Rural & semi-urban India: India’s next generation economic growth hotspot – Broad Points – For Enabling Discussions.

 

Rural & semi-urban India: India’s next generation economic growth hotspot – Broad Points – For Enabling Discussions.

By Dinesh Kumar Kapila, Chief General Manager (Retd), NABARD.  

I was requested to state my views on the subject as above by a Private University. I thought of setting my thoughts into a framework. The perspective for the future in terms of economic growth, that of Rural and Semi Urban India, cannot be a next five years perspective. Considering our present day challenges, it should be ideally assessed from the next twenty five years for India or for that matter any State in India. This presents a major challenge as the scenario which would evolve in terms of technology, economic changes, demographic profile, changing consumer trends and the consequent impact on production, changes in the financial eco system and climate change are imponderables. For example a scenario could evolve that in a hill state short term credit could be more in demand By FPOs and other such aggregators rather than limited to individual farmers for crop loans. Fintech evolving in rural areas are also a gray area in terms of evolution, growth and credit planning. However a vision has to be evolved and a broad array of goals drawn up. Then we can disaggregate and draw up a plan / projection for the next five years and thereafter project in terms of the next two decades to follow.   

The plan would encompass and indicate the perspective for the next five years in any State and as such for the Nation and take into account the following the broad sectors / areas which will impact growth and the rate of growth. These are -

 - the existing infrastructure and infrastructure getting operationalized - the Credit flow by Banks and NBFCs and the trends across sectors Agriculture, Industry Services, Exports, Urban Branches and Rural / Semi Urban Branches. Digitisation and Broadband connectivity and the broadening and deepening of knowledge and awareness, technologically, financially, knowledge wise.

 - the plans of the Central / State Government with specific reference to Agriculture inclusive of Horticulture, Animal Husbandry, Fishery, Markets and Storage. - the existing programmes underway for development with support from own sources or multilateral institutions. This and the point above are important.

 - The Evolving Industrial sector and the sectors such as Agro / Food Processing and the encouragement / incentivization for the rural non farm sector / off farm sector. Logistics and warehousing development..  

- the growth and evolution of the rural and semi urban housing sector and social infrastructure.  And Education and Health care services.

- The growth of the Service Sector in particular in rural areas / small towns (including financial advisors / CA’s etc) and the growth in a commercial orientation.  And attitudes towards commerialisation.  

- Micro finance trends and evolution. From the MFIs and the Bank SHGs loan programme. Plus loans from State Owned Corporations such as SC / ST Corporations and Finance Corporations. A reduction in rural poverty and inequality and impact on consumption patterns..

- Refinance and Infrastructure Support (including watersheds / springsheds) by NABARD and their perspective as shared by the State Focus Paper and District Plans. SIDBI also in addition. 

- Strengthening of the credit dispensation institutions specially RFIs (Rural Financial Institutions) and the expansion of credit opportunities.

- The trends in urbanization and in the development of cities, the move of the rural population to urban areas for economic opportunities and growth, the evolving of rural and semi urban India as growth cum consumption centres, this demographic shift and trend in commercial strengthening is important. 

- The restoration of a pro active extension machinery, proper staffing at rural / semi urban centres, improved administrative efficacy and management acumen,  allocation of resources

(B). In addition, these can also be assessed as a base and then their growth rates -

 - The Traditional Agricultural sector and production oriented crop loan and the traditional investment credit activities such as Farm Mechanisation, Irrigation, Land Dev etc - Efforts as regards small / marginal / tenant farmers 

- Technology oriented protection agriculture, precision agriculture, micro irrigation. The increasing use of Biotechnology and its consequent enhancement of productivity. 

- The Advent of Start ups and their impact. Incentivising exports. 

- Encouraging Agri Preneurs and specially the contribution by the Incubation Centres - Initiatives such as vertical farming near major metros and impact. 

- Trends in improvement of productivity and production of crops including oilseeds, cotton etc and mapping the impact of climate and risk mitigation / adaptation measures.  

- Initiatives in Agriculture / Horticulture such as Replacing and Rejuvenation of the Aging Fruit Trees or improving productivity of vegetable products or expansion of area. 

- Improvement of the Storage sector and Agro Processing Sector specially of rural markets and basic processing sectors and cold stores 

- Impact of the Central Government Schemes viz of Saturation of KCCs AIF AHIDF and FPOs and the schemes for MSMEs and Housing 

- A reduction in social barriers and attitudes and a feudal orientation. The evolution of a more evolved and empowered society with a reduced dependency syndrome – be it on the Government or Civil Society organisations.

