India's economic change story of the last twenty years has made as much impact on its rural landscape as it has on its urban landscape. Collectively, all over India's rural heartland and in its teeming cities, India appears to be readying for an even more impressive era of economic growth.
Today, a staggering 12% of the world's population resides in India's rural areas. There is no question that India's rural markets have become a powerful economic engine. The rural multiplier effect is what excites policy makers and business leaders alike. For every new opportunity for a villager to use his mobile phone to protect his crops, there is a knock-on opportunity for him to purchase a small refrigerator or a motorcycle. There is a growing realization that global investment and growth will increasingly come from rural populations, as their savings translate into consumption. But rural India's contributions to the nation's economic success--and the obvious potential for profitable growth--are just a part of the promise of wholehearted commitment to doing business beyond the city centers and suburbs.
India's rural markets present opportunities that companies seeking to become high-performance businesses cannot afford to ignore. But the size and scale of those markets (three-fourths of the country's approximately 1.1 billion people live in villages) have been offset by concerns about the profitability of these markets and the durability of rural demand.
Now, though there is abundant evidence to indicate that businesses are seeing more promise in India's hinterland. There are several strong regional and macroeconomic reasons for greater confidence. And, there is a growing body of statistics to demonstrate that rural markets, fueled in part by rising purchasing power, hold real prospects for profitable growth across a wide range of industry sectors.
Five reasons for greater business confidence in rural India
(a) About 55 percent of manufacturing GDP is rural; nearly 75 percent of new factories built in the last decade were in rural areas, and rural factories account for 70 percent of all new manufacturing jobs. Industrial development in rural India has increased household purchasing power and income stability. Rural India accounts for about 50 percent of India's gross domestic product (GDP) and nearly 70 percent of India's population. This enormous opportunity has been clear for a decade or more.
(b) The increase in procurement prices (the minimum price that farmers earn on produce sold to the government) is putting more money into the hands of the rural population. A series of good harvests, on the back of good monsoons has accelerated rural employment in agricultural and allied activities.
(c) Between 2009 and 2012, rural consumption per person grew at 19 percent per annum, two percentage points higher than its urban counterparts. In incremental terms, spending in rural India during these two years was USD 69 billion, significantly higher than USD 55 billion by urban populations.
(d) Policy measures such as the National Rural Employment Guarantee Scheme (NREGS), which guarantees 100 days of employment to one member of every rural household, have helped to reduce rural under-employment and raised wages. The official minimum average per-day wage paid under NREGS has increased from INR65 (US$1.4) in 2006-07 to INR100 (US$1.8) in 2011-12 with the total outlay increasing from US$ 2.5 bn in 2006-07 to US$ 8.91 bn in 2011-12.
The increase in rural purchasing power is reflected in many ways. As incomes rise, rural consumption shifts from necessities to discretionary goods and lifestyle products, including mobile phones, television sets and two-wheelers. According to a research done by National Sample Survey Office, nearly 42 percent of rural households owned a television in 2009-2010, up from 26 percent five years earlier. Similarly, 14 percent of rural households had a two-wheeler in 2009-2010, twice the penetration during 2004-2005.
Rural consumers have been trading up, and their consumption basket is beginning to mirror that of the urban consumer. Premium products are replacing entry-level versions, and commodities are giving way to branded products. Nielsen estimates that the fast-moving consumer goods market in rural India will hit US$ 100 billion by 2025, up from US$ 12 billion currently*. Moreover, the government's efforts to improve the efficiency of welfare programs with cash transfers will further boost rural consumption; it plans to deposit US$ 570 billion in the accounts of 100 million poor families by 2014**.
The macroeconomic data clearly point to the soaring potential of India's nonurban markets. But the statistics do not give clues to how interested business leaders might be in the opportunities at hand. Nor do they say whether companies are prepared to make the kind of investments that are required to unlock long-term value from rural markets.
As a matter of fact when Accenture spoke to over 100 business leaders in various sectors, it discovered that all the persistent structural handicaps which come with rural markets make it a far difficult opportunity to capitalize on than perceived. Issues such as inadequate infrastructure, low literacy, and high levels of poverty raise serious question marks about the sustainability of the rural opportunity.
And this is where the rural opportunity discussion takes a sharp turn. While, on the one hand the rural markets appear as an ocean of untapped business opportunity at the same time a possible low return on extremely high effort seems to be the first hurdle that companies have faced. Read more about the various tangible and intangible challenges that rural markets have brought to Indian broad rooms in our next article in this series.
* Rural Spending in India Outpaces Urban Consumption", [email protected], September 2012
** India To Roll Out World's Biggest Direct Cash Transfer Scheme For The Poor", International Business Times, November 2012
(The author is Managing Director, Accenture Management Consulting. Views expressed in this article are author's own and do not represent those of The Indian Expres)