Rural India bucks the trend

Fri, 2 Mar Pre-Open

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Gone are the growth rates of 8-9% which India used to enjoy only a few years earlier. But have they gone forever is the big question. As per the latest GDP figures for the quarter ended December 2011, growth in the country has slowed considerably. In 3QFY12, GDP increased by 6.1% from 6.9% in the previous quarter. This is the weakest growth the economy has seen in almost three years. The Central Statistics Office had earlier estimated growth for the current financial year ending 31 March at 6.9%. But achieving this target looks difficult now.

However, not all parts of India are down in the dumps. Rural villages are seeing growth while the rest of the country falters. Government subsidies, high agricultural support prices and easy access to credit have led to a boom in rural India. Last year, elevated food inflation ate into the wallets of urban dwellers. However these same soaring food prices helped increase farmer incomes significantly. Wages in these areas have increased and non-food consumption is rising rapidly. Sales of cars, two-wheelers, cellphones, household goods and consumer goods are seeing increased traction in these areas. This is besides the usual demand for tractors and farming equipment.

A report by Kotak Mahindra Bank, as quoted in the Financial Times, states that the rural economy (accounting for about 20% of the country's US$ 1.7 trillion economy) grew at an average of around 17% annually in recent years. This compares very favorably to India's average growth of around 8%. The per capita incomes of rural residents have also risen by around 12% annually to US$ 1,100 a year. Government schemes such as the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA) helped inject US$ 9 bn, benefitting 55 m households. Such schemes put a burden on government finances, however doing away with these schemes could be suicidal for the party in power. Thus allocation to these rural development schemes is expected to continue in the next Union Budget.

Higher rural incomes are thus here to stay for the long term. FMCG companies such as ITC Limited and Hindustan Unilever (HUL) which have large rural networks are already seeing benefits. Other companies in their quest for growth need to tap into these rural areas as urban regions are relatively well penetrated. But, as far as overall growth is concerned, until the government puts much needed reforms in place, we may have to get used to sub 8% growth levels.