Rural Spending in India Outpaces Urban Consumption
Posted on September 18, 2012 - knowledge@wharton

For the first time since economic reforms in India were launched in the early 1990s, rural spending in the country has outpaced urban consumption. According to preliminary data released for 2011-2012 by the National Sample Survey Organisation (NSSO), between 2009-2010 and 2011-2012, rural consumption per person grew annually at 19% - or at two percentage points higher than its urban counterpart. In absolute terms, the spending by urban India during this period was pegged at Rs. 2,994 billion (US$53,607 million) and spending by rural India at Rs. 3,750 billion (US$67,144 million). These findings are part of a recent report titled, "Sustaining the Rural Consumption Boom," published by Crisil, a Mumbai-based global research and analytics company.

Consider the case of television sets and mobile phones. According to the Crisil report, ownership of televisions in rural households increased to nearly 42% in 2009-2010, up from 26% five years earlier. Also, about one in every two rural Indian households now has a mobile phone. "The consumption pattern in rural India is shifting from necessities to discretionary goods. For instance, the share of food in the rural consumption basket is gradually decreasing?. Going [forward], we are likely to see more being spent on education, health care, entertainment, etc.," says D.K. Joshi, chief economist at Crisil.

According to Joshi, the rise in income levels in rural households is a result of an increase in non-farm job opportunities and government initiated employment generation schemes, such as the National Rural Employment Guarantee Act (NREGA). The migration from rural to urban India, too, has resulted in increased remittances back home and a shift in buying patterns.

Research firm Nielsen India suggests that one of the key trends driving rural consumption is that indulgence is becoming more routine. The salty snack category, for instance, registered a compound annual growth rate (CAGR) of 55% between 2009 and 2011. There is also a preference for more premium products, and rural buyers are shifting from commodities to branded products. Nielsen estimates that the fast-moving consumer goods market in rural India will hit US$100 billion by 2025, up from US$12 billion at present.

Pawan Bansal, chief operating officer at Jagran Solutions, a brand activation agency, sees a clear shift in the marketing budget of brands. "Earlier, brands used to reserve 70% of their budgets for the urban market and 30% for the rural markets. The share of the urban segment has now fallen to 55%, while that of the rural market has increased to 45%. Almost 60% of our existing clients have recently expressed interest in developing strategies to tap into the rural and semi-urban markets. Brands have begun to realize that the urban market is stagnating, and at the same time [the fact that] the cost of acquisition per customer in rural areas [is] low also makes a big difference."

In a report titled, "The Great Indian Equalization," Neelkanth Mishra, India equity strategist at Credit Suisse, a global financial services company, notes: "The transition away from agriculture has accelerated over the past few years: The drop in male employment in agriculture over the past five years is equal to [decline] over the previous 27 years. Almost 75% of the new factories during the last decade came up in rural India, contributing to 70% of all new manufacturing jobs created."

Mishra's calculations show that rural India drives about half of India's GDP, a ratio that has remained mostly unchanged over the past decade, despite increasing migration to the cities. "What drove the excitement over the past few years has been the much stronger improvement in per capita GDP, which offset the reducing share of rural population due to urbanization. Since financial year 2000, the per capita GDP in rural India has grown at a 150-basis point faster rate than in urban India: 6.2% CAGR versus 4.7%. This is contrary to the trend seen in other emerging economies, where urban productivity growth is higher than in rural."