Making sense of the rural rush

Dehaat India is being described as the saviour of the economy. A range of products and services, from motorcycles to insurance, has been designed for the rural consumer. For the companies behind these offerings, the motivation is healthy bottom-lines in tough times. But how real is the idea of 'rural' consumption, and what are its effects?

Corporate India has carefully timed the announcement of the discovery of the rural Indian market. For the last quarter of the financial year 2008-09, the country's business and financial press has run a number of articles to explain how rural markets for consumer products are doing very well, how companies which have rural products for the hinterland have done their balance sheets much good, and how the economic slowdown can be successfully beaten by selling to the dehaat regions.

The enthusiastic tone to describe an apparently resurgent rural India was set late last year, when the UPA government released its Report to the People: 2004-2008, its self-congratulatory report card. In it, its programmes for rural India are broadly described thus: "The UPA Government has launched Bharat Nirman for comprehensive improvement of rural infrastructure to ensure inclusive growth by ensuring that all eligible villages / habitations have electricity, safe drinking water, all-weather roads, and telephones, and that rural housing and irrigation potential created are substantially augmented."

A new rural economy

There are authoritative numbers from the Central Statistical Organisation (CSO) to support the contention, made by the central government and by corporate India, that there has been a major shift in the structure of rural economy. The new vision of rural economies is that they have departed from being predominantly agricultural and that is not only a growing agricultural services sector, but that all other elements of the services sector are growing, apparently helped by friendly policy and responsive governance, which has also raised demand for consumer goods and durables.

The CSO's data show that the number of establishments (small businesses, proprietorships, the self-employed) in rural India rose by 5.37 per cent between 1998 and 2005, compared with a rise of 4.69 per cent in urban areas. This growth in the number of businesses in rural areas has pushed up the figures of rural employment growth to 3.88 per cent between 1998 and 2005 from 2.2 per cent during 1990 and 1998.

There are three conclusions that government and industry are drawing from this change. One, that there has been a measurable and visible increase in non-farm job opportunities. Two, that this increase has helped control livelihood-driven migration to cities (most conspicuous during sowing seasons for major food crops). Three, that rural India's share in the country's gross domestic product has benefited, accounting for 51 per cent of GDP in 2005-06 from 46 per cent of GDP in 1993-94 - and it is that 5 per cent larger share which is being used as endorsement of policy and as justification for selling to the 'rural market'.

Economics research firm Indicus Analytics points to the key differences in distribution of expenditure as being responsible for growing rural disposable income. The firm calculated the percentage of income spent on 26 different categories of household consumption, for rural and urban homes, to isolate a few categories in which the rural household spent significantly less that its urban counterpart. These are: rent (0.94 per cent compared with 9.19 per cent for urban households), consumer services excluding conveyance (6.48 per cent compared with 10.57 per cent), conveyance (6.63 per cent compared with 9.96 per cent) and entertainment (1.11 per cent compared with 3.11 per cent). [See Table below].

Expenditure on different categories (%)
	Rural	Urban
Beverages	2.59	3.09
Cereals/cereal products & substitutes	11.56	5.68
Clothing	4.75	3.56
Consumer services excl. conveyance	6.48	10.57
Consumer taxes and cesses	0.39	1.34
Conveyance	6.63	9.96
Durable goods	3.79	3.68
Edible oil	2.95	1.94
Education	1.92	3.29
Egg, fish and meat	2.16	1.55
Entertainment	1.11	3.11
Footwear	0.51	0.42
Fruit	1.12	1.19
Fuel and light	18.28	15.87
Medical (institutional)	2.23	1.42
Medical (non-institutional)	5.92	4.21
Milk and milk products	5.52	4.51
Paan, tobacco and intoxicants	1.7	0.91
Personal care and effects	0.55	0.53
Pulses and pulses products	2.06	1.28
Rent	0.94	9.19
Salt and spices	1.35	0.8
Sugar	1.49	0.84
Sundry articles and bedding	4.77	3.89
Toilet articles	5.09	4.38
Vegetables	4.14	2.79
Source: Indicus Analytics. Figures in % for 2008

There is another comparison which stands out between rural and urban households. Urban households spend more than 5 per cent of their incomes on each of the following five categories of consumption: fuel and light, consumer services excluding conveyance, conveyance, rent, and cereals/cereal products and substitutes. These account for 51.27 per cent of urban household expenditure. For the same five categories, the rural household spends 43.89 per cent of its total expenditure. It is the potential in this difference that corporate India seeks to exploit.

