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Monday, December 25, 2006

Village Consumption in India

With all the talk about India's consumption-driven growth model one thing is obvious, roughly 70% of the Indian population - those who live in rural areas - have restricted incomes and aren't going to power any massive increase in economic growth in India in the near future. This is simply a product of the fact that such a very large number of people account for such a comparatively small part of total GDP.

Which is not to say that consumption won't increase in the rural areas. Bloomberg this week has drawn attention to a report from the Associated Chambers of Commerce and Industry of India:

India's consumer and household product companies will probably sell more goods in the country's villages and towns as rural incomes increase, a survey said.

Demand for products such as toothpaste, instant coffee and deodorants in the nation's villages and small towns will increase by 60 percent by 2012, said the Associated Chambers of Commerce and Industry of India, a New Delhi-based association of companies.

Now according to the report itself (which can be found here):

``The per capita income of rural and semi-urban populace will increase as the economic activities grow there due to government focus on their industrialization,''

Now I have no doubt that per capita incomes in the rural areas can grow with time, but I am not sure that matters are as simple as this statement suggests. Government may have the will to see rural per capita incomes rise, but having the will and getting your way are not necessarily the same thing. Of course spending on infrastructure will make many of India's rural areas more accessible, and thus more economically viable, but there are a whole number of issues knocking around in the background here, not least of them being who exactly is going to finance the village infrastructure.

Large infrastructural projects may well be possible with private sector financing in certain key areas (since these will largely be profitable), but these, as we have seen from the Chinese case, may in fact be highly concentrated.

Government financed projects will be much more constrained, since there is the whole question of the fiscal deficit issue to consider, this is why it would have been better that such a significant deficit had not been run up so quickly in recent years.

Indeed in some ways infrastructure may well follow economic activity, rather than the other way round, at this point, and the people - as we have seen in China - may move to the economic activity, rather than the economic activity moving to the people. Even in a European context - for example - regional development policy has often been a lot less successful than the planners would have hoped for.

The big issue is whether economic activity in the poorest areas can grow anything like fast enough to keep pace with rising population numbers. So we may see rural incomes rise in absolute terms - and thus demand for consumer products, whilst in fact per capita incomes may not grow anything like as fast.

All this being said, demand for these products - known as FMGCs - will of course continue apace, and investing in these areas should be a safe enough bet. It remains to be seen however whether the rate of growth in the rural areas is above (or below) the average for the economy as a whole during the next 5 to 10 years.

One last point: in a way there is something sad in the way all this is happening: Take this paragraph in the original report:

In view of ASSOCHAM, the urban pockets which currently are the biggest market size for all FMCG products, in next 4-5 years will switch over their consumption patterns for organic products to keep better their health, thus making an erosion in their present consumption patterns for FMCG products.

That is the urban middle classes are anticipated to exit many of the products whose consumption is expected to grow, and to do this for health reasons, while much of rural India seems destined to move directly from the threshold of malnutrition to the trap of diabetes and obesity. Talk about the chronicle of a tragedy foretold in advance. And this last point from Bloomberg itself:

Companies such as the local unit of Unilever and the country's biggest cigarette maker, ITC Ltd., are expanding their reach in the 638,000 villages and 3,784 towns with less than 100,000 people.

1 comment:

r.d.rajan said...

It certainly is the rural areas that the businesses are going to focus on. What is interesting that I witness is the presence of micro credit organisations (mfi's) that are operating in these areas. Organisations are seeing these institutions as a convenient means of unloading their product on mfi's and then they sell it.They are struggling to build their distribution,their claims notwithstanding. That still leaves a huge opportunity for goods and services that can be made available to the rural consumer by educating the mfi's on the worthiness of the product or service that they choose to sell.