In a first, Bharat surpasses India in consumption


August 30, 2012

Meghna Maiti, Financial Chronicle

Mumbai, August 30, 2012

For the first time in a quarter century, rural India outdid urban consumption in the past two years, according to a Crisil study. Rural spending rode on a big increase in incomes, mainly resulting from non-farm jobs and rural employment guarantee schemes.

A young population, rising incomes and low penetration of many consumer durables mean that rural consumption has the potential to remain an important source of demand, the study says.

But to sustain this, says the study, it is critical to substitute short-term income boosters such as government-sponsored employment schemes with durable job opportunities in rural areas.

Devangshu Dutta, chief executive of Third Eyesight, a retail consulting firm, says rural growth comes on the back of increasing incomes, percolati­on of aspirations and life­style from urban areas. The trend is clearly visible in the consumption of fast moving consumer goods (FMCG) in the hinterland.

One company in this sector, Godrej Consumer Products, has seen strong growth in rural areas… “fuelled by wage increases and enhanced exposure to products,” acc­ording to P Ganesh, the company’s executive vice-president and company secretary. The FMCG sector also benefited from development in tier II and III cities.

Besides guaranteed rural employment, ever-higher minimum support prices for farm produce have helped raised rural incomes and standards of living.

Rural demand accounts now for around 40 per cent of Hindustan Unilever’s sales. The company claims two of every three Indians as its consumers.

Jagdeep Kapoor, CMD of Samsika Marketing & Consultants, estimates that rural areas give the FMCG industry more than half its income. The rural population is far bigger than the urban populace. With the spread of television, internet, rural consumers are now more aware of brands. Two-thirds of India’s billion-plus population are estimated to live in villages.

Harish Manwani, Hindustan Unilever chairman, spoke of the importance of rural India to his company at its recent annual general meeting. “More than 40 per cent of our products are consumed in the fast growing markets of rural India. We have been pioneers in developing rural markets through affordable brands and an unparalleled distribution reach,” he said.

Similarly, 35 per cent of ITC’s FMCG revenue comes from rural India. Hemant Malik, COO for the company’s FMCG marketing and distribution, has not seen a change in the consumption patterns in urban and rural areas. But ITC is closely monitoring this to build sales strategies.

He says ITC does not expect any change in the FMCG demand and consumption pattern in rural India. “Since FMCG items are of daily use, consumption may shift towards smaller pack sizes, and customers may downgrade or substitute items.”

Because a majority of India’s population resides in the villages, the value of goods and services consumed by them has always been more than in urban India. But the difference has been narrowing as urban India has been growing faster.

However, during 2009-10 and 2011-12, rural consumption per capita grew annually at 19 per cent, 2 percentage points higher than in urban areas, according to preliminary data released for 2011-12 by the National Sample Survey Organisation.

In incremental terms, spending by rural India in these two years was Rs 3,75,000 crore, significantly higher than Rs 2,99,400 crore spent by urban people.

With rising purchasing power, a notable phenomenon increasingly discernible in rural consumption is a shift from necessities to discretionary goods. One in every two rural households now has a mobile phone. Even in India’s poorest states such as Bihar and Orissa, one in three rural households has a mobile phone.

Nearly 42 per cent of rural households owned a TV set in 2009-10, up from 26 per cent five years earlier. Similarly, 14 per cent of rural households had a two-wheeler in 2009-10, twice that in 2004-05, although penetration remains well below the urban level of 33 per cent, says the Crisil report. More than half of India’s stock of consumer durables such as TV sets, electric fans and two-wheelers is now in rural India, the report adds.