Mint Explainer: How sustainable is India's rural consumption boom?

Fuelling this revival are higher earnings, supported by recent hikes in minimum wages and minimum support prices (MSPs), along with a robust monsoon that lifted farmers' spirits. Welfare programmes like state-led cash transfers to women, along with a rise in non-farm activities, also played their part.

The upswing, however, isn’t meteoric. Economists like Yuvika Singhal of QuantEco Research caution that rural demand is on a “trajectory of gradual recovery." Inflation looms as a risk, potentially stifling further gains by squeezing household budgets.

Also read: Private consumption returns, boosted by rural demand

Mint delves into the factors behind rural demand’s rebound and the challenges it faces going forward.

What was the role of government cash transfers in reviving rural demand?

Cash transfers supplement household incomes and increase their spending power. Since most beneficiaries of cash transfers are poor households, the money is more likely to be spent rather than saved. Madras School of Economics director NR Bhanumurthy reckons transfers from state governments boosted consumption as the marginal propensity to consume is higher in rural areas.

Over the past year and a half, several state governments have launched cash transfer schemes for adult women, either in the lead-up to state assembly elections or shortly afterward, providing beneficiaries with monthly payments ranging from ₹1,000 to ₹2,000. These include Delhi, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra and Tamil Nadu.

Also, the centre is running the PM Kisan scheme under which ₹6,000 is transferred annually to farmer households in three instalments. Some households receive other cash transfers such as pensions for senior citizens.

Cash transfers and free bus rides for women in some states increased their mobility and empowered them to spend a part of that cash on discretionary goods and services, boosting demand for certain FMCG products.

What about women’s participation in economic activities?

The periodic labour force survey (PLFS) data show a jump in women’s participation in economic activities in rural India since the Covid-19 pandemic. The female worker population ratio in rural India rose to 46.5% (on a usual status basis) in 2023-24 from about 35% when the pandemic struck, with majority self-employed or engaged in family enterprise.

The easing of labour law provisions by some states to allow women to work night shifts also contributed to raising their participation in economic activities across rural and urban areas.

Central government schemes such as the Jal Jeevan Mission for increasing households’ access to tap water and the Ujjwala Yojana which offers subsidised liquified petroleum gas (LPG) liberated women from doing some chores, allowing them time to participate in economic and social activities.

Also read: Rural schemes empower 37 mn women till June, generate 3 billion person-days in FY24, says economic survey

When more women work, their household incomes and purchasing power rise. This has possibly helped boost consumer demand for staples and discretionary from rural areas.

Did the monsoon make a difference?

Unlike in 2022 and 2023, the 2024 monsoon season concluded on a strong note, with favourable spatial distribution.

In 2022, states in the Gangetic plains such as Uttar Pradesh, Bihar, and Jharkhand faced drought-like conditions though overall performance was above normal. In 2023, summer monsoon rains were below normal and uneven in spatial distribution, affected by the El Nino conditions. That impacted agricultural incomes in states reliant on monsoon rains.

Good performance of monsoons this year proved to be a big turning point for the revival of rural demand, Singhal explained. It boosted consumer sentiments which helped further improve demand from rural India. Good rains led to an expansion of sown area for various crops and increased output. It led to greater demand for labour for agricultural and related activities, all of which pay higher wages than those offered for Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) jobs. The rise in farm and non-farm activities has resulted in a month-on-month decline in the demand for MGNREGS work this year.

Does inflation affect rural consumption?

It does. Historically, inflation in rural areas tends to be higher than in urban areas, and that is because of the higher share of food in the consumption basket of rural households. While farm households grow a portion of their food or keep a part of their farm output for their self consumption, they have to pay for all other goods and services.

Addressing supply-side issues such as logistics could soften the impact of inflation for rural consumers, says Bhanumurthy.

Rising food prices – particularly of staples such as potatoes and onion – force limited or uneven income households to allocate more money for food and cut back on discretionary spending.

Rising costs of services like mobile phones and internet, driven by tariff hikes, are straining household budgets and could impact discretionary spending, warns Singhal.

Is bank and NBFC credit helping rural demand recovery?

Rural households have traditionally borrowed from non-formal channels.

However, now many are accessing institutional credit which comes with lower interest rates – and this could be attributed partly to the push factor from the banks as their focus was on retail lending in the past couple of years.

However, Bhanumurthy and Singhal are not unduly worried about the rise in the flow of credit from banks and non-bank financial corporations to rural households.

Also read: Loans to farmers are at a record high. But can fintech firms keep risk in check?

Banks and NBFCs have likely exercised caution in lending to rural households due to regulatory directives on curbing unrestrained retail lending. Despite the Reserve Bank of India's tightened norms on personal and unsecured loans over the past year, rural demand for goods like two-wheelers has remained resilient.