It was very different 30 years ago, for in the 1970s farm income dominated with its 73 per cent share of rural income. This share has dropped to 50 per cent and is expected to come down further to 37 per cent by 2015. 'Non-farm' does not however mean 'non-agricultural'; economists like Rajesh K Shukla of the National Council for Advanced Economic Research (NCAER) point out that rural income derived from non-farm activities is dependent on the agriculture within the rural area, as well as on rural-urban linkages. It is this connection that policymakers and industry are paying more attention to.

"Increased demand for goods and services from rural India will also strengthen the rural-urban linkage," wrote V Shunmugam and Ritambhara Singh, chief economist and senior analyst of MCX (the Multi Commodity Exchange, Mumbai), in Mint, the business daily (April 6). "The government's concentrated efforts have empowered rural India significantly by increasing its disposable incomes. It is time the private sector focused on rural market segments to tide over the downturn in both the urban and global markets."

A new corporate focus

There is evidence enough of such focus from corporate India. Consider these examples:

• The dominant white goods and consumer electronics manufacturers all have dedicated rural marketing campaigns in place, which have become crucial to their company bottom-lines. LG Electronics expects rural revenues to grow from Rs.4180 crores (35 per cent of total revenue) in 2008 to Rs.5490 crores (45 per cent) in 2009. Samsung expects rural markets to contribute 30 per cent to its consumer electronics turnover in 2009. Philips is using its home lighting distribution network (1.8 million outlets strong) to strengthen its rural footprint and the company will use this network to sell irons, mixer-grinders, DVD players and radios.

• Similarly, Whirlpool expects 5-7 per cent growth in 2009 from small towns. Hindustan Unilever has recorded over 16 per cent growth in gross revenue in recent months, at least half of which comes through its extensive rural network. Goldplus is the Tata group's mass-market jewellery brand, which hires unemployed youth as its rural ambassadors. The youth are trained; they then educate rural people by using educational films, flip charts and booklets. Goldplus expects 50 per cent growth this year to account for a tenth of the Tata group's jewellery business revenues.

• Automobile use in rural India is measured by the auto industry at 1-2 per thousand, compared with 10-11 per thousand in cities. By using panchayats, primary healthcare members and regional rural bank members to reach potential buyers, Maruti's rural revenues increased from 3.5 per cent of total sales to 8.5 per cent. Maruti is reported to have sold more than 60,000 cars in rural markets between April 2008 and February 2009. The car company has even launched a campaign - "Ghar Ghar Mein Maruti (a Maruti in every household)" - specifically for these markets.

• Hero Honda's motorcycle sales grew 11 per cent in 2008-09 fiscal against an average sales growth of 1.9 per cent for the industry. For the two-wheeler company, the share of rural sales has gone up from 38 per cent in 2007-08 to 40 per cent in 2008-09. Hero Honda in late 2007 had launched a rural campaign called "Har Gaon, Har Aangan (every village, every home)".

• Bharti Airtel's rural footprint has increased from 6 per cent in 2007-08 to 12.6 per cent until February 2009. Airtel's average revenue per user (a telecom industry metric) in the rural regions has increased from Rs.100 to Rs.150 in the same period. The company sees this is indication of more cash available with the rural consumer, and has even attributed this increase to an increase in minimum support prices for wheat and rice over the last two years.

• IFFCO Tokio General Insurance has tied up insurance with fertiliser. For its Sankat Haran Policy (non-crop insurance), the company offers farmers a free insurance cover worth Rs.4000 with every bag of fertiliser (the sale receipt is also the policy document).

The growth in such markets and the new opportunities being created by companies are being seen, by central policymakers, as the early gains from the increased investment in the farm sector for crop diversification and from alternate revenue channels such as horticulture, poultry and fisheries. Now, the anticipation of another good crop year and further government initiatives are expected to help rural areas remain vibrant even during the present economic slowdown. "To think there will be a further upsurge in farm growth is wrong, but Indian agriculture and the rural economy have been holding out against the slowdown," said IRMA chairman Dr Yoginder K Alagh, as quoted by a business daily.

