What constitutes Rural in India?

A Habitation is defined as urban if:

 It is a location within a municipality or a corporation, a cantonment or a notified town area.

 All other locations which have:

 A minimum population of 5000;

 A population density of more than 400 per sq. km.; and

 Where more than 75% of male work force is engaged in non-agricultural occupations

 A Habitation is defined as rural if:

 It has a population density of less than 400 per sq. km.;

 At least 75 percent of male working population is engaged in agriculture related activities; and

 There is, in the location, no municipality or municipal board.

Brief about Rural India

 Of about 6.4 lakh villages in India, all except about 15000 villages have a population below 5000.

 Less than half the villages are connected through motorable, all weather roads.

Poverty -- Hindrance or Opportunity

 Typical picture of poverty

 4 billion people earn less than $ 2 per day

 Around 30 crore people in India live below poverty line (Population of US 2007)

 Incidence of poverty more severe in rural areas

 Is it a hindrance in rural Marketing ?

The Economic Pyramid

 Tie
r1

Tier 2- 3

Tier 4

Tier 5

Why Rural Marketing ?

 Because people are afraid of the unknown elements of the rural markets and they feel that different market
theories and principles would be required in rural marketing.

 The following areas are the commonest of the worries that trouble the urban marketers, when they even think of
rural markets:-

1- The first source of worry is the product price and affordability in the rural markets.

2- The next source of worry is the needed distribution patterns with problem arising out of lack of proper
transportation.

3- Reaching out to the rural customer through advertising pose a major problem due to illiterate population and lack of
media reach.

4- Most importantly, however, it is rural mindsets that creates a barrier.

The Business Environment of Rural India

Corporate Interest in Rural Market

 Introduction
  Rural India a difficult business location

• Inadequate transport, electric power, and information infrastructure

• Lack of access to modern resources

 an under-trained workforce

 Deployment of modern resources and methods to overcome rural constraints

The paradox of Indian Agriculture

 Economically and socially vital

 23% of the GDP, feeds a billion people

 Employs 66% of the workforce

 High Production yet Impoverished Producers

• Green revolution boosted productivity

• typical Indian farm is a very small-scale operation

• Unable to realize economies of scale

 Vast disparity in access to education and opportunities between urban and rural India

 ITC’s e-Choupal, an example of a commercial venture providing a channel for knowledge and opportunity, higher
incomes for farmers, bringing global resources and practices

GDP by Sector

ITC e- Choupal
Origins of e-choupal

 ITC group, one of India’s foremost private sector companies

 Created International Business Division (IBD) in 1990 as an agri-trading company aiming to “offer the world the
best of India's produce”

 International competition by 1996

 Decided to retain IBD in 1998

 IBD trades in commodities such as feed ingredients, food-grains, coffee, black pepper

 US$150 million company in 2003

 Corporate and social responsibility, an integral part of ITC’s philosophy

• corporate or social agendas not subordinated

 Commercial channels for soy

• traders

• government-mandated markets (mandis)

• producer-run cooperative societies for crushing in cooperative mills

• Average 90% processing through traders & mandis

 Personal consumption (ghani)

Vision and Planning behind e-choupals

 Re-engineer, Not Reconstruct

• retained the efficient providers within the mandi system

• created roles for some inefficient providers

• avoids “reinventing the wheel”

• expertise available to ITC

 Address the Whole, Not Just One Part

• Cooperatives have tried to provide agricultural inputs

 • Rural banks have tried to provide credit

• Mandis have tried to create a better marketing channel

• Village trader

 Accurate assessment and management of risk

 Decreased transaction cost by aggregating services

 Interlinking

 An IT-Driven Solution

• Delivery of real-time information independent of the transaction

• Facilitate collaboration between the many parties required to fulfil the spectrum of farmer needs

• Instalment of expensive IT infrastructure

 Risk Assessment and Mitigation

• Radical shifts in computing access will break community-based business models

• Sanchalaks: threat of unionization and rent extraction

• Scope of the operation: diversity of activities required and the speed of expansion create real threats to
efficient management

 Managing Bureaucracy

• APMC Act prohibited procurements outside the mandi

• ITC convinced the government that e-Choupals would operate according to the spirit of the Act

• Chose to continue paying the tax

Rural Market

The Indian growth story is now spreading itself to India's hinterlands. Rural India, which accounts for more than 70 per
cent of the country’s one billion population (according to the Census of India 2001), is not just witnessing an increase in
its income but also in consumption and production.

