Bharat Shining


For long, it was the almost solitary exception of a certain Hiware Bazar, the extraordinary village of 1,350 in Ahmednagar district of Maharashtra, which has some 60-odd rupee millionaires. The success flattered to deceive the wide world about the real nature of the Indian hinterland’s growth story, or the absence of it. The picture has since had a marked shift — not marked enough to constitute a nationwide trend, but still notable enough for the rapid changes in consumption patterns in the countryside.

Make no mistake about it. The number of those with deep pockets in the hinterland is on the rise, even when the phenomenon may be limited in terms of reach and extent to primarily seven states: Tamil Nadu, Karnataka, Maharashtra, Gujarat, Kerala, Andhra Pradesh and Punjab. The pockets of conspicuous affluence that are mushrooming in these key states have helped change the big picture in a significant manner.

However, a caveat is necessary to comprehend the dimension of the shift. It is not the call of financial inclusion of the government that is leading lenders and corporates into the Indian hinterland, but the sheer opportunity to make profits. For long told by increasing sales of shampoo sachets and low-end motorcycles, the great Indian rural story is having a paradigm shift. Bankers, especially the private ones, who always look for the big ones, are now joining the scramble to capture the rising ranks of the rural rich.

Five years ago, Kotak Mahindra Bank, which was more of a broker-lender than a traditional banker, showed agricultural lending as part of its retail portfolio. At that time, it constituted 15 percent of the total Rs 16,200 crore retail portfolio. According to figures available now, agriculture forms part of Kotak’s commercial banking group, and constitutes 40 percent of the Rs 21,452 crore of such assets.

That one example speaks volumes of the growing importance the non-descript and clichéd countryside now plays in the lives of men driving around in fancy imported cars.

Renowned for taking the cream of the clientele, Kotak has found a new target — the rural rich. As can be empirically established, the confluence of affluence in rural India and saturating business as far as the urban rich are concerned, is forcing several banks to fan out to less-privileged rural India. The banks have an additional incentive: they have the chance to convert the increased savings that lie in physical assets, such as gold, into deposits. Rural India has famously distrusted formalised banking (the savings-in-themattress phenomenon), but the scenario is changing.

Wealth in the countryside is growing, which has made the proposition of being in rural India interesting for lenders, bankers and corporates. Financially more remunerative farming and the real estate boom in parts of the country over the past 15 years have put many farmers in the league of at least rupee millionaires, making them an attractive proposition for bankers.

A case in point are the strides made by HDFC Bank, which started moving into the rural market only five years ago, but now has almost 55 percent of its more than 3,500 branches in rural and semi-urban areas. In 2013, it opened a majority of its 520-odd new branches in the preceding year in rural and semi-urban pockets.

Although the Reserve Bank of India (RBI) mandates banks to open a quarter of their branches in villages with less than 10,000 population, reports indicate that Kotak Mahindra plans to do more as the cost of setting them up is just a fraction of what it takes in an urban area or city.

Banks are fast realising that rural branches are not necessarily loss-making and unviable. They are making special efforts to keep them slim and efficient, which will translate into greater profits for them. A banker with HDFC explained that most of the rural branches are profitmaking, especially if the need to keep the costs low is kept in mind. The banks offer almost everything from a plain savings account to loans for businesses — they also provide ready wealth management advice. No longer is it the monopoly of a State Bank of India to woo rural targets with comparatively deeper pockets.

As an expansion strategy, many lenders lean on the village sarpanch who, according to most, is probably the best PR person or salesman the banks could have. With his network, the sarpanch could also act as a credit information bureau by suggesting who are trustworthy and who are not. It is no longer rare for rural bankers to carry a micro ATM with them, which can do multiple transactions at a time, including cash withdrawal, deposit, fund transfer and balance enquiry.

This scene is being played out practically every single day in the interiors. Many sincerely believe that rural India, with 68 percent of the country’s population, is evolving rapidly and changing character with growing incomes, rising literacy and aspirations. It has the potential to be a sustainable growth engine of the Indian economy.

