Rural vs. Urban: Why are villages driving growth?
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Today on The Daily Brief:
Why is the demand slowing down in urban?
Maruti’s budget car sales are falling—Is trouble brewing?
6 big warnings from RBI Governor
Why is the demand slowing down in urban?
In today’s first story, let’s talk about an important shift in India’s consumer landscape. Urban demand for everyday products is slowing down, while rural areas are showing surprising strength and growth in spending.
In short, big cities like Delhi, Mumbai, Bengaluru, and others, which have traditionally driven much of the country’s sales for essentials and luxury items, are now experiencing a decline in demand. On the other hand, smaller towns and rural areas—usually considered more budget-conscious markets—are emerging as fast-growing sources of demand!
Let’s start by understanding what’s behind this urban slowdown.
Urban India has always been at the heart of the country’s consumer spending. People in major cities tend to buy more, adopt trends faster and are often attracted to branded goods. This has made cities a primary focus for large FMCG companies like Tata Consumer Products, Hindustan Unilever (HUL), and Nestlé, which have relied on urban demand to drive growth. However, that urban demand is now starting to slow down.
For example, Tata Consumer Products recently reported a “softening” in urban demand, citing food inflation as a key reason. Rising prices for essentials—like grains, fruits, and vegetables—are stretching household budgets thin. When people are forced to spend more on basic needs, they’re less likely to splurge on non-essentials like premium snacks or personal care products. HUL echoed this, saying that “urban growth has moderated” and that big cities are now falling behind in spending growth.
Nestlé India’s CEO, Suresh Narayanan, illustrated this trend with numbers: growth in the food and beverage sector, once comfortably in double digits, has now dropped to just 1.5–2%. According to Narayanan, it’s the largest urban markets that are feeling the most strain.
But the big question is—why are urban budgets tightening?
Both urban and rural India have felt the impact of inflation, but urban households have been hit harder, especially as food costs continue to rise. Inflation in cities has made it difficult for households to stretch their budgets, meaning non-essential purchases are often the first to go. A recent Department of Economic Affairs report—the “September Economic Review”—confirmed this, noting that urban consumers are focusing on essentials and cutting back on other items.
This shift is putting pressure on FMCG companies that have traditionally relied on strong urban demand. Simply put, people in cities are feeling the pinch of rising prices and are becoming more cautious about discretionary spending.
Meanwhile, rural India is offering a surprising contrast. Although rural demand isn’t booming, it’s steady—and even expanding in some areas. Rural consumers are spending more on products that were once mostly popular with urban buyers, including SUVs and larger packs of FMCG goods. Take Maruti Suzuki, for example. Rural buyers have traditionally preferred smaller, more affordable cars, but recent data shows an increase in rural SUV sales—a category once dominated by urban demand. This shift suggests that rural India is not only buying more but is opting for higher-value items, indicating a rise in purchasing power.
Maruti Suzuki noted that rural demand for SUVs now makes up 54% of their rural sales mix, highlighting this trend. FMCG companies like Tata Consumer Products and HUL are seeing similar patterns, with rural consumers buying larger packs and showing more interest in personal care and snack products. This breaks the stereotype that rural buyers are solely focused on budget items.
A few factors are driving this steady rural demand. First, favorable monsoon rains have boosted agricultural yields, which has increased farmers’ incomes, giving them more to spend. Second, government investments in rural infrastructure, like roads and agricultural facilities, indirectly support rural incomes, strengthening purchasing power.
We’re also seeing rural and urban consumption habits begin to converge. Where rural consumers once focused on smaller, basic products, they’re now more open to premium items. As Maruti noted, this “convergence in consumption patterns” suggests that rural India is evolving beyond its image as a strictly low-budget market.
That said, while rural demand is holding steady for now, companies remain cautious. For FMCG players like Tata Consumer and HUL, rural demand isn’t a guaranteed offset for urban slowdowns. Rural growth relies heavily on factors like crop performance, inflation, and ongoing government support. For example, HUL noted that while rural demand is stable, rural income growth and employment stability are essential for continued spending—and these can vary.
