Rural India is a major part of India's domestic consumption story not just because it has more than 60% of India's population, but because it already has 56% of India's income, 64% of expenditure and 33% of India's savings. The rural share of popular consumer goods and durables ranges from 30% to 60% and sales to rural India are steadily growing. After rural consumption came to the rescue in 2008-09, there is a worrying groundswell of optimism that rural consumers will come to the rescue of Indian economy once again, which is in the midst of a sharp slowdown. However, this optimism may be misplaced.
As the country stares at one of the worst droughts in decades, Indians in rural areas are putting off spending due to concerns about the coming harvest. Already, traders of expensive products like home appliances and two-wheelers are facing the heat of a slowdown. Even dealers of big companies are facing slowdown.
According to a dealer of Hero MotoCorp, sales growth in rural areas is stagnant. Buying sentiment has weakened and inquiries from our customers are not that encouraging. The rains, which act as strong check on inflation, are vital for not only the agriculture sector, but also the broader economy. A patchy monsoon could crimp food output and hit farm income.
Concerns over inflation, which is in double digits, are adding to worries among consumers about their purchasing power. India's headline inflation stood at 7.25% in June, well above the Reserve Bank of India-set threshold level of 5%. Overall food inflation rose to 10.81% in June, from 10.74% in May. Higher prices, coupled with this year's poor monsoon (over 20% below normal) is playing villain in the country's rural consumption story.
The rural India consumption story has been driving a major part of the economy in the past few years. The austerity stories of farmers, agricultural workers, small traders and other low income people all point to a slide in consumption. If the macro economic situation as well as the monsoon doesn't improve in the coming days, it could impact the overall economy.