Industry
Private consumption returns, boosted by rural demand
Summary
- Private final consumption expenditure—or simply put, consumer spending—grew strongly by 7.4% in the April-June period of the current financial year as against 4% in the preceding quarter.
After a long gap, private consumption has seen a sharp increase in the first quarter of FY25. Mint looks at the importance of this development, what has caused the revival and what it means for India’s economic growth going forward.
Is consumer spending reviving?
Private final consumption expenditure—or simply put, consumer spending—grew strongly by 7.4% in the April-June period of the current financial year as against 4% in the preceding quarter. This is the first time in seven quarters that private consumption has positively contributed to the growth in gross domestic product (GDP). In other words, its growth was more than that of the GDP. In the past, while GDP grew at a rapid pace, private consumption would lag (see chart), pulling down the overall economic performance, which was powered predominantly by government spending.
Read more: India’s economy needs moderate corporate taxes to prosper
What has caused this revival?
A revival in rural consumption is the main factor. After covid, India saw an uneven demand growth. While demand in urban areas was strong, rural demand was sluggish due to patchy monsoon and lower output. But in recent months, rural demand has been picking up. In the April-June period, it overtook urban consumption after a lengthy gap. Experts have pointed out that all the factors that typically boost rural demand—adequate rainfall, good output and reasonable prices for the produce—are improving. The World Bank recently increased India’s GDP growth rate on account of the revival in rural demand.
Did this revival aid GDP growth in Q1FY25?
Yes. Due to the elections, government spending, which has been powering economic growth, faltered in the first quarter of FY25. This caused GDP growth to slow to 6.7% from 7.8% in Q4 of FY24. It would have been even lower but for the revival in private consumption. The sharp revival, experts say, added 1 percentage point to GDP growth.
Read more: Godrej Consumer is making the right moves, but the positives are priced-in
What does this mean for future growth?
Private consumption accounts for more than 50% of GDP and can thus accelerate economic growth rapidly. If the revival in consumer spending sustains and accelerates, demand for products and services will increase, causing capacity utilization to improve. This will then trigger private investment, another engine of growth. Despite the government’s best efforts, private investment is tepid. The private sector, unsure of a sustained revival in demand, has refrained from making any fresh investments to enhance capacity.
Is the Indian economy hitting a sweet spot?
The possibility of three of the four engines of growth—government spending, private consumption and private investment—firing on all cylinders soon is real, assuming private consumption accelerates. Revival of exports, the fourth engine of growth, will depend on how the global economy and more particularly, developed country economies perform. The bottom line: Three of the four engines of growth doing well, something the economy has not experienced in the recent past, would mean accelerated GDP growth for India.
