The Rural Consumer Myth - I

Livemint.com - March 25, 2008

“Growth in the hinterland is neither insulated from the rest of the world nor any different
from it.”

By Rama Bijapurkar & Rajeev Shukla

There is a worrying groundswell of optimism that rural consumers will come to the rescue of an
Indian economy which is in the midst of a sharp slowdown. This optimism may be misplaced.

We examine two issues. One: How safe and insulated is rural consumption, both from the
travails of the world around it and from its own special sources of volatility and shock?

Two: How different is the nature of rural consumption, now and going forward, both from its
urban counterpart, as well as from its own past patterns? We'll tackle the first issue in this piece
and the next in the concluding article.

Hearing phrases such as “rural renaissance” or “rural India to the rescue”, makes us nervous.
Such talk bears overtones of the “Great Indian Middle Class” story of the 1990s, where we called
victory at least a decade before we should have. Indian companies suffered; thanks to the slow
demand that followed ramping up of capacity. This time, let us examine the evidence more
carefully and granularly before firms invest money behind the idea that a 700-million-people
phoenix is rising from the dark waters.

First, let‟s get the obvious facts that everyone knows out of the way. Rural India is a major part
of India‟s domestic consumption story not just because it has 70% of India‟s population, but
because it already has 56% of India‟s income, 64% of expenditure and 33% of India‟s savings.
The rural share of popular consumer goods and durables ranges from 30% to 60% and sales to
rural India are steadily growing. Between 2005 and 2008, according to data from the Indian
Revenue Service, colour television sets penetration increased by 7% and packaged biscuits by
10%, aggressive categories such as shampoo even increased penetration by 37%.

It is important to appreciate what even a 1% increase in such a mass as rural India represents. A
1% increase in refrigerator penetration over a five-year period means that more than 1.5 million
refrigerators have been added. The new owners of colour television sets in the last three years are
equivalent to the population of Sweden or half that of Australia. So, even at this low rate, rural
India unleashes enormous consumption power. But the question is: How sustainable, stable and
volatility-free is this growth in income and consumption?

Periodically, India has seen a consumption spurt because of a one-time burst of a combination of
events. This recent spurt seems no different. Over the past four years, the monsoon has been
good; the support prices for crops have grown at 10-15% (Compound annual growth rate) in
2005-08 compared with 2.5-4% in 2002-05; in addition to a healthy flow of farm credit, there has
been a one-time loan write-off of Rs. 65,318 Crores, as well as a sizeable cash outlay from the
National Rural Employment Guarantee Scheme. This doesn‟t show an intrinsic growth in rural
India; this growth is instead owing to a combination of acts of God and acts of government, both
of which have a tendency towards erratic behaviour.

At the same time there has been a step change in rural road connectivity from less than 40%
connectivity in 2004 to at least 70% connectivity at the end of 2008, according to IIFL research.
In addition to road connectivity, there has been a real improvement in phone connectivity as
well. This improvement in infrastructure has the potential to improve rural incomes in a
sustainable fashion, although it must be pointed out that the effect of these will be felt much
more now when this quantum jump is occurring, than in the years to come. So, let‟s be cautious
before extrapolating too much.

Consider agriculture, which accounts for half of rural income. This has been growing very
slowly, simply because agriculture is not profitable for the majority of farmers in India who work
in small holdings. Only 4% of rural Indian households comprise large farmers with landholdings
more than 10 acres. 30% of rural households are marginal farmers with less than 2 acres, and
another 15% have 2-4 acres. Given all the problems farmers face in earning a surplus from
agriculture, it is unlikely that we will see productivity-driven income growth (as opposed to
price-driven growth) in the agricultural sector on a sustained basis. S. Sivakumar of ITC‟s E-
Choupal makes the point that even though we don‟t see improvement in agricultural
productivity, we are probably seeing some improvement in terms of income growths because of
better price discovery.

Hence, it doesn‟t appear that steady and sustained sizeable growths in consumption will come on
account of agricultural income growth. In pockets we may see better crops, captive buyers,
export-focused higher price or acre-yielding farms, but we don‟t know enough to say whether
this is merely the tip of the iceberg or the tipping point. We eagerly wait to hear from experts on
agriculture on this. Therefore, it is to non-agricultural income that we turn to see if this sector is
indeed the future driver of sustainable consumption growths for rural India and, then, for India as
a whole.

