Rural demand seen ebbing in next fiscal, urban rising

Rural demand, which has drived consumption growth and helped the economy remain afloat since 2018-19, may drop due to the falling prices of farm produce but urban demand is likely to pick up in the new financial year, according to a report.

Though rural demand outperformed in 2020, with the pandemic shock hurting urban India more, we see urban demand driving recovery in 2021, according to the report by Bank of America Securities.

Urban demand has on the wane since 2018 after the twin shocks of note ban and the hurriedly rolled out GST. Adding to the double whammy was the crisis in the non-banking financial sector, which has been one of the major drivers of consumption credit with the bankruptcy of IL&FS in September 2019 and the resultant risk aversion bank had developed.

The brokerage expects the autumn kharif farm income growth to slow to 7.4 per cent from 10.6 per cent last year, as lower pricing power offsets a larger crop. On the other hand, the summer rabi farm income growth should pick up to 10.4 per cent in 2021, from 8.7 per cent in 2020, with a turnaround in sugarcane returns.

"We continue to believe that rural demand should remain relatively weak into the summer of 2021.

"It is obviously better than urban demand, which has shrunk due to the pandemic in 2020-21. In 2021-22, recovery should be led by a rebound in urban demand," said the report.

Accordingly, the foreign brokerage has further downgraded its forecast of 2020-21 growth in autumn kharif income to 7.4 per cent from 9.4 per cent earlier, and down from 10.6 per cent in 2019-20. It has upgrade the summer rabi income growth to 10.4 per cent in 2021, from an estimated 8.7 per cent last year. This assumes a further 5 per cent increase in sugarcane prices.

Weak rural demand is in line with the brokerage's survey that shows the pandemic is now fast progressing from a supply shock to a demand shock, given the massive jobs and income losses.