Urban India’s spendings too low amid corona crisis; GDP unlikely to revive shortly, says SBI Research

It is to be noted that during the past two decades, rural consumption growth has outpaced urban consumption growth only twice.

The coronavirus-led disruptions in India have strongly hit the consumption in the urban areas. While rural consumption recovered strongly during Jul-Aug 2020, urban consumption remained very weak, said the SBI Ecowrap report. The urban consumption shrank 34 per cent on-year in the first quarter while rural consumption shrank only 4 per cent. Further, in the first two months of the second quarter urban consumption fell 18 per cent on-year, compared to a flat rate of rural consumption. The agricultural sector has performed much better than the non-farm sector during the past 6-7 months, which has helped the rural sector to outperform the urban sector.

It is to be noted that during the past two decades, rural consumption growth has outpaced urban consumption growth only twice. The report added that the fall in urban consumption is seriously worrying. From an average growth of 8 per cent during FY 2017-19, urban consumption declined 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 FY2017-19, before easing to 3.4 per cent in FY20 and further shrinking by nearly 4 per cent on-year.

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The road ahead

Urban consumption is undergoing an unprecedented downfall and it is unlikely that consumption expenditure will revive without a recovery in urban consumption. Moreover, if the rural sector does the heavy lifting, it could be highly inflationary. Given the disproportionate harm to the urban sector, a strong recovery in PCE, and real GDP growth seems far-fetched in the absence of any major support such as jobs and income guarantee, the SBI research report highlighted. Meanwhile, the economy has registered a record low of 23.9 per cent contraction in the second quarter and the short-term outlook doesn’t give much relief as well. 

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