Chennai: Urban consumption has contracted more than 25 per cent between April and August, witnessing the worst decline in two decades due to massive job losses and reduction in income levels.
Real private consumption expenditure declined 26.7 per cent in the June quarter against the same period last year. While urban consumption contracted 34 per cent, rural consumption shrank only 4 per cent. In July and August, while urban consumption declined 18 per cent, rural consumption was almost flat, finds Motilal Oswal Financial Services.
From an average growth of 8 per cent during FY17-19, urban consumption declined 0.6 per cent for the first time in two decades in FY20 before collapsing by more than a quarter during April-August 2020. Rural consumption, on the other hand, grew at an average of 6 per cent during FY17-19 before easing to 3.4 per cent in FY20 and shrinking 4 per cent in during April-August.
Falling passenger vehicle sales, weak air passenger traffic and declining production of consumer durable goods along with weak imports of non-farm consumer goods had led to the sharp and sudden deterioration in urban consumption in FY20.
One the other hand, various government policies such as a higher allocation of MGNREGA incomes and better Kharif crop output have supported the recovery in the rural economy. In fact, rural spending by the government grew 48.7 per cent during April-August, the highest in 12 years. The impact of the pandemic too has been much lesser in the rural areas compared to the cities.
Massive job losses and salary cuts along with the higher incidence of pandemic continues to hurt urban consumption.
According to Motilal Oswal, revival in private consumption is unlikely without a recovery in urban consumption. Covid-19 has affected the urban sector disproportionately. However, in the absence of any major support in the form of jobs or income guarantee, the recovery private consumption and real GDP growth seem far-fetched. Rural consumption outpacing urban consumption can also lead to higher inflation.