Table 2: Size of rural markets
State	Market size (crores)	Rural population (millions, 2001 census)	Market size per capita (rupees)
Uttar Pradesh	146,528	131,658,339	11,129
Andhra Pradesh	130,611	55,401,067	23,576
Maharashtra	126,313	55,777,647	22,646
West Bengal	122,703	57,748,946	21,248
Gujarat	86,451	31,740,767	27,237
Karnataka	70,044	34,889,033	20,076
Rajasthan	62,082	43,292,813	14,340
Tamilnadu	61,422	34,921,681	17,589
Kerala	60,327	23,574,449	25,590
Orissa	57,254	31,287,422	18,299
Bihar	57,062	74,316,709	7,678
Haryana	53,455	15,029,260	35,567
Madhya Pradesh	51,102	44,380,878	11,514
Punjab	39,867	16,096,488	24,768
Jharkhand	37,721	20,952,088	18,003
Assam	36,880	23,216,288	15,885
Chhattisgarh	33,859	16,648,056	20,338
Himachal Pradesh	18,404	5,482,319	33,570
Jammu & Kashmir	15,307	7,627,062	20,069
Uttarakhand	14,796	6,310,275	23,447
Tripura	6,593	2,653,453	24,847
Delhi	4,944	944,727	52,333
Goa	4,292	677,091	63,389
Meghalaya	4,189	1,864,711	22,465
Nagaland	4,078	1,647,249	24,756
Manipur	3,845	1,590,820	24,170
Arunachal Pradesh	1,831	870,087	21,044
Sikkim	1,278	480,981	26,571
Puducherry	814	325,726	24,990
Mizoram	773	447,567	17,271
Andaman & Nicobar	623	239,954	25,963
Daman & Diu	545	100,856	54,037
Chandigarh	525	92,120	56,991
Dadra & Nagar Haveli	349	170,027	20,526
Lakshadweep	154	33,683	45,720
Source: Indicus Analytics

From the point of view of private sector India, there are two lessons to be drawn. One, that the fortunes of participants in the rural economy have not been significantly affected by the economic slowdown. The rationale is that public investment in rural employment and infrastructure will continue, so that entrepreneurs who continue to make products for rural India will weather the current slump in global and urban demand. Two, that the rural economy needs to be "de-risked and strengthened" (as an editorial in a business daily has put it) and provided a modern financial system that will bring down the cost of services and help spread the benefits.

There is good reason to do so, according to the Associated Chambers of Commerce and Industry of India (Assocham), one of our biggest industry and business associations. This month, Assocham released a report titled The Rise of Rural India which has sought to explain why this market has become so important for companies, particularly consumer goods companies. "The fast moving consumer goods (FMCG) sector in rural areas is expected to grow by 40 per cent as against 25 per cent in urban areas," said Assocham president Sajjan Jindal. The report says that rising rural incomes, healthy agriculture growth, swelling demand, rising consumerism across India, and wider distribution of FMCG products in the rural market are contributing to high growth and rapid expansion of the FMCG industry in rural India.

This expansion is seen in the market sizes calculated for India's rural population by state [See Table 2]. Using data from Indicus Analytics, the five biggest rural markets are: Uttar Pradesh (Rs.146,528 crores), Andhra Pradesh (Rs.130,611 crores), Maharashtra (Rs.126,313 crores), West Bengal (Rs.122,703 crores) and Gujarat (Rs.86,451 crores). When filtered by states with rural populations of 10 million and more, and sorted by per capita 'market size', the states of Haryana, Gujarat, Kerala, Punjab and Andhra Pradesh top the list of 17 such states, with figures ranging from Rs.35,500 to Rs.23,500 as the per capita market potential.

A more sober, wider reality

The question is: how real is this market potential? Despite the list of individual company successes and despite the ringing encomiums from industry associations for central government policies, the trend is seen as suspect in critical quarters. "It is a mirage of prosperity. Consumers are cutting down on necessities," is the cautionary note provided by R S Deshpande, director of the Institute for Social and Economic Change. Krishan Bir Chaudhary of the Bharat Krishak Samaj has also attempted to place in perspective the idea that rural prosperity is widespread. His reminder is that such prosperity is restricted to a few places where high land real estate prices have concentrated money in the hands of a few.

Wherever new money has not been concentrated, or is not visible in consumption, is where conditions have changed little despite the rising rural sales graphs of companies. The evidence exists in another set of numbers: crop prices, input costs of cultivation, the consumer price index for agricultural labour and the wholesale price index. Whether in the rural markets of Jharkhand (market size Rs 37,721 crore, rural population 20.9 million) or Assam (market size Rs 36,880 crore, rural population 23.2 million) or Chhattisgarh (market size Rs 33,859 crore, rural population 16.6 million) when agricultural crop prices do not rise as much as input costs for cultivation - or as much as any other goods farmers have to buy - it affects the real incomes of farming households. It is just the same for non-agricultural small producers.