The Union Budget for 2009-10 hiked the allocation for the National Rural Employment Guarantee Act (NREGA) to US$
8.03 billion, giving a boost to the rural economy. This is in addition to the ambitious Bharat Nirman Programme with an
outlay of US$ 34.84 billion for improving rural infrastructure.

According to a study on the impact of the slowdown on rural markets commissioned by RMAI and conducted by MART,
the rural economy has not been impacted by the global economic slowdown, according to a study by the Rural Marketing
Association of India (RMAI).

The study found that the rural and small town economy which accounts for 60 per cent of India’s income has remained
insulated from the economic slowdown. Moreover, rural incomes are on the rise driven largely due to continuous growth
in agriculture for four consecutive years.

Moreover, the rural consumer market, which grew 25 per cent in 2008 when demand in urban areas slowed due to the
global recession, is expected to reach US$ 425 billion in 2010-11 with 720-790 million customers, according to a white
paper prepared by CII-Technopak. That will be double the 2004-05 market size of US$ 220 billion.

According to the study, while the durables market shrunk in urban India, the rural market is seeing a 15 per cent growth
rate. Fast moving consumer goods (FMCG) sales are up 23 per cent and telecom is growing at 13 per cent.

FMCG

According to figures released by market researcher AC Nielsen, demand for personal care products grew faster in rural
areas than urban areas during the period April-September 2009.

Several FMCG companies such as Godrej Consumer Products, Dabur, Marico and Hindustan Unilever (HUL) have
increased their hiring in rural India and small towns in order to establish a local connect and increase visibility.

GlaxoSmithkline Consumer Healthcare (GSK) and Nestle and are now launching products specifically for rural markets.
Anand Ramanathan, an analyst from KPMG, said, “Till recently, most FMCG companies used to treat rural markets as
adjuncts to their urban strongholds and rural consumers as a homogeneous mass without segmenting them into target
markets and positioning brands appropriately.”

Retail

The rural retail market is currently estimated at US$ 112 billion, or around 40 per cent of the US$ 280 billion Indian retail
market, according to a study paper, ‘The Rise of Rural India’, by the Associated Chambers of Commerce and Industry of
India (ASSOCHAM).

Major domestic retailers like AV Birla, ITC, Godrej, Reliance and many others have already set up farm linkages.
Hariyali Kisan Bazaars (DCM) and Aadhars (Pantaloon-Godrej JV), Choupal Sagars (ITC), Kisan Sansars (Tata),
Reliance Fresh, Project Shakti (Hindustan Unilever) and Naya Yug Bazaar are established rural retail hubs.

Pharmaceuticals /Healthcare

According to a report by McKinsey, the rural and tier-II pharmaceuticals market will account for almost half of the
growth till 2015. The tier-II market will grow to 44 per cent by 2015, amounting to US$ 8.8 billion.

The health ministry is setting up a mechanism to screen people in rural areas for lifestyle diseases such as diabetes. Union
Health Minister Ghulam Nabi Azad said that in the case of diabetes, the government was working out a strategy to
diagnose those in the age group 30-40 years in rural areas, for diseases.

The multinational drug company, Sanofi-Aventis, has launched ‘Prayas’, a marketing initiative to market generics in rural
areas and small towns. Through this initiative, the company looks to share medical knowledge with a body of practitioners
and specialists in rural areas through workshops.

