India’s household consumption, which contributes c.60% of GDP, bottomed out in FY14 but slipped to 6% in H2-FY15 after a sharp recovery in H1-FY15 to 6.6% from 5.8% in H2-FY14. Much of the reduction was concentrated in Q3-FY15, when 12% lower-thannormal monsoon rains reduced crop production by 7%. The improvement in consumption to 7.9% in Q4-FY15 (4.2% in Q3-FY15) was likely led by higher urban demand. Urban demand has shown signs of recovery since the beginning of FY15. The average of proxy indicators of urban and rural demand shows that urban demandgrowth outpaced rural demand growth for the first time since mid-2008 in mid-FY15. Standard Chartered assess the strength of rural consumption demand by monitoring rural wages, tractor sales and two-wheeler sales and assess the urban demand through credit flow to selected sectors, such as personal loans, car sales and passenger air traffic. The sharp slowdown in inflation in FY15 – which is expected to continue in FY16 -boosted real purchasing power, especially in urban India. Recent salary surveys indicate that wages/salaries will improve mildly in FY16. Urban consumption is expected to rise on expectations of a tighter labour market (hiring appears to be picking up), two successive years of positive real wage growth, lower lending rates, and a positive wealth effect from buoyant asset markets, says Standard Chartered.
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