Moreover, government support has played a crucial role in rural growth. With elections on the horizon, there’s a possibility that policies could shift. If rural-focused spending is reduced post-election, rural demand might lose some of its current momentum. So, although rural areas are becoming more influential, their growth remains sensitive to policy changes and agricultural outcomes.
In summary, we’re seeing an interesting shift in India’s consumer dynamics. Urban areas, once considered the powerhouse of consumer demand, are now slowing down, while rural India is stepping up with steady demand. This points to a slow but noticeable convergence in consumer behavior across regions.
For companies, this shift means it’s no longer accurate to view urban and rural markets as entirely separate worlds. Both urban and rural consumers will play essential roles in driving growth, but this balance depends on rural incomes remaining stable. This evolving landscape brings a clear message: as India’s consumption patterns become more balanced, companies will need to adapt, finding ways to meet both urban caution and rural resilience in a changing market.
Maruti’s budget car sales are falling—Is trouble brewing?
In this story, let’s explore what’s happening with Maruti Suzuki following their latest quarterly results.
As India’s largest carmaker, Maruti holds over 40% of the Indian passenger vehicle market. This means Maruti’s performance can often give us a glimpse into what Indian car buyers are thinking, their preferences, and some of the challenges in the auto industry.
Starting with Maruti’s Q2 FY25 results, the company’s revenue remained steady this quarter, but their profit after tax (PAT) took a bit of a hit. Maruti’s PAT for this quarter stood at ₹3,692 crore, a 17% drop compared to last year.
Now, you might wonder why profits fell even though revenue stayed about the same. The decline wasn’t just due to weaker sales; a big part of it was a one-time tax expense caused by recent changes in tax rules under the Finance Act.
As for Maruti’s car sales, they did see a slight drop in volume this quarter. The total number of cars sold dipped by 1.9% compared to last year, with domestic sales down by 3.9%. While this may not sound too alarming at first, for Maruti—whose growth has often relied on entry-level, affordable cars—this shift hints at something more significant.
Historically, Maruti’s entry-level cars, like the Alto and WagonR, have been the backbone of its success. These models appeal to first-time buyers and budget-conscious families. But things seem to be changing. This quarter, Maruti reported that sales in its mini and compact segments dropped by around 15% compared to last year.
According to Maruti’s Chairman, R.C. Bhargava, the rising prices of cars have made entry-level models less affordable for many buyers. Bhargava highlighted an interesting fact: back in 2018-19, lower-cost cars made up around 80% of the market, but now they account for less than 50%.
This shift reflects a change in both buyer preferences and affordability, marking a significant moment for Maruti and the Indian auto market.
In short, fewer people are buying budget-friendly cars, and Bhargava expressed concern that if this segment doesn’t pick up, it could eventually impact sales of higher-end models. Entry-level buyers often move up to pricier models later, so a shrinking budget car segment could affect Maruti’s long-term sales potential.
That said, while entry-level cars are facing challenges, Maruti’s SUVs are doing well. This quarter, utility vehicles (UVs), including popular models like the Grand Vitara and Fronx, made up nearly 39% of Maruti’s domestic sales. This segment saw a small increase, growing by 0.3% year-over-year.
SUVs appeal to buyers not only because of their size and durability but also for the status they bring. Recognizing this demand, Maruti has strengthened its SUV lineup to meet buyers’ interest in larger vehicles. What’s also working in Maruti’s favor is that SUVs generally come with higher price tags, contributing more revenue per vehicle than smaller cars. According to Maruti’s management, this shift toward SUVs is helping the company manage the challenges in the entry-level segment.
On the other hand, while Maruti’s entry-level cars are facing difficulties, its CNG models are performing well. To give you an idea, one in every three cars Maruti sold this quarter was CNG-powered. This is significant because CNG (Compressed Natural Gas) is more affordable and stable in price compared to petrol or diesel, making it an attractive choice in a market where fuel costs can be unpredictable.
With 14 CNG models, Maruti now has the widest CNG lineup in the Indian market, catering to customers looking for more economical and eco-friendly options.
