August 2012

CRISIL Insight

Sustaining the rural consumption boom

CRISIL Insight

Analytical Contacts
Dharmakirti Joshi
Chief Economist Email: dharmakirti.joshi@crisil.com

Vidya Mahambare
Principal Economist Email: vidya.mahambare@crisil.com

Sustaining the rural consumption boom

Rural spending outpaced urban consumption in the two years up to 2011-12, the first time in nearly 25 years. This was fuelled by a strong increase in incomes, led by rising non-farm employment opportunities and the governments rural focus through employment generation schemes. For India, a young population, rising income and low penetration of many consumer durables means that rural consumption has the potential to remain an important source of demand. To sustain this phenomenon it is critical to substitute short-term income boosters such as government-sponsored employment guarantee schemes with durable job opportunities in rural areas.

For the first time since economic reforms began two decades ago in early 1990s, rural India has trumped urban India on the consumption front. Because a majority of Indias population resides in the villages, the value of goods and services consumed has always been greater in rural India but urban India had narrowed the differential during most of the last decade by growing at a faster pace. Between 2009-10 and 2011-12, however, rural consumption per person grew annually at 19 per cent two percentage points higher than its urban counterpart, according to preliminary data released for 2011-12 by the National Sample Survey Organisation (NSSO). In incremental terms, spending by rural India during these two years was Rs 3,750 billion, significantly higher than Rs 2994 billion by urbanites (Figure 1).

Figure 1: Incremental consumption expenditure in 2011-12 over 2009-10

(Rs billion) 3750

2994

Urban

Rural

Source: NSSO and CRISIL Estimates

With rising purchasing power, a notable phenomenon that is increasingly discernible in rural consumption is a shift from necessities to discretionary goods (Figure 2). About one in every two rural households now has a mobile phone. Even in Indias poorest states such as Bihar and Orissa, one in three rural households has a mobile phone (Figure 3). Nearly 42 per cent of rural households owned a television in 2009-10, up from 26

CRISIL Insight

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 still remains well below the urban household penetration level of 33 per cent in 2009-10. In fact, more than half of Indias stock of consumer durables such as television sets, electric fans and two-wheelers is now in rural India.
Figure 2: Rural households owning consumer durables
Bicycle 60 50 40 30 20 10 0 1993-94 1999-00 2004-05 2009-10 Electric Fan TV Two wheeler

Source: NSSO

Figure 3: Mobile phone handset ownership per 1000 rural households in 2009-10
Orissa West Bengal Bihar Madya Pradesh Andhra Pradesh Maharashtra All India Uttar Pradesh Karnataka Guajrat Tamil Nadu Haryana Punjab Rajasthan Kerala 0 100 200 300 400 500 600 700 800 900

Source: NSSO

There are also interesting state-wise differences in the ownership of durables in rural India, depending on the differences in purchasing power and cultural preferences. While in rural Bihar, only 6 per cent own a two/four-wheeler, one in two households in rural Punjab has a two-/four-wheeler a ratio even higher than that in urban Maharashtra and Karnataka.

The boost to rural consumption in recent years was underpinned by an across-the-board rise in household

(% of total rural households)

incomes due to increase in non-farm job opportunities and government initiated employment generation schemes. NSSO data shows that during 2004-05 to 2009-10 rural construction jobs rose by 88 per cent and the number of people employed in agriculture fell from 249 million to 229 million (Table 1). In addition, anecdotal evidence suggests that intra-state rural-urban migration rose in the second half of the last decade as job opportunities were created in urban areas by infrastructure and construction projects. Consequently, remittances to families in rural India would have boosted consumption. NSSO data suggests that nearly 72 per cent of male migrants (seeking work) from rural areas to other parts of India sent remittances in 2007-08.

Table 1: Rural Employment in million

Agriculture, hunting & forestry & fishing 1999-00 2004-05 2009-10 218.3 249.4 229.0 Industry 32.6 47.0 58.6 Manufacturing 21.2 27.8 24.2 construction 9.4 16.8 31.7 Services 35.5 46.7 49.5

Note: Manufacturing & construction are included under industrial employment Source: NSSO and CRISIL Estimates

The Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) introduced in 2006 and extended to all of rural India in 2008 and other social sector schemes fuelled job creation on an unprecedented scale and provided an opportunity to rural households to supplement their traditional farm income. Nearly 27 per cent of rural households availed employment under MGNREGS in 2009-10. Wages under MGNREGS, which now increase with retail inflation, set the benchmark for all rural wages. This has had a cascading effect on wages across rural income groups; as a result, rural wages have risen faster than inflation since 2007-08. For example, while nominal wages of rural unskilled (casual) labour rose nearly 19 per cent per year between2007-08 and 2009-10, real wages after accounting for the impact of inflation rose by nearly 14 per cent.

Although the impact of government-led social sector schemes on the rural populace has been positive, the pressure on public finances will make it difficult to significantly hike spending on these schemes in future. To keep the rural growth story intact, therefore, it is imperative that the private sector creates large-scale employment opportunities, so that the country can reap the demographic dividend arising from rising working age population in rural areas. Government policies will have to play a key role in enabling the private sector to create jobs in rural areas. The push to implement the National Manufacturing Policy, with focus on skill development and productive job creation, would need to supplant the focus on social sector schemes. There is an old saying: Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime. Until now, the predominant focus of government social sector programmes has been on providing fish. This needs to change.

CRISIL Insight

Clearly, the untapped rural potential remains huge over 60 per cent of Indias population in 2026 will continue to reside in rural areas. A large portion of this population will have opportunities to move up the consumption ladder as rural areas of relatively poor states such as Bihar and Uttar Pradesh catch up with todays income and consumption pattern in relatively affluent states. The pace and depth of rural renaissance, however, will depend on policy initiatives to overcome the challenges faced by rural India.

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