India might be reeling from two years of negative agricultural growth and drought conditions have hit some 330 million people but impact on rural markets and consumption might be not as dramatic as some feel.
The key reason for this is the fundamental changes in the nature of rural markets, incomes, buying power, mobility and the nature of agriculture itself, I gathered from an interesting panel discussion I chaired this week. The insights in themselves may not be new but are worth contrasting afresh with the bad news around India's rural economy.
The discussion on rural strategy and action was organised and led by Pradeep Kashyap, founder of consulting firm MART and considered by many as the father of rural marketing.
Kashyap and some of the panelists had some these interesting insights to share, in no specific order:
1. The big picture is this. Roughly 15% of India's GDP does come from agriculture but over 50% of India's population depends on agriculture. This is the key cause for the concerns we see around us.
But rural India does not equal agriculture. Agriculture is only 1/3rd of rural GDP. Services make up 40% and manufacturing (including unorganised) make up 30%. Examples include poultry and construction. Moreover, the services (like the rest of the economy) component has been rising steadily and does not usually figure in most off-the-cuff assessments. Also, 75% of rural workforce depends on agriculture.
2. Almost half of all consumers or 50% are in rural India now. Interestingly marketers do not spend as much to reach this 50%, instead focussing their efforts more on urban-centric markets.
Importantly, the divide between the two is steadily reducing with fewer dissimilarities between rural and urban consumers. For instance, an increasing propensity to try new categories from baby foods to breakfast cereals (earlier reports).
3. Furthermore, agriculture is not all foodgrain production as is commonly believed. A third of agriculture production is now horticulture which includes fruits, vegetables and spices. Total production of horticulture at 280 million tonnes last year has now overtaken foodgrain production at 260 million tonnes.
This is a significant shift in agriculture composition, something which, according to Kashyap's team is yet to trigger effective responses, including from, for example, tractor manufacturers. "How many tractor companies have created products for horticulture ?" was the question posed.
4. The number of salaried individuals in rural India has risen sharply. From 11% in 2008 to 22% in 2013 and still rising. Moreover, salaries continue to rise and in all likelihood the 7th Pay Commission will provide a fresh fillip to rural consumption as well, as has been speculated already.
The rise in salaries has led to buying power and disposable income going up three times in rural households as compared to urban households. Take the case of a bank employee. Her salary is almost, if not the same as her urban counterpart but with every increase, has seen much higher buying power in her rural environment. And the cost of living is obviously lower.
5. Over 95% of village households own their homes, compared to 69% in urban India. This is an important differentiator in consumption behaviour and confidence. And also the resilience to battle tough times, whether from crop failure or agriculture slowdown. On the other hand, many rural households, particularly those owning farmland, have multiple incomes, including from dairy products.
6. India's dairy sector continues to grow with reports pegging growth now at 16% in revenue terms last year. Interestingly, the dairy sector has grown even while there was a decline in agricultural growth so has milk production.
"The co-operative sector of India's dairy industry has been growing at almost 20% compounded annually while the processed milk industry has been growing at 22%. The dairy industry contributes to around 33% of the value of agricultural production in India" (T Nanda Kumar, Chairman, National Dairy Development Board).
Consumer production giants Unilever India and ITC were both sanguine about their growth prospects and did not see the current agri-situation affecting them much. The consensus was that there was sufficient runway for growth in rural markets for their products and the real challenge was finding the right product, the right size and value for the consumer, as always.
The entry and success of brands like Patanjali (now a Rs 5,000 crore brand) had obviously demonstrated that markets were open to new entrants. Consumer product majors also have to battle strong regional brands in addition to newcomers like Patanjali. The arrival of Patanjali has obviously caused much concern in boardrooms. The battle will only make life for the consumer more interesting.
Finally, while the economic cost of two bad monsoons, drought and a water crisis may be somewhat limited, the social cost is undoubtedly high as we are seeing already. Also, while in the last 50 years, there have never been more than two consecutive bad monsoons, we also have to acknowledge that climate change is causing fundamental disruptions in weather patterns.