Two years ago, credit-rating agency Crisil had attributed the growth in consumption in rural India to non-farm job opportunities and State-initiated employment generation schemes. The study noted a shift in spending patterns in rural areas with consumers moving beyond necessities such as toothpaste and soaps to so-called discretionary products such as television sets and mobile phones. One in every two rural households in the regions studied had a mobile phone and even in the country’s poorest states such as Bihar and Odisha, one in every three households had a mobile phone.

Some 42 percent of rural households owned a television, according to the study, up from 26 percent in 2009.

Consumers in rural areas are using products that once sold largely in urban areas: skin and personal care products are showing substantial growth, according to a recent study by Assocham. Even when it comes to consumer packaged goods, semi-urban and small towns are leading growth in terms of value.

The RBI has reported that consumer prices in rural India rose 8.7 percent in 2012-13, while rural wages jumped by some 18 percent. The extra cash in the hands of the rural population has fuelled demands for several such products that were considered to be almost the exclusive domain of urban areas and metros. However, the question that remains largely unanswered is whether real wages in the rural areas are also increasing, given the nature of the limited employment provided by State-run schemes such as MGNREGA. The majority of the government- run schemes are short-term income boosters and the need to replace them by sustainable job schemes is largely paid mere lip service. The upbeat rural story will come under stress if sustained inflation continues.

Figures reveal that growth in sales of scooters and motorbikes slowed by 5 points or more last year to end just a point or so below 10 percent. That is the alternative rural story that could quite easily overtake the upbeat one if inflation and other variables remain high, warn experts.

The changes have been bewildering indeed. Even the smallest village store today offers customers the choice of a dozen soap brands, toothpastes, shampoos and the like — striking outward manifestations of a fast-changing consumer marketplace.

Probably, nothing illustrates the transformation of the marketplace better than the oft-cited success story of one of India’s largest consumer products maker, Hindustan Unilever Ltd (HUL). According to a study, two years after India embarked on its ambitious reforms journey in 1991, the country’s largest consumer goods company had revenues of around $400,000. By 2013, HUL was not just reflecting the new reality of the Indian marketplace — that of a globally integrated economy — in its name alone. Its revenues had also grown more than 11-fold to more than $4.6 billion.

Several conscious decisions helped the HUL advance. Its ability to spot the changes in the marketplace and adapt to them has been an abiding factor, claim its managers. For instance, HUL was one of the early entrants into the rural marketplace, where rising growth, better technologies and supportive government policies in a few states were combining to transform the traditional rural economy. Now, with half of India’s estimated consumption market for packaged consumer goods and durables, that rural bet has paid off. HUL retained its numero uno status in the consumer goods segment until the cigarette manufacturer ITC successfully rode the reform wave to transform itself into a food, consumer products, packaging, hospitality and information technology conglomerate.

In the durables space, the transformation has been equally dramatic. The incredible growth in mobile telephony has transformed India, making it the world’s second biggest marketplace with more than 800 million connections.

Rising prosperity in select states is indeed luring India’s big business to the hinterland, prompting heavyweights such as Tatas, Birlas and Godrej to devise fresh strategies to enlarge their farm portfolios. Without exception, all these companies believe that the farm sector provides them with big growth opportunities as rural consumption outpaces urban demand.

A recent survey by Crisil revealed that for the first time in 20 years, additional spending by rural India at Rs 37.5 crore was significantly higher that that of urban dwellers at Rs 29.94 crore.

“Underpinning this growth in rural consumption is a strong rise in rural incomes due to rising non-farm employment and the government’s rural focus through employment generation schemes,” the report said.

There is a trend towards specialisation and value addition. Consider this. Rallis has compiled a digitised database of more than 700,000 Rallis Kisan Kutumb farmers whom it contacts regularly using mobile phones, Internet, newsletters or through its field staff to offer products and services. This data gives them the kind of raw market intelligence necessary to create new offerings. Farmers in some regions are given a toll-free number to discuss their issues with an agricultural expert. They aspire soon to reach out to 1 million farmers, and capture a larger share of their wallet.

Mahindra & Mahindra has built the world’s largest tractor business by volume. It achieved this a couple of years ago.