 C. Based on the previous inputs, we can further expand the discussion as follows -

Role of Agriculture:  The growth of the national nonfarm economy is significantly impacted by agricultural growth rates. Agricultural growth stimulates growth in manufacturing and tertiary sectors, contributing to overall economic development. We have had a slow down in growth rates, in any case this sector has underperformed.

Rural-Urban Growth Linkages: The rural nonfarm economy in India accounts for a significant portion of full-time employment and income in rural areas. It is closely linked to agriculture and plays a key role in employment growth and poverty alleviation. Increases in farm income stimulates the demand for consumer goods and services, affecting poverty and spatial growth patterns. At the same time infrastructure connectivity and better market integration begets better returns to the agri value chains. FPOs can effectively be both, last mile service delivery posts as well as entry points for viable market opportunities. However, FPOs require deep and close handholding over several years.

Urban-Rural Economic Growth:  Evidence suggests that urban economic growth has become more strongly linked to the reduction of rural poverty since last two decades. While rural growth remains vital for poverty reduction, urban economic growth has emerged as an important driver of poverty reduction, benefiting India's rural poor.

Importance of Growing Towns:  Studies suggest that the link from urban development to rural poverty reduction is stronger if urban economic growth stems from India’s secondary towns rather than from the big cities. Small and medium-size towns demonstrate the strongest urban-rural growth links, aiding the transformation of the rural economy out of agriculture.

Impact of Urban Growth:  Urban areas are identified as demand hubs for rural producers, places of employment for rural workers, and a source of domestic remittances. Urban growth has reduced urban poverty and has also shown evidence of a stronger link to rural poverty reduction, contributing to the overall reduction of poverty in India.

Policy Initiatives:  Initiatives such as meeting aspirations by providing amenities akin to urban areas, a desire for a better quality of life, are important. The growth of social media makes the contrast evident. Improved services and infrastructure so as to enhance rural connectivity for development, aiming to raise awareness and implement market-based solutions to issues of rural connectivity and development. This needs to improvised with latest policy updates.

 Demographic shifts - Moving farm oriented labour to manufacturing / services and its outreach by way of farm cum retail stores, rural health centres and education centres, effective extension and through ACABC trained trainees, etc. Plus the level and quality of education in Agriculture has to improve. Skill development has to be monitored, not just disseminated.

Cooperatives – While FPOs are the trend, there is a major structure in place, the Cooperative Structure. This requires revitalization and freedom from excessive controls. The RCS has to evolve as facilitator and not an administrator.

Regulatory Structure – This is much needed. But any introduction of laws and rules must be preceded by a stress on reaching out and explanations and the need. Regulations to free markets, encourage exports, reduce the role of commission agents by encouraging farmers to evolve commercially.     

Some Other Core Concerns - The market for agricultural land is under-developed on account of lack of proper land revenue records, lack of property rights, etc.
There is uneven development of big dams and irrigation projects without much complementarities simultaneously with small and micro irrigation and improvement of the distribution system. There are collusive and other anticompetitive practices in the wholesale trade and retail trade, particularly in agricultural products. This is a core concern.
Financial Sector Innovation - In order to achieve comprehensive financial inclusion, we need to have a truly innovative approach in product design, distribution and service with collaborative models to make impact at scale. It is happening but needs a more sustained drive coupled with a digitized and transparent land registry / record system.

Gender Empowerment – This is a crucial missing link and is most important.  A role in decision making at the farm and gender friendly farm equipment.  

Employment - Contrary to the common perception about predominance of agriculture in rural economy, about two third of rural income is now generated in non agricultural activities. Similarly, it looks amazing to find that more than half of the value added in manufacturing sector in India is contributed by rural areas. However, the impressive growth of non agricultural sector in rural India has not brought significant employment gains or reduction in disparity in worker productivity. This underlines the need for a new approach to direct the transition of rural economy.

Communication Barriers – This again needs to addressed, urban models of communication need to be localized effectively. Plus the trust barrier is a concern with urban India. As evident by the agitation on farm laws. Perhaps laws on controlling monopolies, cartels and a more accessible arbitration machinery would have helped.

Thrust Areas - The thrust areas identified by me once some years ago for a State to facilitate a higher growth in rural and semi urban areas included, Production of cash crops through adoption of precision farming practices (Poly-House cultivation and related irrigation structures), Diversification of Agriculture through adoption of Micro-irrigation and other related infrastructure., Rejuvenation of old apple orchards , Promoting cultivation of medicinal and aromatic plants under contract farming mode, Development of floriculture on commercial lines, Fruit and Vegetable Preservation (as about 20-25 percent of the fruit production goes waste), , Development of animal husbandry (100% coverage of breedable cows and buffaloes, and Development of rural infrastructure. Each state will have to strategise accordingly for facilitating a push in Agriculture and enhancing rural incomes.

