Despite the declining significance of the monsoon on the economy and the diminishing share of agriculture in India’s GDP, the rural market remains an integral part of India’s economy, accounting for more than 70% of India’s population and typically comprising more than 50% of total consumption. Interestingly, the retail boom that has swept the country in recent years is now making its way to the “bottom of the pyramid”, enabling a trickle-down impact and empowering the rural economy. Further, a growing number of companies have begun to see potential in rural areas largely due to the rural sector’s role in both demand and supply dynamics.
Supported by rising income growth—a result of farmers getting better deals as their produce is diverted to major retailers where payment is immediate and producing more lucrative crops —rural consumers’ spending trends is in the midst of a significant shift. For instance, food items, which comprised 73% of expenditure in the 1970s, are down to 55%. A factor aiding consumption is the wealth effect of land sales. Therefore, companies are increasingly using various experiments to tap the latent rural potential. Apart from the traditional initiatives of marketing agri-produce inputs (tractors, fertilizers, seeds), companies have forayed into consumer durables, financial services and other areas.
Rising rural incomes have resulted in a visible rise in rural spending—not only on agricultural inputs, but also on groceries, household items, and consumer durables. While demand is a major growth driver in the rural segment, a number of companies have forayed into the sector to improve supply-chain dynamics directly with the farmer. By eliminating the role of the middleman, the farm-to-fork models (e.g., ITC’s E-Choupal, HLL Project Shakti, DCM Shriram, Godrej Agrovet) have introduced price transparency and reduced wastages. Contract farming is also seeing growing corporate interest.
With 58% of farming households still lacking access to basic banking services, and financial inclusion gaining importance with policymakers, microfinance has emerged as an attractive proposition for large banks. Moreover, with several companies also tying up with banks, retail is fast aiding penetration into financial services in the rural segment. For instance, ITC and DCM are collaborating with the State Bank of India and ICICI Bank, respectively, to either open branches in their stores or aid farmers with loans, thus eliminating the moneylender. Insurance companies are making inroads, too. Insurance currently covers only 2% of our poor. Regulations stipulate that 7% of a company’s policies must come from rural areas in the first year of operation , moving up to 16% by the fifth year.
Although telecommunications grew at unprecedented pace over the past decade, the distribution is highly distorted, with urban tele-density at 31%, and rural at 2-3%. Companies have begun tapping the mobile telecom market through innovative initiatives— several Reliance phones are targeted at rural markets through an emphasis on price; other providers such as Nokia, Motorola and Vodafone have also launched low-cost handsets in the $20-30 range. Another initiative is the Mahamaza model where dealers consolidate orders from surrounding villages and pass on the discounts from bulk buying.
The IT segment’s foray into rural areas is still in a fairly nascent stage, but an interesting initiative is the Byrraju Foundation’s GramIT project set up by Satyam Computers. The aim is to set up basic data processing outsourcing centres in the 160 villages adopted by Byrraju so as to enhance employment, technology and education, and at the same time benefit from low-cost labour.
Government initiatives have also been positive and have encouraged growing commercial viability. These include the Rural Employment Guarantee Scheme and the Bharat Nirman Programme, both aimed at building infrastructure. Improvements in infrastructure are also the key to connecting rural areas with the hinterland, which in turn would encourage corporate entry. As a recent McKinsey study points out, such initiatives have a twofold impact on rural incomes—in the short term, they create jobs that will boost income growth, while over the longer term, they stimulate local economies, which in turn provide alternate sources of income for residents.
The positive impact stemming from corporate forays into rural India should be wide-ranging. Apart from encouraging employment generation within agriculture, companies’ increased emphasis on rural retail should also help diversify employment. More importantly, the upward shift in income levels should eventually help lift people out of poverty and create a stronger middle class. As farm-sector activities climb up the value chain, productivity within agriculture is also likely to see an improvement. In sum, the rural sector is becoming an increasingly important—not to mention profitable—business opportunity for companies.
(Rohini Malkani is an economist with Citigroup India. Comment at email@example.com)