The steady and consistent performance of automaker Maruti Suzuki provides another dimension to the upbeat story. Its rural sales grew 16 percent in 2013-14. At 336,463 units, this segment comprises 32 percent of the car market leader’s total sales spread over 93,500 villages, up from 44,374 villages where the company sold its cars in 2012-13.

According to company honchos, Maruti sees its non-metro push as the drive to the future. Maruti chairman RC Bhargava says that the future growth of the automobile industry will be driven more and more by non-metro cities and rural areas.

The rural focus comes on the back of Maruti’s strategy of hitting sales of 3 million units in the longer term. Analysts say Maruti has managed to “crack” the rural market thanks to its focus on fuel efficiency and network expansion. Maruti, which has 3,000 rural service outlets, is planning to expand that network by 200 this year. It is also planning to double its 1,000-strong mobile service vans across rural markets.

Maruti’s rural thrust commenced tepidly in the slowdown of 2008, but really came good in 2013 when the car market saw its worst slowdown in a decade. While the rest of the market ground to a negative growth curve, Maruti saw its smaller and rural markets — with populations of less than 10,000 people — growing around 14-15 percent. Until 2007-08, only 4 percent of Maruti’s total sales came from rural markets. In six years, that share has multiplied to 32 percent.

“The rise in commerce in rural India is a symptom of how villages in the vicinity of urban ateas are also changing,” wrote sociologist Dipankar Gupta while analysing the 2011 Census.

The point is further elaborated by Jawaharlal Nehru University’s research associate Dilip Mohanty who has closely studied the spurt in the number of rural rich in selected pockets. “According to the Telecom Regulatory Authority of India, there are 352 million mobile connections in rural areas,” he says. “Nearly every big village in relatively developed states is aping urban areas, both in terms of choice of non-food consumer goods and spending. In fact, there is a definite trend of rural spending on consumer goods fast outpacing urban demand.

Last year, disclosures about how more than 100 village headmen in Bihar siphoned off MGNREGA funds to line their pockets and became millionaires overnight had caused a huge furore. There are new acquisitive categories that are taking advantage of cheap institutional credit, if they can afford it.

FMCG in the rural areas: bad definitions and hardsell

Everything truthful lies in the definitions. This is an axiom, an oxymoron and an irony. And a satire, if that’s your inclination. Here’s why. By Kajal Basu

This much is true: Fast-Moving Consumer Goods (FMCG), popularly called consumer packaged goods, play a vital role as a necessity and as an inelastic product. Rural India accounts for 70 percent of India’s population, 56 percent of national income, 64 percent of total expenditure, and one-third of the total savings. The Indian FMCG sector is the fourth largest in the economy, with a total market size of 1.67 lakh crore.

The market is estimated to grow to $100 billion by 2025, according to market research firm Nielsen. In the past decade, the FMCG sector has grown at an average of 11 percent a year; in the past five years, annual growth was 17 percent. The FMCG industry is characterised by a well-established distribution network, low penetration levels, low operating cost, lower per capita consumption, and intense competition between the organised and the unorganised segments.

And this is the dichotomy: According to Census 2011, human aggregations qualify as rural (villages) if they have surveyed, demarcated boundaries not within a municipality, corporation or board; populations of less than 5,000; population density of less than 400 per sq km; and at least 75 percent of the male working population engaged in agriculture and allied activities. Going by these parameters, there are 585,764 villages in the country, of which 0.5 percent (or 2,929) have populations of more than 10,000, 2 percent (11,715) have populations of 2,000-10,000, and 18 percent (105,438) have populations of less than 2,000.

According to Census 2011, there are 7,935 towns in the country, up by 2,774 since Census 2001 — a growth of 35 percent, which is more than double the population growth rate in the same decade. The rural population, which is 68.84 percent of the country’s total population, has shown a decadal decline of 2.45 percent, while the urban growth rate is 31.16 percent. What this essentially means is that there has been a mass transfer from the rural to the urban areas; a corresponding exposure to unsummoned consumer goods advertising; proximity to retail centres; proximity to FMCG choice; and, often, the means to exercise choice.