Telecommunication
A joint Confederation of Indian Industries (CII) and Ernst & Young report reveals that of the next 250 million Indian
wireless users, approximately 100 million (40 per cent) are likely to be from rural areas, and by 2012, rural users will
account for over 60 per cent of the total telecom subscriber base in India.

In a bid to acquire rural subscribers, most Indian telecom operators have started investing in infrastructure to roll out their
services in these areas. Realising this as a huge potential, small Indian handset manufacturing companies, including
Micromax, Intex Technologies and Karbonn, have lined up a marketing spend of around US$ 21.02 million for the
financial year 2009-10.

Infrastructure

The World Bank has said that all-weather roads in villages in India have served to double the income of rural households,
lift the literacy rate and increase land prices. Meanwhile, the Orissa government had decided to undertake an initiative to
improve roadways in rural areas and upgrade 10,000 km of roads in rural areas. The decision was taken at a high level
meeting chaired by Mr Naveen Patnaik, Chief Minister of Orissa in December 2009.

The National Bank for Agriculture and Rural Development (NABARD) has sanctioned an amount of US$ 34.4 million to
the government of West Bengal under the Rural Infrastructure Development Fund (RIDF) XV. NABARD has also
sanctioned a US$ 26.29 million loan to Karnataka for the construction of infrastructure projects, such as secondary
schools, rural godowns, jetties, minor irrigation structures, roads and bridges, in rural areas.

Automobiles

Mahindra and Mahindra Group (M&M) arm, Mahindra First Choice, has announced that it is to set up sales and service
outlets in rural areas with the target of setting up 100,000 vehicles by 2015, according to M&M President Rajeev Dubey.

Meanwhile, motorcycle manufacturer TVS Motor Co. Ltd has said that it is depending on a far-reaching penetration of the
rural market and the launch of new brands to boost the company’s growth in 2010.

Services Sector

According to a report based on the 63rd round of survey by the National Sample Survey Organisation (NSSO), 60 per cent
of the services sector enterprises in the country are located in rural areas.

Of the 16.5 million services sector enterprises in India in 2006-07, 85 per cent were own account enterprises (OAEs)
while the remaining 15 per cent were establishments. Seventy six per cent of the workers employed in these enterprises
were employed in the rural areas of the country.

Road ahead

According to international consultancy firm Celent, rural markets in India will grow to a potential of US$ 1.9 billion by
2015 from the current US$ 487 million. Rural markets are growing at double the pace of urban markets and for many
product categories, rural markets account for well over 60 per cent of the national demand.

The success of the National Rural Livelihood Mission (NRLM), which has so far trained 100,000 rural youth, has led the
rural development ministry to request an increase in budgetary allocation for the project. Rita Sharma, Secretary in the
Rural Development Ministry, has said that they had sought US$ 2.29 billion from the Finance Ministry.

MAJOR ECONOMIC REFORMS AND RECOMMENDATIONS FOR FUTURE REFORMS IN INDIA

While the U.S. media has focused on India’s increasing competitiveness in software development and information
technology, software and IT constitute only a small part of the Indian economy: more than 50% of India’s output comes
from its manufacturing and agricultural sectors, and 70% of its labor force is employed in agricultural. India needs
policies to improve these sectors’ long-term competitiveness in order to sustain and enhance its current growth rate. The
reform process of the last 15 years is far from complete.

FISCAL AND ADMINISTRATIVE REFORM

India’s fiscal policy is a key part of its overall economic history and central to its growth prospects. It was a major
contributor to the 1991 BOP crisis, and in the future, persistent budget deficits may hinder the country's economic growth.
The shortfalls of India’s public services and infrastructure are quite obvious, and a miserable fiscal policy is a major
reason for this gross underinvestment. While inadequate public revenues and low rates of public savings have contributed
to India’s fiscal shortcomings, the heart of the problem lies in India’s public expenditures and management systems.
Major administrative reform is required.