Execution - The focus is on execution, Execution is the challenge. Specially by State Level Agencies. The ability to conceptualise, allocate resources, apply manpower to the project, coupled with rigourous monitoring is a weakness. This is a concern still, though it has improved. If this is not addressed, then the structural weaknesses remain. This crucial aspect is often ignored. Private sector facilitation can supplement, not supplant.

Any success as a report suggests, hinges on providing an impetus to consumption and growing the rural economy requires the bringing together of three  key elements together for a successful outcome – Desirability (Consumer need), Viability (Business lens) and Feasibility (Operation and technological lens). This as such is the basic stress of this paper.

 

D. The forecast.

The forecast is positive and the next stage of growth has to come from Rural and Semi Urban India subject to the issues and concerns raised above being addressed. However, it will not exceed Urban India, particularly due to the economies of scale in urban agglomerations.

We have the data from the Government about the consumption trends in India and the narrowing of the gap between consumption trends in urban areas and rural areas, though admittedly the gap is substantial. But another way is to assess the demand and trends as delineated by corporate organisations. These organisations do have a pulse of emerging trends and demand and the statements and views expressed by corporate sector organisations do bear out the enhancement in demand. There has been muted demand in some sectors certainly but overall the trend is optimistic. As of now, corporates are reporting in some cases demand which is 1.5 times the urban demand and are opening up and investing in distribution centres and logistical chains, though the sparsely populated areas are a challenge. A case in reference are statements from  Pidilite or Nestle.  

There is a sizeable growth potential for consumption financing and schemes like Buy Now, Pay Later (BNPL) because rural consumption is high (~50% of total consumption) and credit penetration is low compared to the urban sector (~22% versus ~37%). Multiple start-ups are exploring partnerships and funding options to provide new credit solutions, such as Meesho. Meesho is now a major client of large logistics warehouses, a development which has gone very much un-noticed.  These are just examples to stress there is growth and if major corporates / start ups are acknowledging it, there is a realistic basis to it.

Entrepreneurs are now evolving and addressing new areas in rural and semi urban India. Views exchanged with some investors do indicate the encouraging positivity and upward tick in demand.  I have personally mentored two such start ups / entrepreneurs at the initial level when they  needed guidance. They are themselves addressing the urban markets and building a value chain. Call them agripreneurs or entrepreneurs or selfpreneurs, they are there and taking full advantage of digitization and internet services. The language barrier is there but I myself did not mind acting as a facilitator cum translator for the initial phase.  This is not isolated instances but happening across geographies.

The Indian economy is marked by its diversity, with the rural sector contributing significantly to its growth. With a population of 1.4 billion, India has become one of the biggest and most important markets in the world, with 65% of the market still being in rural areas. 

The Indian consumer market will quadruple by 2031, growing from $2.3 trillion in 2022 to $5.2 trillion. The major cause of this expansion is seen to be a rise in household earnings and greater expenditure on food and other products. India anticipates significant growth in the electrical goods and electricity supply facilitated area, with a significant rural market contribution.

Electrification in rural areas has provided consumers with access to the latest innovations resulting in an upgrade of lifestyle. Overall this increases the demand for such products. India's rural market is expanding swiftly, allowing businesses to establish a following among rural consumers. Small towns and villages are experiencing quicker growth in consumer goods demand than cities, from everyday necessities to high-tech devices.

In fact, it is anticipated that rural commerce in India will grow at a CAGR of almost 20%. Numerous factors, such as rising income levels, an improved standard of living, greater interaction between urban and rural regions, and increasing mobile phone connectivity among rural populations, can be attributed to this remarkable development.

Changing Consumer Behavior: Rural consumers are becoming more aware and conscious of their needs and are willing to spend on products that improve their quality of life. With the increasing exposure to urban lifestyles and aspirations, rural consumers are also demanding more premium FMEG / FMCG products.

Improvement and increase in electrification and improved connectivity have created a significant opportunity for brands in the FMEG space. Effective distribution has also been greatly aided by supply networks giving them access to the latest products. As electrification penetrates further the consumers there is going to be a rapid shift in customer behaviour that prioritises safety, and products are becoming more affordable.

Access to new customers: Rural areas provide access to new customers who are not yet familiar with the products and services offered by FMEG brands. And FMCG Brands. These markets are largely untapped, providing an opportunity for FMEG brands to reach new customers or bring in new products at varying price points and better quality. So, while the rural market presents immense growth opportunities, brands need actionable strategies to crack the rural retail code and effectively reach this consumer base. To open the floor to such heights, brands, use channel partners to take advantage of their local knowledge and expertise to better understand the needs of customers in rural areas.

