Friday 29 Oct 2010

The Rural Push: Hinterlands Promise

Rural market can be the economys next growth driver
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As the India Economic Summit 2009 gets underway in the capital, the big question in the minds of senior government officials as well as corporate bosses is: what will be the next big driver for Indias growth story? This year, the Prime Ministers Economic Advisory Council forecasts a GDP growth rate of 6.5 per cent, making India one of the fastest growing economies in the world. Though nobody expects a return to the 9 per cent-plus growth rate by the next year, the government is hoping that by fiscal 2011-12, India would have gone back to that rate, or somewhere close. But what will help achieve these growth rates? Will it be the same drivers that pushed India into the super growth orbit in the immediate past? Or will we see a completely new set of drivers? There is a growing feeling in certain circles of the government that the big trigger in the next couple of years will be the growth of the rural economy and a rapid increase in rural consumption. After the government announced the stimulus packages late last year, cabinet secretary K.M. Chandrasekhar pointed out that it was the rural economy that had prevented India from joining the global economic freefall. In the past few years, the position of our rural economy has considerably improved, he had said, adding that India has a strong rural market that will act as a bulwark against the external forces. Some people outside the government hold similar views. Pradeep Kashyap, CEO of market research firm MART, says that they have done studies that show that it was demand from rural India that kept the growth rate ticking. For instance, their study shows that cement demand for rural housing did not show a dip because rural houses are for selfoccupation compared with demand for housing in urban centres that was speculative. The problem is that while there is plenty of anecdotal evidence that rural consumption and rural income is growing rapidly and that it went up even while the urban consumption slowed during the meltdown there are no statistics that the government has collected to gauge the true potential of the rural promise. Sure, the number of urban households 60 million is less than half of the rural households (150 million) in the country. And despite growing urbanisation, it is generally accepted that even by 2025, over 60 per cent of the countrys population will still reside in rural India.

But beyond that, there are scant statistics that capture the true measure and the patterns of rural consumption in real time. Most of the data being used by the government is four to five years old, and they are unlikely to reflect the current real conditions on the ground. The Big Promise And yet, despite the lack of data, company after company has stories of how galloping rural demand is counter-balancing slowing urban consumption. From telecom majors to financial services providers to car, bike and tractor manufacturers, almost everyone has a story to tell. Maruti Suzuki turned to the rural market seriously in 2008-09 when the slowdown drained demand from the big cities. It created a team for spurring sales for cars in rural areas. It got its dealers to set up points of contact in villages and tiny towns and covered 84 per cent of the 3,800odd tehsils in India. Its rural offerings are centered around micro and compact cars Maruti 800, Omni, Alto and Wagon-R. The percentage of rural sales in the companys total sales trebled in 2008-09 to 9 per cent from the 2007-08 level. In the first half of the current fiscal year, rural markets contribution has reached 16 per cent. Mayank Pareek, executive officer (marketing and sales) of Maruti, says, What we have found so far is just the proverbial tip of the iceberg. There are about 600,000 villages and very small towns in India and most of these are getting a road for the first time. With roads the need for travel will rise in these places. He says, Earlier the rural consumer bought Maruti vehicles by travelling to the cities, but now we are selling the vehicles to that consumer (in the villages).

Then take companies such as Hero Honda where sales are equally divided between rural and urban areas. In fact, during the slowdown, Hero Honda managed to do rather well as the cashpaying rural India ensured that the companys sales did not crumble because of scarce and expensive auto finance, something that hurt other two-wheeler producers. The company sold 3.7 million two-wheelers in 2008-09, 12 per cent more than in the previous year, while its main rival, Bajaj Auto, slipped by more than 20 per cent in absence of tight credit and generally poor consumer sentiment in the big cities. Godrej Consumer Products saw rural sales grow at 40 per cent in the past six months, compared with 20 per cent growth in urban sales. Where only a few companies such as ITC and Mahindra & Mahindra had done anything to seriously tap the rural economy till a few years ago, many new companies, in all sorts of businesses, are now gearing up to tap the opportunity. Similarly, telecom companies such as Bharti Airtel and Tata Teleservices have rolled out plans to tap the rural market. Bharti has said that it would invest $1.5 billion this fiscal to improve connectivity in rural areas. And Tata Teleservices has planned a new marketing strategy of going door-to-door and even involving gram panchayats to impress upon people the benefits of mobile telephony. Companies such as Philips and even Eveready have rolled out new cheap lanterns to replace the kerosene ones specifically targeted at the rural market. Some are building their own marketing networks while others are piggybacking on infrastructure built by others. A good example of the latter is pharma giant Roche Diagnostics (India), which has tied up with Delhi-based Mankind Pharma to market its new diabetes monitoring devices for the rural market. The incidence of diabetes in rural areas is high and Mankinds reach is very broad. This agreement has helped us significantly increase our sales in rural markets, where we still continue to look for new ways to expand our business, says Bhunesh Agrawal, chairman and managing director, Roche. Government Does Its Bit Meanwhile, the government is planning to go on a rural infrastructure overdrive to make sure that the rural economy picks up even faster. The thinking is based on the logic that rural consumption will not take the next quantum jump unless the right conditions are created. Whats the point in selling a fridge in rural India when there is no electricity? Pronab Sen, Indias chief statistician, says that rural market may be key for the next wave of growth but asks, Do we have the right infrastructure for this? Conveying a similar apprehension Vikram Akula, CEO of SKS Microfinance, says, There is an enormous demand for basic services in addition to financial services. The poor lack access to basic services (and these are) areas of enormous unmet demand, as well as business opportunities.

