Firms must tackle rural-urban divide6 min read . Updated: 30 Nov 2008, 11:40 PM IST
Firms must tackle rural-urban divide
Firms must tackle rural-urban divide
Rural India accounts for 70% of India’s population, 56% of national income, 64% of total expenditure and one-third of the total savings, a recent analysis by NCAER shows. The traditional vision of the rural economy as purely agricultural is clearly obsolete. There is a vast gap between the consumption patterns of rural and urban consumers but rural markets have huge potential—and there is a lot of money there too.
These markets call for scanning and sieving ideas and plans, market research, consumer behaviour studies, product strategies, channel selection and distribution, supply chain management, media selection and focused communication. Rajesh Shukla, a senior fellow at National Council for Applied Economic Research, or NCAER, India’s leading economic research institution, spoke to Mint on the potential of rural markets. Edited excerpts:
Rural India has grown tremendously in the past few years. Could you give us a brief overview of how this market looks in terms of population, demography, income groups and consumption trends?
In real terms (at 1999 prices), the size of the rural economy will be about Rs16 trillion in 2012-13 as compared to Rs12 trillion in 2007-08. The share of non-farm income will be about two-thirds of the rural economy by 2012-13. The term “non-farm" encompasses all non-crop agricultural activities: It includes manufacturing activities, electricity, gas, construction, (the) mining and quarrying trade, transportation and services in rural areas. It supplements employment to small and marginal farm households, especially during the slack season, and reduces income inequalities and rural-urban migration, which has fallen from 6.5% in 1981 to 2.8% in 2001.
With this economic growth, what’s expected is a major shift in income demographics. For instance, the share of low- income households (Rs45,000 average household income at 2004-05 prices) in rural India will decline from 58% in 1995 to 27% at present to 14% further in 2012. On the other hand, the middle-high income households (Rs2.25 lakh average household income at 2004-05 prices) will constitute about half of the rural households. These constituted 13% of total households in 1995-96.
Despite reports that rural markets are growing fast, most consumer product makers are either not present or have limited exposure to these. Why? Is it the affordability factor or companies’ inability to connect and communicate better with consumers?
One often hears of the great rural-urban divide, the vast difference between rural and urban consumption patterns. We now have empirical evidence. The low rural penetration rates can be attributed to three major factors: low income levels, inadequate connectivity (electricity, roads and information) and different lifestyles. In the case of electrical goods such as TV, refrigerator, among others, lack of the spread of electricity is the single most important factor explaining the rural-urban differential in penetration levels, followed by the difference in incomes and differences in lifestyles.
For instance, the market for electrical goods grew at an average of nearly 12.4% per annum; the bulk of this increase (74%) is absorbed in urban areas. In contrast, in the case of non-electrical goods, only 36% of the net additions to stock accrued to urban areas. This is perhaps the reason why the contribution of electricity in explaining the rural-urban differential is more.
What is the potential of this market? What is the likely size of consumption now and what does it look like in the next five years?
Rural consumers are expected to maintain their dominant share in the country’s consumer durables market even by the end of the decade. Rural consumers accounted for around 60% of the total ownership of low-cost items such as bicycles, pressure cookers and wristwatches in 1995-96. The share is expected to rise to three-fourths in 2009-10. Also, the rural share in demand is expected to rise further for automobiles such as motorcycles (55%), scooters (40%) and car/jeeps (at least 9%) by the end of the decade.
What are the factors, if any, that could derail this growth?
Looking ahead, the evolving demographic profile in favour of the younger population suggests that the growth prospects of the Indian economy remain strong, provided their potential is effectively utilized. Also, increase in the pace of growth in agriculture income on a sustainable basis is critical as it has strong forward linkages with the industrial and service sectors.
If appropriate strategies by the local government and companies are adapted to tackle some of the bottlenecks (infrastructure, connectivity, affordable goods and services as per need), the increasing economic growth will bring more growth in the rural market (rather) than derail it.
Having said that, the expected growth could be delayed if companies still treat rural India as an extension of the existing urban market. On top of this, not much focused regular research has been done on consumer behaviour in rural areas, whereas there is a considerable amount of data on the urban consumers.
An even greater challenge lies in terms of the vast differences in rural areas which severely limit the marketer’s ability to segment, target and position his offerings. The population is dispersed to such an extent that 90% of the rural population is concentrated in villages with a population of less than 2,000. So, the geographical spread is not as homogeneous as it is with the urban areas owing to vast differences in culture and education levels.
One more grey area that needs to be probed is the importance of the retailer in rural trade. A rural consumer’s brand choices are greatly restricted and this is where the retailer comes into the picture. The rural customer generally goes to the same retailer to buy goods. Naturally, there’s a very strong bonding in terms of trust between the two. Thus, as there is a need to understand the rural consumer, similarly there is need to study the retailer as he is a chief influencer in the buying decision.
What steps do companies need to take to boost consumption in these markets?
Rural consumers are relatively poor but it is to some extent compensated by the low cost of living in rural areas. Thus, for the same level of income, a rural consumer would have a higher purchasing power compared to his urban counterpart. The multiplicity of media directed at rural India has made the rural consumer aware of a whole modernized world of consumer goods available to urban consumers. Many of these may not be affordable, but the rural buyer wants similar comforts, conveniences and entertainment as enjoyed by urban buyers. Thus, differences seem to arise mainly on account of certain external factors. This shapes the rural market, rather than the tastes of the rural consumers themselves.
Ultimately, the winner would be one with (the) required resources such as time and money and also with the much needed innovative ideas to tap the rural markets.