Rural Consumption Revival: Fact or Fiction?
Apr 9, 2025
After facing a prolonged slowdown in rural consumption since 2021—largely triggered by soaring inflation—the consumer goods industry is finally breathing a sigh of relief. Encouraging signs across key indicators suggest that rural demand is on the mend. This positions the FMCG sector for a return to mainstream growth.
Once trailing behind urban consumption, rural growth has now begun to outpace its urban counterpart. According to the RBI’s August 2024 bulletin, easing inflationary pressures have revived rural spending. This is helping bridge the gap in consumption volumes between urban and rural markets.
Accounting for 52% of FMCG volume, the rural market is witnessing renewed momentum. These are driven by favorable global trends and a domestic demand shifts. As per Centrum Institutional Research, this upturn is expected to fuel growth in the months ahead. As per Crisil, FMCG growth in smaller regions will achieve 7–9% revenue growth this fiscal, underpinned by a rise in volumes.
What Fuels Rural Demand?
Understanding what drives rural demand is essential to gauging its impact on the FMCG sector. Considering, a large part of India’s population still resides in rural areas. As disposable incomes rise, patterns of consumption driven economy shift, making income growth a vital influence on rural buying behavior. Rural demand is shaped by several factors. These include the quality of the monsoon, agricultural harvests, and MSPs set by the government for key crops. Non-farm income also plays an important role, and encouragingly, many of these factors have shown positive trends recently.
Monsoon-linked consumption changes holds a decisive role in determining whether rural consumption will strengthen or falter. According to the IMD, India experienced above-normal rainfall in September 2024. Averaging 109% of the Long Period Average, this is a sign for agricultural productivity and spending trends in agricultural belts.
CRI also highlights that an increase in MSPs, especially for pulses, is likely to further support demand in the sector. Echoing this optimism, RBI noted that the revival in rural consumption report is becoming increasingly evident. Rising incomes are now fueling growth of FMCG industry in India.
How Important Is Rural Demand for India?
With the majority of India’s population residing in rural regions, the economic development in rural areas is crucial in driving broader economic growth. A robust rural sector fuels consumption, which remains one of the key engines powering the country’s GDP. In FY23, India recorded an impressive 7.2% GDP growth, largely propelled by a surge in private consumption. However, this uptick was primarily urban-driven. For India to sustain and surpass an 8% growth trajectory consistently, rural consumption must gain momentum. Achieving this would require favorable monsoon conditions, strong agricultural output, and remunerative prices for farm produce.
What Lies Ahead for Rural Demand?
Some consumer goods companies will begin to observe early signs of a potential revival festive season demand in smaller towns. There is cautious optimism across the industry. Much depends on reservoir levels and crop yields, both affected by the erratic Southwest monsoon. On the global front, rising oil prices—exacerbated by the Israel-Palestine conflict—pose another challenge.
The onset of the festive season traditionally boosts demand for FMCG products. Especially for leading brands like HUL, ITC, Dabur, Marico, GCPL, Britannia, United Spirits, Radico, and Bikaji.
As rural demand is on rebound, its role in steering the FMCG sector’s growth in India is becoming more evident. The key question now is its sustainability. With the base effect in play, the outlook for the sector and rural economy remains optimistic.
Rural Consumption: The Catalyst Behind FMCG Growth in India
As the FMCG sector braces for an upward trajectory, rural demand is a pivotal driver of this growth. The connection between rural consumption and the sector’s performance has never been more intertwined.
According to SP Sharma, Chief Economist and DSG at the PHD Chamber of Commerce and Industry, rural demand in India plays a vital role in propelling the FMCG sector forward. With a significant portion of India’s population residing in rural areas, their contribution to the overall consumption basket is substantial. As rural demand experiences a strong revival, FMCG companies are likely to benefit from more robust growth in the future.
Moreover, the momentum isn’t limited to traditional rural areas. Tier-2 and Tier-3 cities have emerged as strong contributors, with people adopting aspirational lifestyles similar to their metropolitan counterparts. This trend, driven by rising purchasing power, is expected to sustain itself over the long term.
Rahul Aggarwal, Founder of Coffeeza, highlights factors like increasing disposable incomes, urbanization, digital access, and the rise of e-commerce and quick commerce are driving significant consumption in smaller cities. Improved logistics and infrastructure have turned these regions into thriving consumer hubs. Here people are more willing to spend across a diverse product range.
