Urban Consumption Dips Even As Rural Growth Sees Modest Revival

Even as rural demand appears to be seeing signs of a slow and steady revival, urban demand is slowing down. Rural growth is showing signs of revival after rural inflation and inequitable monsoons impacted spending in 2023. However, urban demand now appears to be decelerating, with high frequency indicators such as passenger vehicle sales contracting on an annual basis, while FMCG volumes are growing at a slower pace.

In July 2024, passenger vehicle segment contracted by 2.5%, compared to July 2023, posting a sales of about 3.42 lakh units. Three wheelers posted a growth of 5.1% compared to July last year, while two-wheelers also posted a growth of 12.5% in July 2024 as compared to July 2023.

Car discounts have doubled from last year and are likely to stay high through the festive season, till the end of December 2024 as carmakers and dealers rush to liquidate a huge pile-up of inventory amid slowing sales, said Teresa John, lead economist at Nirmal Bang Institutional equities.

From market leader Maruti Suzuki India Ltd. to Hyundai Motor Co., Tata Motors Ltd., Skoda Auto and Honda Motor Co., all are offering cash discounts, exchange bonus and additional benefits even on popular models. Several senior industry executives and dealers said these are the highest discounts seen in the local market since fiscal 2020, when the industry had rolled out a slew of promotional offers to liquidate inventory ahead of the transition to Bharat Stage-VI emission standards, John said.

FMCG, too, is seeing the impact. "While rural volume growth at 5.2% continues to outpace the 2.8% growth in urban areas, both regions experienced softer consumption this quarter," said Roosevelt Dsouza, head of customer success—India at Nielsen IQ.

The slowdown in urban consumption amid a revival in rural spending, is also a proxy for spending on premium and mass segments, according to Seshadri Sen, head of research and strategist at Emkay Global Financial Services. While mass consumption is recovering, some segments of premium consumption are seeing signs of slowing down, Sen said. The base effect is one of the reasons for slower growth in premium products. The segment has had a dream run in the past three-four years and it is now normalising, Sen explained.

Secondly, white collar employment had a horrific last year, with even premier engineering and management colleges being unable to place students, he said. That had a ripple effect, with more consumers turning cautious and clamping down on consumption.

Thirdly, there has also been some impact of the RBI clamping down on unsecured lending, according to Sen. More than restrictive monetary policy, the regulatory environment for lending has impacted consumption in turn, he explained.

Incrementally, urban growth is moderating with the best of pent up demand and excess savings largely being exhausted, said John. This is a trend we are seeing globally, even in the US pandemic excess savings have been exhausted, she added.

Similarly, even real estate inventories are normalising, John said. Hiring by Global Captive Centre are off highs, and IT companies have delayed joining dates. All of this points to some moderation in demand.

The trend is expected to continue through fiscal 2025, according to Sen. While the recent uptick in IT hiring is encouraging, it will need to be tracked more closely, he said.