Planning Commission deputy chairman Montek Singh Ahluwalia agrees with that view and says that is why the government is putting a lot of stress on rural infrastructure development. We need to have a much broader expansion of infrastructure in the rural areas than we have had in the past. Apart from the social side, this is important to improve the economic efficiency. Connecting farmers to markets essentially widens their opportunities. They can then go into a wide range of income-earning opportunities rather than self-sufficient type of production. Unless they have a cash income, they cannot have a demand for anything else. And here there is lot of scope for that. The government is speeding up its spending on rural India quite massively. Under the programme of Bharat Nirman, aimed at improving rural roads, housing, irrigation and electricity, the government spending is estimated at Rs 1,76,000 crore during 2005-09. That apart, there is an effort to put money into the hands of the rural poor directly through the National Rural Employment Guarantee Scheme (NREGS), where Rs 1,00,000 crore has been earkmarked for the 11th Plan period (2007-11). And just in this current year, the government has already earmarked 39 per cent or Rs 39,000 crore towards this scheme. Apart from providing the basic services, these schemes directly put money into peoples hands and even provide employment opportunities. Schemes such as NREGS and other constructionlinked schemes directly provide employment and, therefore, even cash. Some of the measures that the government is taking today will pay back only in the long term, because of the lag effect. For example, while spending in rural infrastructure will have some immediate benefits jobs in the infrastructure projects the real benefits will come when this infrastructure becomes functional. New roads connecting villages to cities will help villagers find better markets and better price for their produce, while giving corporate India more opportunities to sell goods and services to villages. Similarly, proper electrification of rural areas will improve productivity and incomes. The promise of rural India is immense. Much depends on the governments ability to tap it though. THE OPTIMIST Key is to look out for non-farm activity

Post-crisis, the question now is, can India sustain high growth rates of the past that has largely been driven by urban-centric services and construc-tion? Indias chief statistician Pronab Sen speaks to BW about Indias rural markets, which are seen as the next growth driver for the economy. Excerpts: Can we say the next wave of growth will come from rural markets? It is certainly possible that rural markets will give Indias next wave of growth. But the fact is, do we have the right infrastructure for this? But given the atten-tion being paid to rural infrastructure, rural India is likely to get good roads and quality power. What more needs to be done? First, a lot depends on how urban-centric industries move to rural areas. There is increased diversification. But the key is ICT (information, communication and technologies), which will only happen with better infrastructure. Industry has to take a call on tapping the people involved in non-farm activities. How big is the rural market? How different is it in terms of requirements? Consumer behaviour is very difficult to assess in this case. However, both urban and rural markets can thrive side-by-side and in an independent manner. After all, there are cultural differences. But if you say the FMCG market alone is Rs 200 crore I would say it is much more like Rs 2,000 crore! You must understand that rural market has a lot of non-farm activity. Almost 50 per cent of rural income now comes from non-farm activity such as kirana stores. Is the government collecting data on the rural market and on how incomes are rising after including NREGS? Not yet but the key is to look out for non-farm activity that is growing very rapidly. With inputs from Feroz Ahmed, Noemie Bisserbe and Suneera Tandon kandula dot subramaniam at abp dot in URL for this article : http://www.businessworld.in:80/bw/2009_11_07_The_Rural_Push_Hinterlands_Promise.html Copyright 2008 Businessworld.in