India Economy

Rural consumption boom

Updated on: Oct 27, 2012
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Rural consumption boom in recent years has partly been fired by an unprecedented surge in rural wages and rural-focused government spending.

Rural India is and will remain a major consumer of goods and services, its sheer size making it a force to reckon with. It is well known that 70 per cent of the country’s population and 56 per cent of its overall consumption comes from rural India.

The rural economy is expected to continue to account for a major share (almost 60 per cent) of India’s population in just 25 years from now.

The period between 2004-05 and 2009-10, the time span for our analysis, started with an unprecedented lift in India’s GDP growth and ended with a rural-focused fiscal stimulus. Rural wages received a major boost: Wages of casual labour in rural areas rose by over 24 per cent per year between 2007-08 and 2009-10 — faster than the inflation rate.

Consumption patterns

These developments ought to have benefited rural consumption, particularly in six rural-dominated States (States with higher proportion of rural population vis-à-vis all-India) such as Andhra Pradesh (AP), Bihar, Kerala, Madhya Pradesh (MP), Orissa and Uttar Pradesh (UP).

However, according to NSSO data, these developments have had a differential impact on rural consumption across States. For instance, Kerala, the highest per capita income state among the six rural-dominated States, witnessed the fastest growth in per person rural consumption (non-food) during 2004-05 to 2009-10.

The State’s high GDP growth was supported by remittance income from abroad, which continued to rise even in the aftermath of the global financial crisis in 2008-09.

Consequently, per person consumption of non-food items (growing at 19.9 per cent per year, the highest in India) outpaced food consumption (11.3 per cent) during the period. The faster growth in non-food consumption vis-à-vis food reflects a clear shift towards discretionary spending.

Rural non-food consumption grew faster than food in other States as well; UP and AP, however, were the exceptions, where food consumption outpaced non-food consumption.

Given its large, fast growing rural population, UP continued to dominate non-food consumption expenditure, which, at Rs 28,400 crore, remained the highest in India.

AP, which enjoys above all-India average per capita income, registered a higher than all-India GDP growth of 9.1 per cent during 2005-06 to 2009-10. But growth in per capita rural non-food consumption expenditure in the state was anemic at 4.8 per cent per year.

Clearly, rural consumption was not a growth driver in AP as in other rural-dominated states.

Bihar, catching up

Bihar, a State with the lowest per capita income and lowest per person consumption expenditure, has recently moved onto a higher growth trajectory. Its GDP growth accelerated to 15 per cent per year during 2010-11 and 2011-12 from 8 per cent per year between 2005-06 and 2009-10.

The rural per person non-food consumption expenditure in the State too rose to 15 per cent per year during the period.

The rising per capita consumption together with the growing rural population raised Bihar’s share in all-India rural non-food consumption expenditure to 6.5 per cent from 6.3 per cent during this period.

Spending and rising income

Bihar has thus begun to catch up with the other States and is witnessing a surge in first-time purchases of durables such as bicycles and electric fans.

Penetration of bicycles rose fastest in rural Bihar (increased by 196 per 1000 households between 2004-05 and 2009-10), followed by MP, Rajasthan and Orissa. Going ahead, greater discretionary spending ability in line with the increase in income levels, improved infrastructure (power, road network) and growing awareness due to improved penetration of media/TV will continue to support rural consumption demand.

A combination of rising income and improvement in physical infrastructure can help poorer States such as Bihar, MP, UP and Orissa realise the hitherto untapped rural potential. (Improved road connectivity raises demand for vehicles whereas power availability pushes up demand for electrical goods.)

In contrast, high income states with fast growing non-food rural consumption, like Kerala, will see a shift in consumption pattern towards high-value goods.

Kerala is already witnessing de-growth in rural bicycle penetration; however, it continues to see rising penetration of premium durables such as automobiles.

On a sobering note, it must be mentioned that the rural consumption boom in recent years has partly been fired by an unprecedented surge in rural wages and rural-focused government spending.

To maintain the rural consumption momentum over the long run, it is critical to substitute short-term income boosters, such as government-sponsored employment guarantee schemes and welfare spending, with durable job opportunities in rural areas.

(The author is Chief Economist, CRISIL. The views are personal.)

Published on October 27, 2012

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