Prime Minister Narendra Modi, during the inauguration of Grameen Bharat Mahotsav 2025, emphasized that the more prosperous our villages become, the more critical their role will be in achieving the vision of a developed India. Encouragingly, the rural-urban consumption gap is already beginning to narrow. Semi-rural and small towns consumption insights reflects their share in the sale of discretionary products. For the first time, some consumer goods companies expressed more concern about urban demand than rural.
This shift is backed by hard numbers. Dabur India reported that rural volume growth has outpaced urban for four consecutive quarters as of December 2024. Similarly, NielsenIQ’s FMCG update for the July–September quarter revealed that rural demand grew twice as fast as urban markets—driven primarily by the strong performance of food staples and the resurgence of mid-sized companies.
Urban demand grew by 2.8%, while rural demand surged 6%, building on a 5.2% rise in the previous quarter. Overall, the FMCG sector witnessed a 5.7% growth by value and 4.1% by volume, with price-led growth contributing 1.5%. These figures clearly show that rural demand is currently the more dynamic growth engine.
That said, the resurgence in rural consumption does not entirely offset the decline in urban mass-market spending. For instance, Hindustan Unilever, derives only a third of its sales from smaller towns and village market demand. With the demand gap narrowing between urban and rural, latter is likely to become an important pillar for future growth
An important sign of this evolution is the shift away from low-value essential goods—typically priced at ₹5 or ₹10. In four years, there has been a drop in the contribution of ₹5 packs across categories like noodles, chocolates etc. In the case of biscuits, sales at these price points have stagnated. This trend indicates that rural consumers are upgrading their shopping habits. They are opting for larger packs that offer more value per rupee spent.
Such behavioral shifts signal a deeper transformation in rural consumption, one that increasingly mirrors urban patterns. This shift is supported by factors such as direct benefit transfers, improved infrastructure, and greater financial inclusion. If these top consumer trends continue, rural and semi-rural India may soon stand with urban centers in terms of consumption. This will bring about a structural change in how the FMCG sector approaches market expansion and brand engagement.
What Weighed Down Rural Consumption?
Rural demand took a significant hit during the second wave of the COVID-19 and has struggled to recover ever since. The situation was further worsened in the first quarter of FY2023–24, when unseasonal rainfall caused widespread crop damage and reduced yields. The second quarter didn’t offer much relief either, as an erratic monsoon disrupted crop sowing cycles.
Compounding these challenges was rising inflation, which made essential items—including food—more expensive. In fact, in September 2023, rural inflation stood at 5.33%, notably higher than urban inflation at 4.65%. Faced with higher living costs, stagnating income and households spending recovery, they have cut back on discretionary spending. This has further delayed any meaningful revival in demand.
Is Rural Demand on the Mend?
As of now, a full recovery remains elusive. In Q2FY24, Hindustan Unilever reported flat profits compared to the same period the previous year. Marico and Dabur also shared subdued performance, pointing to persistent weakness in rural demand as the key factor.
As per NielsenIQ, rural demand lagged behind urban consumption by 200–300 basis points in the same quarter. However, some companies bucked the trend. Nestlé India reported a 36% profit jump, while ITC saw a 6% increase in profits. Analysts suggest that these positive results stem from Nestlé’s urban-centric portfolio and ITC’s strong performance in its cigarettes and hospitality businesses, which are less reliant on rural markets.
What Drove the Surge in Consumption During 2022–23?
Rural demand traditionally contributes around a third of the revenue for consumer goods companies. This offers a vital pulse check on the India rural economy. However, by Q2FY24, the mixed performance of key FMCG players raised questions about the strength of rural demand. Some companies posted healthy growth, while others continued to struggle—fueling speculation about whether a true rural recovery is underway.
In contrast, the overall consumption growth in 2022–23 stood at 7.5%, largely powered by urban spending. Indian Consumer behaviour in cities remained optimistic about their financial prospects, which translated into increased spending. This was reflected in the Reserve Bank of India’s Consumer Confidence Index, which reached a four-year high in September. RBI data also showed a rise in household liabilities, indicating that consumers were borrowing more and spending freely.
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