With the farm sector showing signs of revival on the back of a good monsoon, India Ratings today said the moderating urban spending is likely to drag the consumer sector performance.
"While Ind-Ra expects rural spending to improve PFCE (private final consumption expenditure), a possible further slowdown in urban consumption may potentially limit the PFCE growth rate," the ratings agency said in a report.
It said that the PFCE grew only at 2.2 per cent for the September quarter, and the possible reason for the drag is the slowdown in the urban spending.
It can be noted that the country's GDP growth accelerated to 4.8 per cent for the fiscal on the back of a healthy 4.6 per cent growth in agriculture, up from the 2.7 per cent number for the previous fiscal.
India Ratings said weak corporate performance, which translates into moderate nominal wage growth that does not beat the consumer price inflation, is one of the key factors resulting in the moderation in the urban spending.
It cited findings from the September 2013 Consumer Confidence Survey conducted by the Reserve Bank of India (RBI) in six metropolitan cities which suggests that the confidence of urban consumers is deteriorating.
The ratings agency said the performance of sectors such as the quick service restaurants and passenger vehicles may be impacted as a result of this.
Commenting on the retail sector, it said: "Given the drag in urban spending, doubt remains over whether the double-digit revenue growth may be maintained at the current levels of EBITDA (pre tax) margin."
On auto, it said the weakening discretionary purchase power will weigh down the passenger vehicle volumes and the rural sector alone can provide support to the segment after the harvest season.