WWRR Vol.2.015

India
Agri-inputs / Automobiles
BENJAMIN MATHEW: STATE OF THE RURAL ECONOMY
Head of Strategy &
Partner, MART
Key takeaways
56% of GDP is accounted for by rural India. A ‘rural’ area is defined as area where 75%
of male population is engaged in agriculture, total population is less than 4,000 people
and population density does not exceed 400 persons per sq. km. India has 640,000
villages, which account for ~70% of total population. There is disparity among these as
17% of villages contribute 5% of population but 60% of rural wealth. This data is
relevant for FMCG companies for whom rural is a focus area for growth.
Agriculture growth is difficult and cannot exceed 4-5% despite interventions.
Rural incomes will remain depressed due to high disguised unemployment. Thus, it is
imperative to pull people out of agriculture and into other professions (services and
industry). Over the past decade, 90 mn people have moved out from agriculture into
services and industry. The positive is that multiplicity of incomes is reducing volatility in
incomes. By 2020, every agricultural household will have one person employed in the
services sector. MNREGA has played an important role in lifting rural incomes.
Healthcare can create a good number of jobs. Horticulture and cash crops are also
contributing to employment and agriculture incomes. Poultry is also an employment
generator, and has added 3.8 mn jobs in small towns and rural areas. The construction
industry can also absorb people – for instance, tile manufacturing also needs 0.5 mn
people. Skilling is a problem as people are not employable to start with. The income of a
construction worker would be twice that of a farmer, and thus this sector can
meaningfully improve incomes.
Irrigation is enabling multiple cropping of land in a year, improving incomes, and
increasing demand of equipment such as tractors.
In 2016, rural households spent 49% on food, 7% on health, 5% on travel, 6% on
clothing, 6% on durables, 4% on household, 9% on fuel, 3% on education and 11% on
others expenses. Proportional spend on food is high, but is expected to reduce. Fuel is still
a high cost (higher than urban). In times of higher incomes, rural households would
spend first on acquiring productive assets, durables, education, travel etc., and would
then focus on other items of discretionary spend.
Regional retail players such as Balaji and Ghari are more successful than national
chains as they connect to consumers better. They also realize that the buying behavior of
rural consumers’ is very different from the urban customer. Eastern has the largest
proportion of rural retail outlets (81%), while southern India has the lowest proportion
(66%). National FMCG companies cater to 0.5-1.0 mn outlets, which is only a small
proportion of overall outlets.
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH