakh crore). It shows that rural regions are not just catching up—they're driving India's consumption engine, especially as urban demand remains muted under the weight of inflation. Among the standout districts are Dakshina Kannada in Karnataka and Namakkal in Tamil Nadu, where per capita incomes have exceeded $5,000, buoyed by strong contributions from manufacturing, livestock, aquaculture, and real estate.Services sector is the key growth drivers, the fastest-growing, clocking an 8.8% CAGR, led by trade & hotels (9.8%), financial services (9.1%) and real estate (8.3%). Industry comes second with a stable 7.1% CAGR, driven by mining (13.5%) and construction (8.7%). Agriculture trails with 3.9% CAGR, hampered by slow crop growth (2.8%).The report underscores stark inequalities across districts—some thriving above $5,000 per capita income while many in Uttar Pradesh remain below $1,000. Still, this growing pool of higher-income rural consumers is poised to fuel demand for discretionary goods and services, offering a compelling opportunity for businesses and policymakers alike.Even as urban slowdown persisted, rural demand for India's fast moving consumer goods (FMCG) declined in the January-March '25 quarter year-on-year, though it was still four times faster than in cities, research firm NielsenIQ said in its quarter update in May. Smaller manufacturers drove growth of the sector for the second consecutive quarter, while rural markets outpaced urban growth for the fifth consecutive quarter.Rural markets, which contribute over a third of overall consumer goods sales in India, grew 8.4% year-on-year by volume compared to 2.6% growth in urban India.Rural sector powered small manufacturers with annual turnover below Rs 100 crore which grew 11.9% by volumes, while companies with a turnover between Rs 100 crore to Rs 1,000 crore reported volume growth of 6.4% in the quarter. 'Small manufacturers grew twice as fast than the overall FMCG market, gaining ground due to a low base, rural growth and changing market dynamics, though their long-term momentum remains to be seen,' Roosevelt D'Souza, head of customer success – FMCG, NielsenIQ India, said.Various trends show that the rural could become the new urban for India's businesses, especially FMCG, as villages come up on the consumption ladder, even as rural-contiguous areas, the small towns, are also witnessing resurgence in India's business and economy.