Large and Growing Market: As the fastest-growing markets, rural areas are just unlocking their untapped potential. The increasing penetration of mobile phones and internet connectivity in these areas has increased exposure, resulting in a demand for FMEG products, while setting a base for e-commerce sales as well. As people in rural areas become more affluent, there is an increasing demand for products and services. These include electronic products, which are becoming increasingly important for work, education, and entertainment.

Rising Incomes: With several initiatives and efforts of the government, the per capita income in rural areas has been steadily rising, resulting in increased spending power among rural consumers. This has led to a growing demand for FMEG products in these areas, especially in the household appliances and personal care segments for the brands' rural market. For example, cash crops often generate higher incomes for farmers which improves the livelihoods of farmers, leading to economic development in rural areas. The increased income generated from cash crops is also a key factor for increased spending. The same applies to the FMCG Sector. Periodic variations may occur, but the trend is positive.

Government Initiatives: The Indian government has launched several initiatives to promote rural development and increase the standard of living in these areas. Initiatives such as the Pradhan Mantri Ujjwala Yojana (PMUY) and the Pradhan Mantri Awas Yojana (PMAY) have led to an increase in demand for LPG cylinders and household appliances, respectively.

The Government of India launched Pradhan Mantri Sahaj Bijli Har Ghar Yojana – SAUBHAGYA in October 2017 intending to achieve universal household electrification, by providing electricity connections to all un-electrified households in rural areas and all poor households in urban areas in the country. Food, health, housing, education, are all undergoing a change, though certain states continue to cause concern.

In recent years, there has been a growing trend of rural tourism in India, which has created employment opportunities and income for rural communities. Similarly, investments in healthcare and education can improve the quality of life and human capital in rural areas, leading to long-term economic growth.

Exports of goods and services also play an important role in the economic development of rural areas. income generated from these exports can help improve the livelihoods of farmers and rural communities resulting in a shift in rural markets.

Overall, FMEG and FMCG brands have a huge opportunity to tap into the growing demand in rural areas. By focusing on innovation, affordability, and marketing strategies tailored to these markets, FMEG / FMCG brands can successfully expand their reach and increase their market share in India.

The statements from the Government indicate that 60 crore citizens have been incorporated within the economic mainstream, the marketplace which consisted of upto 70 crore citizens has now expanded to 130 crore. 10 crore families had been provide gas cylinders, 12 crore citizens toilets,14 crore households piped water, 11 crore farmers provided Rs 6000 a year, 4 crore provided housing, 80 crore provided highly subsidized food grains. This would vest them with a degree of purchasing power and the basic subsistence to  move up the economic indices.

The initiatives in direct transfers, UPI, building rural infrastructure, augmenting farmers income, are all improving rural livelihoods significantly. Once we meet our need for necessities, we tend to spend on other discretionary goods, besides, if foodgrains are free or subsidized, it could in all probability facilitate spending on other items. Niti Aayog has stated that 24 crore citizens are now out of multidimensional poverty. Rural poverty is stated to be 4.4 % lower than 2018-19, urban poverty by 1.7 %. The Government’s spending on welfare seems certainly to have made an impact.  

But there are wide variations across states and thing states on equality and equity. This a concern. Policy makers do recognize this.  On estimated per capita income, Sikkim was the highest among Indian states at around 519 thousand Indian rupees in the financial year 2023. Meanwhile, it was the lowest in the northern state of Bihar at over 54 thousand rupees. India’s youngest state, Telangana stood in the fifth place. The country's average per capita income that year was an estimated 172 thousand rupees.

We need to remember that in many FMCG and other such products,  seventy five cities with a population of five lakh and above account for 40 % of consumption, 60 % accounted for by semi urban / rural India and smaller evolving cities. The optimism in growth is certainly getting reflected in rural India, though I am aware that critics say, take away the growth in flour (atta), the growth in consumption is maybe 1.80 %. But seasonal or annual variations need not impact our overall assessment. Corporate India has to reduce its fixation with price points and marketing, as regards the introduction of products in rural / semi urban India, maybe relook and rework their strategy.   That could be a start.

The main point is that overall, in the totality of it, the trend is certainly positive and the pulse of the population is optimistic. We are on the cusp or verge of breaking out of a prolonged phase of stagnation in rural India. We need to instill a sense of self belief and empowerment. That is a soft skill which eludes many planners. Moving from one level, as are as of now, to the next level, will require the calibrated addressing of challenges set out earlier. We have evolved, but each move up the level requires another set of initiatives. If we can put it together, we can bring about a major economic change.

================================================================