There is a reason why FMCG and consumer durable companies depart from census definitions, and consider any demarcated area with a population of 20,000-99,999 as a ‘rural’ market. In effect, for these companies, it isn’t rural India that is ‘rural’: rural India for them means Class-II (population of 50,000- 100,000) and Class-III (20,000-49,999) towns, because these have the purchasing power, and any area with a lower human population is too small to support the kinds of FMCG outlets in their plural that would make marketing to them viable. (Not ‘sustainable’ — in these times, almost anything is sustainable given an inflow of money; but viability means an outflow of profits sustained for evermore beyond an initial period of necessary sustainability.)

What this also means is that FMCG marketing studies of rural areas are bedevilled by contradictions: the academic studies, even those by think-tanks such as CRISIL, McKinsey, Nielsen, PricewaterhouseCoopers and the Associated Chambers of Commerce and Industry in India (ASSOCHAM), mean one thing; the FMCG companies themselves mean quite another.

Their reports on the swift spread of FMCG in the rural ‘sector’ will drown the reader in statistics; yet, there is never a mention of what numbers constitute ruralised locales and rural sublocales, no statistics on the differentials between urban agglomerations (UAs) and outgrowths (OGs); not even a mention of the fact that UAs often and increasingly include rural OGs that share characteristics, both essential and peripheral but necessary to market-planning, with outright rural areas as defined by the census.

So PricewaterhouseCoopers says: “Around 70 percent of the total households in India (188 million) resides in the rural areas. The total number of rural households is expected to rise from 135 million in 2001-02 to 153 million in 2009-10. This presents the largest potential market in the world. The annual size of the rural FMCG market was estimated at around $10.5 billion in 2001-02. With growing incomes at both the rural and the urban level, the market potential is expected to expand further.” Perhaps it does; and perhaps it is expected to. But what this 2010 report doesn’t account for is detailed demographics, which has bedevilled marketers in India for as long as marketing has been around.

This disdain or, to be generous, unwillingness to tackle the baseline reduces terminology such as “drive penetration” and “low and high penetration categories” to just so much puff and powder.

The India Rural Development Report 2012-13 says: “Recent data show that rural monthly per capita consumption expenditure (MPCE) grew at a rapid 5.5 percent a year between 2009-10 and 2011-12 (NSSO 2012). While average rural MPCE remains about half of urban, the growth in rural income and expenditure is reflected in a sharp drop in rural poverty to less than 26 percent from 34 percent in just two years. With its growing purchasing power, the rural market is no longer a residual retail market. Products are being designed to cater specifically to rural demand.

There is more, much more, on exactly these lines, all which blur any detailing and speak in terms of overbroad statistics. While there is no doubt that rural incomes have gone up often the result of cash repatriations and repatriation banking, in which money is sent back home to be banked back home there are no statistics to show exactly how much of the new rural ‘richness’ is the result of sustainable self-earnings.

What is true is this: that generation-to-generation percolating transfers and the fracturing of landholdings among children are behind increasing landholding fragmentation in the rural areas. By 2010- 11, about 66 percent of landholdings in the country had been rendered marginal (less than 2.5 acres). (In 1970-71, just before the land agitations took off and just after the landmark Operation Barga in West Bengal, 51 percent of landholdings were marginal.) There was, in effect, higher rural spend relative to today. As of 2012 (Union Ministry of Agriculture report), 18 percent of land was held by small farmers (2.5-5 acres). This brings the total land being held by small and marginal farmers to 84 percent of all land, or 44 percent of the total operated area.

Furthermore, the reach of large landowners has also come down. In 1970-71, when zamindars were getting whacked all over the place by surging land reforms, big landowners controlled 31 percent of the total operated area. By 2010-11, this had declined to less than 11 percent.

Today, what is called a “large farmer” (who owns more than 24.7 acres) in India is a small farmer by international standards. Nor is all the land viable. The severe degradation of land means that 57 percent of the total land in the country has been degraded by environmental and manmade causes.