The popular view is that nonagricultural income, which accounts for a hefty 50% or rural
income, is far more stable than agricultural income. Certainly, agricultural income is far more
attractive, though that does not mean it is far more stable. Data from the National Service
Schemes (NSS) show that rural households with non-agriculture as the main source of income
are far higher spenders than agricultural households, and more urban-like in their proportion of
food expenditure.

Non-agricultural income is widespread, and of different kinds. Data from the National Council of
Applied Economic Research (NCAER) show that not counting labour, 25% of rural households
can be classified as solely non-agricultural income earners and they have a 38% share of rural
income. This statistic is disproportionately higher than when weighted for population. Piecework
labour accounts for 20% of rural income and 36% of the rural population, but it can be both
agricultural and non-agricultural (depending on what kind of work is available). The bloated
NSS number of agricultural labourers is based on a faulty question. As Dipankar Gupta points
out in the September 2008 issue of Seminar magazine, even if a person works for one day on the
land during a year, NSS classifies him as a “farmer”. “For the remaining 364 days this „farmer‟
could be a bricklayer, a carpenter, a welder,‟ Gupta notes.

Farmers or those “self-employed in agriculture” comprise 41% of the rural population, and
provide 43% of the income, according to NCAER. This is just about what they should have,
given their population weight. (Our 4 December Mint article on “Spotlight on rural consumers”,
discusses this.) Even these farmer households whose main source of income is agriculture have a
non-agricultural income stream.

On an aggregate, 29% of all farm households also have non-agricultural income streams, led by
large farmers. We don‟t know what percentage of income this is, but it does look significant.

Subir Gokarn, chief economist at Crisil, makes the point that some of this income from “other
sources” is also, in states such as Kerala, Uttar Pradesh and Bihar, made up of remittances from
rural migrants to urban cities. When these migrants return home because of job losses, not only
does remittance income disappear, it also results in more stress because there are more mouths to
feed.

Therefore, before we hail non-agricultural income as the saviour of consumption in troubled

times, we need to examine how dependent it is on the agricultural economy, the urban economy,
and perhaps even the global economy.

The truth is that we don‟t yet have an answer to this through direct field surveys that actually ask
people who their customers or their employers are. Sadly, Indian companies‟ willingness to pay
for hard data is low and in the absence of this, India is now at a pace where conjecture, no matter
how widely believed, can be a dangerous basis for business planning.

However, we will attempt to take a stab at answering this. Research from IIFL says that of the
54% of non-farm rural income, 12% is dependent on urban or overseas markets while 42% is
dependent on farming or hunting. This is worrying indeed. If we were to attempt a conclusion
based on the data NCAER has on occupation and share of earnings, perhaps most of the 20%
share of rural income from salaried earners will be urban-dependent, but not agriculture-
dependent, and most of the 15% share of rural income from those self-employed in non-
agricultural is probably agricultural income-dependent. We come to this conjecture based on an
analysis of the income distribution of people in each occupation profile and our assessment of
exactly what these jobs may be, based on ground-level experience.

Most of the “other income”, accounting for a 3% share of rural income, is also in the top quintile.
Therefore, assuming that higher the income, the more urban-dependent the occupation is,
perhaps 20-25% or rural income is definitely urban-dependent but agriculture-independent, and
we can‟t really say much about the rest except to assume that it is dependent on the local
economy, whatever that may be.

Therefore, before we celebrate that half of rural income is “safe” from agriculture, we must
admit the sobering thought that about half of this “safe from agriculture” income is urban-
dependent, another chunk in certain states is migrant-dependent and the rest is determined by
agricultural income.

However, there will be time periods and geographic pockets where sudden activity will affect
(Positively or negatively) non-farm rural incomes. Until we have facts that throw more light on
this relationship at a very granular household level, based on on-the-ground anecdotal evidence it
seems that in a good agricultural income year, non-agricultural income acts as multiplier for
consumption; and in a bad year it acts as a moderator, but not as a saviour for rural consumption.
It also seems that its multiplier effect is probably far greater than its moderator effect. So, it is
too early to call victory. But we have a newer and better framework of rural consumption to
watch and learn as we go along. Until then, we can only pray that agriculture can hold up for
another two years while the urban economy recovers from this slowdown.