There is another factor, just as inexorably in motion upwards like agricultural input costs. The consumer price index for industrial workers increased steadily until October 2006, and thereafter the index for agricultural labourers has moved up more rapidly. The main reason is most likely the increase in the price of food, which reached alarming highs in 2008. They did so in the wake of a steady rise in consumer prices over a five-year period, from 1999-2000 to 2004-05, during which their rise was 40 per cent.

How likely is it that nominal wage incomes for most workers in rural areas have increased by that much in this same period? Is the larger number of establishments (small services, self-employed, proprietorships) an indicator of the need to supplement dwindling real incomes? Where then are the widespread disposable income surpluses that corporate India, the UPA and government-friendly economists want us to see?

It is this mismatch that partly explains the reaction to the news, on 19 March 2009, that the wholesale price index (WPI) for all commodities had increased at the low rate of 0.44 per cent. The automatic reaction was one of admiring welcome - there was acclaim that this index now reflected the lifting of inflationary pressures which had borne down on our citizens only half a year earlier. "WPI inflation peaked at close to 13 per cent in August 2008," stated the Economic Advisory Council, in its Review of Economy, January 2009. "Consumer price inflation (CPI) continued to rise to 11 per cent in October and November due to price increase in primary foodstuff. The Council expects that the WPI inflation rate for manufactured goods is likely to fall to 4 per cent in February and fall further by the end of March 2009, a trend that may continue for a few months into the next fiscal year. However, inflation in primary foods is likely to remain elevated at close to 8 per cent."

This is a far more sober assessment than what corporate India is customarily used to. What are the real impacts? The prices for non-food primary products have barely moved. Oilseed prices have fallen by more than 5 per cent. This immediately affects all the producers of cash crops, who will be getting the same or less for their products although they are paying more for food. They are also paying more for fertiliser and pesticides, whose prices have increased by more than 5 per cent in the last two years. CPI inflation will also fall, said the Council, but the extent of the fall is unlikely to match that for WPI, "considering the expected higher rate of food inflation and its larger weight in the consumer price indices". Where then will the surpluses continue to come from, especially since rural food inflation is usually 2 to 2.5 per cent higher than urban?

The Communist Party of India (Marxist) has consistently questioned the UPA's inflation equations. "Shamefully, the UPA government is now claiming great success in controlling inflation, at a time when the entire global economy is spiralling rapidly into recession," stated a commentary in People's Democracy, the weekly organ of the CPI-M, in March 2009. "Inflation in prices of food articles are 8 per cent and foodgrains are 11 per cent higher than a year ago, respectively. There was a cut down on food subsidies when a big increase was required. During the UPA regime (2004-2009) the average share for food security allocation on all programmes has stayed below 1 per cent of GDP (current prices), at a time when 16 countries increased their subsidies from near zero to up to 2.7 per cent of GDP as a response to higher food prices."

Policymaking by numbers is always tricky, if not downright dangerous. The differences in rural household distribution of income that are seen to give hinterland homes the spending edge also point to serious problems. Using the same data set, rural households are severely under pressure by disproportionate spending on four important categories:

• on cereals/cereal products and substitutes rural households spend 11.56 per cent of their total expenditure, compared with 5.68 per cent for urban households, a difference of 5.88 per cent;

• on fuel and light (energy for cooking and energy for lighting) rural households spend 18.28 per cent of their total expenditure while urban households spend 15.87 per cent (this category takes up the biggest chunk of expenditure for both types of households);

• on non-institutional medical care the rural household spends 5.92 per cent of total expenditure as compared with 4.21 per cent for the urban household; and

• on vegetables the village household spends 4.14 per cent of total expenditure compared with the 2.79 per cent the city household spends. This last category demonstrates how counter-intuitive actual rural spending patterns can be, as a real reflection of the distortions the rural household economy survives in.

Mixer-grinders, 150 cc motorcycles, entry-level flat screen television sets, mini doses of insurance, cars that will be fuelled by CNG, refrigerators that need to voltage stabilisers, cosmetics and toiletries - the list of new products that corporate India wants to attach the 'rural' tag to has grown quickly. What is at stake here is not only the survival of India's ambitious, if creative, consumer goods manufacturers. At a time when data from regional rural banks is revealing more about the size, shape and reasons for farmers' indebtedness than ever before, at stake is also the financial security of the rural household.