Is Reverse Migration Fueling Rural Demand? Understanding the Dynamics of India's Consumption Shift
The Ministry of Finance's Monthly Economic Report highlights a significant slowdown in consumption and industrial activity during H1 FY25, a trend we've been analyzing in the context of the ongoing stock market correction.
Urban demand has witnessed a notable deceleration, with FMCG volume growth dropping from 10.1% in Q1 FY24 to 2.8% in Q1 FY25. Auto sales in urban centers have declined by 2.3% in H1 FY25, reflecting broader consumption weakness.
This shift could point to genuine rural economic resilience or, alternatively, the migration of flexible workforce (contract-based workers) back to their hometowns from urban centers, where employment has slowed.
Shifting Consumption Patterns
However, this urban slowdown appears to be offset by strengthening rural demand. FMCG volume growth in rural areas increased from 4.0% to 5.2%, while rural auto sales grew by 1.9%. These growth rate differences between urban and rural markets should be viewed in the context of India's population distribution, with rural areas accounting for 65% of the population compared to 35% in urban centers.
The automotive sector presents an intriguing picture at the aggregate level. Total domestic sales reached 1.3 crore units in H1 FY25, showing a marginal growth of 0.5% YoY. However, the composition of this growth reveals a significant shift - two-wheeler sales surged by 16% to over 1 crore units, while passenger car sales declined by 18% to 6.6 lakh units. This shift could point to genuine rural economic resilience or, alternatively, the migration of flexible workforce (contract-based workers) back to their hometowns from urban centers, where employment has slowed.
While the government attributes rural demand strength to above-normal rainfall (108% of LPA) and higher MSP for kharif crops, MGNREGA enrolment data suggests a different driver may be at play. In just H1 FY25, the scheme has already enrolled 44.3 million households, compared to 60 million for the entire FY24. With last year's spending exceeding the initial budget of Rs 60,000 crore to reach Rs 1.06 trillion, this year's allocation of Rs 86,000 crore is likely to prove insufficient given the current enrollment trajectory.
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Central capex execution up to August is only 27% of the annual target compared to 37% last year, likely affecting employment in urban construction projects and slowing income growth in urban areas.
Other Factors for Reverse Migration
The slowdown in government infrastructure spending post-elections in H1 FY25 may also have impacted urban-rural migration, with contract-based workers moving back to rural areas due to stalled urban projects. Central capex execution up to August is only 27% of the annual target compared to 37% last year, likely affecting employment in urban construction projects and slowing income growth in urban areas.
Even the dramatic slowdown in modern retail – YoY growth dropping from 24% to 3% for hypermarkets, and general trade - 8.5% to 5% for kirana stores, should be viewed through the lens of this (short-term) change in demographic patterns rather than as pure consumption weakness.
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