What we are staring in the face is a twisting of numerics and terminology in the service of marketing jargon. There is no doubt that FMCG companies have ‘a plan’ for rural India, and are following a template — but it’s neither a firm plan nor a rational template (rationalised, perhaps, but not rational).

What FMCG companies are depending upon is not so much sales to agrarian units as to non-farm livelihood households. The number of households that exist primarily on rural non-farm employment (RNFE) income has increased from nearly 32 percent in 1993-94 to over 42 percent in 2009-10 (NSSO 2011), which brings them neck and neck with the nearly 40 percent of rural labour households that also own land. But for this still uncertain demographic, rural sales of FMCG at least, what are known as “organised sector” FMCG companies would be impossible to quantify with even as much statistical malleability as one comes across in report after report today.

There is another way that a statistical paradox has made its way into the common discourse on rural expenditure on FMCG. The years 2000-04 were by all indications the worst period for FMCG growth in India in the past three decades. The FMCG industry’s growth declined to the low single-digits. The trend was reflected in the large, listed FMCG companies of the time — Hindustan Unilever Ltd, a mammoth with a revenue of Rs 221 billion in 2011-12, Nestle, ITC, GlaxoSmithKline and Colgate. There was sales shrinkage but strong margin expansion, notwithstanding the paucity of operating leverage.

But it was HUL that did the most damage. What is known as its “power-brand strategy”, which it initiated in 2000, cutting its brands from 130 to 40, pulled the entire industry down. HUL pulled its brands from the urban as well as the rural markets, with its pullback the most severe in the rural segment. Its compound annual growth rate in those years was exactly 0 percent. The FMCG industry still blames today’s sketchy growth rate to hul losing market share to the unorganised competition, especially in rural brands such as soaps, detergents and tea.

In effect, a great deal to do with rural FMCG growth or otherwise boiled down to how seriously a single company underperformed, affecting the growth of FMCG across the board. In point of fact, growth in rural consumption has less to do with the earning and spending capacities of the rural poor than has been guesstimated; it has as much to do with the planning and execution of corporate marketing policies.

To hold today that rural India is catching up with urban India could well be a well-marketed myth. Over the years, rural-urban inequality has only worsened or, at best, chopped about like a rollercoaster ride, with today at a low point. The urban-rural MPCE ratio increased from about 1.5 (early 1980s) to about 1.7 (late 1990s). And then it shot up to 2 by 2010. These are unarguable statistical indications of social distress. Going by the Gini coefficient, the standard measure of inequality, rural inequality plateaued from 1983-97 (0.302-0.305). (It had even dipped to 0.277 in 1990-91). But in 1999-2010, the Gini coefficient increased from 0.263 to 0.284.

(The Gini coefficient measures income inequality. It lies between 0 and 1, where 0 corresponds with perfect equality [where income is the same for everyone] and 1 corresponds with perfect inequality [where income is concentrated in one person — with everyone else having zero income.]

The Gini coefficient of inequality is higher in the rural areas of Kerala, Punjab, Himachal Pradesh, Madhya Pradesh and Haryana than in the rest of India. In contrast, Assam, Jharkhand, Rajasthan, Bihar, West Bengal and the Northeast have markedly lower rural inequalities. In 14 states, however, rural inequalities slid between 1993-94 and 2009-10.

Rural poverty has grouped and coalesced in Jharkhand, Bihar, Assam, Odisha, Chhattisgarh, Madhya Pradesh and Uttar Pradesh. Their percentage of the poor significantly exceeds their percentage of the national population. In 1993-94, nearly 50 percent of the rural poor were concentrated in these states. This escalated to 63 percent in 2009-10 and 65 percent in 2011-12.

These states have been left out of the rural FMCG gung-ho drive even in the iffy corporate studies.

There is no doubt statistical and anecdotal that rural poverty, measured purely by consumption (and not satisfaction, by any parameter), has decreased from 42 percent in 2004-05 to 34 percent in 2009- 10 and 26 percent in 2011-12. But whether or not this should be read as spiking dans locale FMCG consumption as against other kinds such as developmental: education, employment, repatriable, etc is moot.

What is certain is that definitions and statistics by FMCG companies are not the thing to go by.


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