Despite softer domestic sales, Maruti’s exports have shown promising growth. Export sales rose by 12% this quarter, driven by demand for models like the Fronx in countries such as Japan. This international demand provides Maruti with some protection against weaker sales in India, especially in the entry-level segment.
Even though Maruti is seeing growth in SUVs, CNG models, and exports, there’s pressure on profit margins. To keep sales up, Maruti has had to increase discounts on its vehicles. On average, the per-car discount went up to ₹29,300 from ₹21,700 last quarter. These discounts are essential for attracting buyers but directly impact profitability. Rising costs for raw materials also add to the challenge, although Maruti has managed this partly by controlling inventory and keeping other expenses in check.
Maruti’s electric vehicle (EV) strategy is also noteworthy. The company plans to launch its first high-spec electric SUV next year, designed from the ground up as an EV with a 60 kWh battery. This model will target both the Indian and international markets, especially countries like Japan and parts of Europe. This step marks a significant shift for Maruti, showing it’s serious about entering the EV space, a sector that could play a big role in the future of the auto industry.
Additionally, Maruti is teaming up with Toyota to produce its first electric vehicle for Toyota in India, with production slated to begin in 2025 at Maruti’s Gujarat plant. This partnership also involves Daihatsu, underscoring Maruti’s strategic approach to EVs by collaborating to gain from shared expertise and production scale.
So, where does Maruti go from here? The big question is whether the growth in SUVs, CNG models, and exports will be enough to offset the slowdown in entry-level cars. If Maruti’s strategy pays off, the company could maintain its position as India’s automotive leader, despite the challenges in the budget car market. However, if entry-level sales continue to weaken, Maruti’s long-term growth could be at risk.
6 big warnings from RBI Governor
In the next story, let’s talk about a recent speech by RBI Governor Shaktikanta Das at the Peterson Institute for International Economics. His speech covered six major issues that are reshaping global finance and affecting economies around the world.
Each of these points is both complex and important for us as investors and market watchers. Let’s break them down one by one.
1. Reforming Global Financial Institutions
Governor Das began by discussing institutions like the International Monetary Fund (IMF) and the World Bank. These organizations were originally created to help countries through economic crises and keep global financial systems stable. But here’s the issue: they were set up over 75 years ago, reflecting a world where developed nations had greater influence and control.
Meanwhile, emerging markets have grown significantly in size and importance, and they now need a larger voice and better access to these institutions’ resources. The current imbalance makes it harder for these economies to get the support they need, which can have a ripple effect on global markets. Governor Das proposed a solution: giving emerging economies more representation and influence within the IMF and World Bank to reflect today’s global economy. Otherwise, he warned, these institutions risk becoming less relevant and less effective in addressing modern financial challenges.
2. The Global Debt Crisis – An Urgent Concern
The second point he made was about the global debt crisis. Simply put, debt can be useful if managed well, but when a country struggles to manage its debt, it becomes a huge problem. Recent efforts by the G20, like the Debt Service Suspension Initiative and the Common Framework for Debt Treatments, aimed to help struggling countries. However, these are temporary fixes, not long-term solutions.
Governor Das pointed out that the current system for dealing with debt crises is slow, unorganized, and often lacks transparency. There’s no efficient, streamlined process to help countries in severe debt, which only adds to their economic strain. He suggested bringing both public and private creditors together, speeding up debt restructuring, and aligning debt relief with sustainable development goals. Without this kind of change, vulnerable nations could remain trapped in debt, posing risks to global economic stability.
3. Fragmenting Global Economy
Governor Das also highlighted a growing trend—the fragmentation of the global economy. Countries are trading less with each other, partly due to new restrictions and geopolitical tensions. The IMF estimates that these trade barriers could cost the global economy around $7.4 trillion over time, which would impact everyone.
This fragmentation means that countries are increasingly “friend-shoring” and “reshoring”—focusing on trading with allies and moving production back home. As this trend grows, financial institutions are feeling the pressure too, facing higher costs and lower profitability. Emerging economies, which rely heavily on trade, will need to strengthen their financial reserves to weather the challenges of a more divided global economy.
