Rural Demand: Nature15/05/2020
One of the key endeavours of the Modi government has been to double farm incomes by 2022. In that direction, the government announced a farmer friendly budget in 2017 which assured minimum support prices (MSP) at 150% of cost. The intent was twofold. Firstly, this would increase farm incomes and secondly, it would create demand for seeds, fertilizers, tractors and agrochemicals, triggering a major demand cycle in the rural areas. However, farmer stress appears to have continued and rural consumption has fallen.
The importance of rural and semi-urban consumption was highlighted when the CFO of Parle hinted that the company may have to cut nearly 8,000 jobs due to weak demand. Now, Parle sells biscuits at the market entry point and has a strong presence in the rural and semi-urban areas. This was a clear indication that rural demand was faltering to the extent that even a biscuit packet at Rs5 was not finding willing buyers. That brings us to a much bigger question; why is rural demand so critical for India?
Rural India is all about jobs and consumption
Agriculture, which is the predominant occupation of rural India, is still restricted to just 15% of GDP in terms of overall contribution. But it directly and indirectly employs more than 70% of the all-India workface. That share would be a lot higher in rural areas. In other words, the rural household economy and demand generation is largely farm dependent.
Why has rural demand slowed in the last few years?
The slowdown in rural demand has seen a gradual aggravation in the last five years and that has been driven by a variety of reasons.
In the last five years, only 2016 was a year of above average monsoons. The remaining years saw average or below-average monsoons. Years like 2019 may have seen adequate rainfall but the onset of monsoons was delayed impacting the sowing season.
Demonetization was one of the major reasons for the slowdown in rural consumption. Rural India is still largely cash driven and that took its toll on rural businesses, rural transactions and rural spending power. However, with currency levels coming back to pre-demonetization levels, that should get sorted out.
GST implementation in July 2017 also played its part in slowing rural consumption. The stringent compliance requirements put tremendous pressure on small and medium sized businesses putting many of them out of business. That did impact demand.
Why rural demand matters to Indian economy?
In an interesting study conducted by CSFB, it was found that the willingness of the Indian consumer to postpone purchases of consumer durables had touched a high of 1 year. Effectively, consumers were willing to put off purchase of durables like white goods, two wheelers, entry level cars, etc. by up to one year as they were not confident of the economic conditions. The liquidity crunch in the aftermath of the NBFC crisis has also created problems for rural demand as NBFCs and MFIs were virtually acting as the last mile delivery agents for banks. That has hit fund flows into rural areas in a big way.
There are 3 principal reasons why this rural slowdown impacts consumption in general.
- Rural India accounts for 37% of overall FMCG spend and, according to Nielsen, this is likely to get closer to 50% in the next 5 years. That is a very large chunk of the consumption market and that explains why consumption stories are under strain.
- Rural sector consumption demand for FMCG products has traditionally grown at 3-5% more than the urban demand growth and that differential has been the key to creating alpha for the FMCG companies
- Finally, the high marginally propensity to consume among the rural population makes it an important and lucrative consumption market.
The main reason why the companies are focusing on rural market and developing effective strategies is to tap the market potential, that can be identified as follows:
Large and scattered population:
According to the 2001 census, 740 million Indians forming 70 per cent of India’s population live in rural areas. The rate of increase in rural population is also greater than that of urban population. The rural population is scattered in over 6 lakhs villages. The rural population is highly scattered, but holds a big promise for the marketers.
Higher purchasing capacity:
Purchasing power of the rural people is on rise. Marketers have realized the potential of rural markets, and thus are expanding their operations in rural India. In recent years, rural markets have acquired significance in countries like China and India, as the overall growth of the economy has resulted into substantial increase in purchasing power of rural communities.
The rural market is growing steadily over the years. Demand for traditional products such as bicycles, mopeds and agricultural inputs; branded products such as toothpaste, tea, soaps and other FMCGs; and consumer durables such as refrigerators, TV and washing machines has also grown over the years.
Development of infrastructure:
There is development of infrastructure facilities such as construction of roads and transportation, communication network, rural electrification and public service projects in rural India, which has increased the scope of rural marketing.
Low standard of living:
The standard of living of rural areas is low and rural consumers have diverse socio-economic backwardness. This is different in different parts of the country. A consumer in a village area has a low standard of living because of low literacy, low per capita income, social backwardness and low savings.
The rural consumer values old customs and traditions. They do not prefer changes. Gradually, the rural population is changing its demand pattern, and there is demand for branded products in villages.
The urban products cannot be dumped on rural population; separate sets of products are designed for rural consumers to suit the rural demands. The marketing mix elements are to be adjusted according to the requirements of the rural consumers.