What’s Been Done

India’s fiscal reforms focused on generating revenue through rationalizing the tax structure and increasing compliance.
Specifically, the reforms:

• Lowered taxes (individual, corporate, excise and custom) • Broadened the tax base; • Removed exemptions and
concessions to reduce distortions; • Simplified laws and procedures to close loopholes and increase compliance, including
using technology to better track tax payments.

Unfortunately, total tax revenues fell from 9.7% of GDP in 1990-91 to 8.8% of GDP in 2000-01.19 Additionally, India’s
current fiscal deficit of $37 million places it among the highest in the developing world, and its public debt hovers around
60% of GDP.20

The Way Forward

“If India’s government is going to make a difference, it needs to raise more taxes,” The Economist wrote recently, which,
considering the source, indicates the severity of the problem.21 To improve its tax system, India should: • Increase taxes
on services and implement a tax on e-commerce; • Modernize tax administration through better utilizing technology; •
Restructure tax collection and allocation system to increase revenues at local and state levels. Complete the replacement
of complex sales taxes with a more coordinated, coherent VAT system;

• Use technology to better enforce property and agricultural income taxes;

• Remove distortionary tax exemptions;

• Reduce the mean and variance of import tariffs;

• Repeal the corporate tax.

On the expenditure side, the various levels of government should:

• Reduce subsidies (which are generally poorly targeted);

• Downsize overstaffed public institutions, particularly at state and local levels;

• Separate policy and implementation functions through administrative reforms;

• Reduce bureaucratic controls and set performance targets;

• Institute mechanisms like greater public transparency to increase accountability.22

INFRASTRUCTURE REFORMS
Infrastructure remains perhaps the greatest drag on India’s current growth prospects. Major public work projects,
however, present implementation challenges, particularly due to corruption.

Previous infrastructure reforms:

• Invested, with limited success, in improving airports and road networks;

• Privatized successfully a small number of ports and roads;

• Improved the reach of the telecom sector.

The Way Forward

India’s growth will be severely jeopardized without substantial improvements ininfrastructure. India needs to:

• Implement major public works projects, taking advantage of public-private partnerships where possible;

• Privatize the energy sector and base user-charges on economic cost (some states have already taken lead in this effort);

• Continue to increase tele-density among its population, as India remains way behind countries like China and
Thailand;28

• Increase transparency in implementing infrastructure projects;

• Invest in a variety of renewable sources like ethanol and wind energy.

LABOR REFORM

Although India’s restrictive labor laws are not a problem during times of expansion and do not affect high-skilled workers
in the software and R&D sectors, they discourage further private investments, particularly in the manufacturing sector.

Labor markets remain one of the most regulated sectors of the Indian economy as labor reform was not addressed in the
early 1990s.

A more flexible labor policy will support business development and enhance India’s growth. In particular, policies should
be designed to:

• Remove restrictions on laying-off workers;

• Moderate benefits obtained by unions;

• Deregulate wage practices. Labor reforms should be coupled with the creation of a stronger social safety net to support

affected employees.

AGRICULTURAL REFORM

As the majority of the labor force still works in agriculture, reform of this sector is essential for widespread growth and to
reduce income inequalities. Reform measures should enhance both production and marketability of the country’s
agricultural production.29 Additionally, changes will allow some Indian agriculturalists to find income alternatives while
they gain greater skills necessary for work in the manufacturing sector.

What’s Been Done Agriculture has been largely ignored in the reforms of the last 15 years due to entrenched interest
groups.
Substantial deregulation of the agricultural sector is necessary in order to increase India’s competitiveness in world
markets. To achieve this, the government should:

• Eliminate subsidies that have largely benefited interest groups rather than poor farmers, in order to align incentives and
liberate resources from state budgets;

• Reallocate these freed-up resources toward urgent public interventions, such as building roads, irrigation channels, and
refrigeration facilities.

• Eliminate artificial price supports for food goods to reduce corruption and distortionary farming incentives.