4. The Digital and Financial Divide
As the world becomes more digital, there’s a growing gap between countries that are ready for the digital economy and those that aren’t. This “digital divide” affects access to online services and broader economic opportunities. Digital infrastructure—such as high-speed internet, tech regulations, and skilled workforces—is essential for participating in today’s economy.
Governor Das also pointed out that the financial system itself is changing, with new players like fintech companies, shadow banks, and decentralized finance (DeFi). These groups hold a significant share of global assets but aren’t as closely regulated as traditional banks, which can create financial risks. He argued for stricter oversight to ensure these emerging sectors don’t destabilize the economy, especially in developing countries with limited regulatory resources.
5. Climate Change and Central Banking
One of the unique points he raised was about the connection between climate change and central banking. As climate events like floods, wildfires, and droughts disrupt economies, central banks must consider climate risks when planning for financial stability.
According to Governor Das, central banks have four key roles in addressing climate risk:
Managing Price Stability: A shift to a low-carbon economy can affect prices, so central banks need to account for this.
Protecting Financial Stability: Climate-related disruptions can have ripple effects across the financial system.
Supporting Financial Institutions: Central banks can help banks and financial firms manage climate-related risks.
Driving Research and Awareness: Contributing knowledge and raising awareness on climate risks.
In India, the RBI has already taken steps in this direction, such as promoting green bonds and renewable energy projects. However, central banks face a balancing act: they must address climate risks without overstepping their legal powers.
6. India’s Economic Performance
Finally, Governor Das shared an optimistic view of India’s economic path. Over the past three years, India has averaged over 8% real GDP growth, and the RBI expects around 7.2% growth for 2024-25. This growth is supported by strong domestic demand, favorable policies, and a resilient services sector.
While inflation is under control for now, there are risks on the horizon. But overall, India’s outlook seems strong, especially compared to some other global economies.
In summary, Governor Das’s speech was a call to action on many fronts, highlighting areas where global financial systems need to modernize and work together to address today’s challenges. From rethinking the roles of the IMF and World Bank to tackling the global debt crisis, he emphasized that it’s time for some tough adjustments. Addressing the digital divide, climate risks, and economic fragmentation will require more cooperation and forward-looking policies.
Tidbits
Amazon India’s units reported mixed financial results for FY24, with Amazon Pay leading revenue growth at 9.2% and net losses dropping by 39%. Despite regulatory and market pressures, Amazon’s growth in digital payments and logistics shows a strategic focus amid a challenging environment.
To meet SEBI’s 25% public shareholding requirement, Adani Enterprises has paused its Adani Wilmar demerger plans. As the Adani Group shifts toward sectors like green hydrogen and infrastructure, this move could open up new growth opportunities aligned with India’s economic priorities.
Despite a nine-month pause in onboarding, Razorpay’s revenue grew 24% to ₹2,068 crore in FY24, showing strong resilience despite regulatory challenges. With rapid onboarding after recent approval, Razorpay’s adaptability reinforces its position in India’s digital payments sector.
The RBI has instructed Warburg Pincus to reduce its stake in Home First Finance to below 20% before proceeding with its acquisition of Shriram Housing Finance. This move highlights the RBI’s focus on maintaining competition and avoiding excessive control in the housing finance market.
India’s credit card spending surged by 25% year-on-year in September, reaching ₹1.76 trillion, fueled by festive promotions and EMIs. While spending momentum remains strong, banks are cautious, noting early signs of stress in credit segments as consumer debt levels rise.
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Beautifully pendown, but the recent interview of Jayen Mehta ( MD of Amul ) in which he said that Amul is seeing good festive demand and has recorded double digit volume growth. Considering the fact that Amul mainly deals in basic necessities which caters to both rural and urban area so why does these companies like HUL, Tata Cons, Nestle is hinting for consumer slowdown? Are they facing competition from D2C brands or anything else?
Thank you for sharing your insights on the current expenditure situation in India. While the three topics discussed today were all compelling, they appear somewhat contradictory when considered together. There is a clear decline in consumer expenditure in urban India, which seems to be offset by an increase in rural expenditure—likely a seasonal shift. Along with a 25% rise in credit card usage, it raises questions that basis on which the RBI expects consumer spending to drive economic growth.