Rama Bijapurkar is an independent management consultant. Rajeev Shukla is a senior fellow at

the National Council of Applied Economic Research. This is the second instalment of a two-part
article on the rural economy. Comments are welcome at theirview@livemint.com

The Rural Consumer Myth - II

Livemint.com - March 26, 2009

“We should envision villages smartly and not assume that they are at a lower evolutionary
stage.”

By Rama Bijapurkar & Rajeev Shukla

The recent media attention paid to the rural economy would make it seem as if the rural
consumer is a different Indian altogether. But this is not such an open-and-shut case.

In the first of our two-part article on Wednesday, we had concluded that the rural economy isn‟t
as isolated from the urban downturn or from the vicissitudes of agriculture as most would
imagine. Here we address the issue of the nature of the rural consumer, etching out a mental
model.

Many of us are not sure how much water of progress has flowed under the rural bridge. Some are
beginning to wonder if there is indeed a rural-urban market divide. A corollary to this is the
growing belief that our domestic market has at last reached a scale; this belief has prompted
companies to focus on domestic markets, as Bharti Telecom has demonstrated of late. On a less
business-related note, some political analysts are warning that political parties that do not
understand the new rural mindset, and deploy stale strategies, are in for unpleasant surprises
come this general election.

The mental models etched in many minds are that of a rural India still stuck in the dark ages.
Anecdotal evidence shows very visible signs of marked modernity and progress, consumer
durable and non-durable product sales to rural areas show steady increases, yet census data
corroborates the “stuck in the dark ages” description of rural India. Only 25% of rural
households have access to tap water (compared with 70% in urban India); 45% have no
electricity in urban households; while 52% have semi-pucca houses (compared with 80% in
urban areas having pucca houses).

The truth obviously lies somewhere in between. This is why we need to build new mental
models about rural India today, taking into account the following points.

First, rural India isn‟t a single homogenous block; it is heterogeneous. In fact, the label Rural
India is a catch-all phrase to describe many disparate parts in many stages of development,
driven by many different forces. The rural parts of Uttarakhand, Gujarat and Bihar are all
different in character.

Second, rural India is made up of all kind of occupations. The rural consumer could be a bank
clerk commuting to the nearest town or an agricultural labourer in a thatched-roof hut.

Third, with road connectivity so widespread, the notion that rural Indians are stuck in the
hinterland, and unexposed to the developments around them, simply isn‟t true anymore. Children
and women commute farther for their schools and for their shopping, respectively.

Fourth, rural Indians have small and compact families, just like urban India. According to the
National Council of Applied Economic Research (NCAER) data, the average rural family has
5.08 persons; the average urban family, 4.81 persons.

Fifth, while rural India is exposed to all new things urban, it still has a low level of traditional
education, making rural Indians different kind of consumers. 26% of rural India‟s chief wage
earners (CWEs) are illiterate compared with 8% in urban India. 7% of rural CWEs are graduates
compared with 29% in urban India.

Finally, there‟s the issue of income. Rural India has an average per capita income that is half that
or urban India. Extrapolating from income data from NCAER, we know that 21.7% of the rural
population is below the poverty line; for urban populations, the incidence of poverty is 20.8%,
not much lower.

It is just that this translates into there times as many poor households in rural India, a whopping
160 million people at least. The rural numbers are large and rural India harbours as many rich
households as urban India.

The richest quintile of urban India and the poorest of rural India are the outliers. The rest are
fairly comparable, showing that scale is possible by skilfully combining urban and rural
consumers, especially in good road connected geographies and progressive states. What kind of
income growths can we see in rural India?

The past four years of good gross domestic product (GDP) growth have sharply increased
middle-income households and high-income households in rural India while decreasing lower-
income households. Future GDP growth, even moderate, will double the high and upper-middle
income groups. So, rural consumption is well on its way and we must never forget that even a
small shift upwards of this large population will make a lot of waves.
What we must never do is make the same mistake with rural India that Western multinationals
make with India as a whole - assume that it will evolve the same way with a 10-year lag. The
rural Indian market and consumer calls for sophisticated new marketing strategies and
paradigms, not a transplant of old ideas.

Rama Bijapurkar is an independent management consultant. Rajeev Shukla is a senior fellow at

the National Council of Applied Economic Research. This is the second instalment of a two-part
article on the rural economy. Comments are welcome at theirview@livemint.com