Rising population the biggest driver of rural demand

Demand for fast-moving consumer goods in rural India over the past two decades has been largely driven by increased population and not higher consumption, market researcher Kantar said in a new report.

The compounded annual growth rate in villages between 2004 and 2023 was 3.4%, outpacing urban growth rate of 2.8%. However, just 1.1% was actual consumption growth in rural areas, indicating that nearly two-thirds was driven by population increase. In fact, the average shopping basket size in the hinterland slightly declined after inflation tampered with rural's most important metric-price.

"There is a whole lot of development that has happened in rural areas. LPG, electrification, two-wheelers and telecom have all increased and these are fighting for limited money that rural people have. So, the focus on FMCG has remained as it is and not excited consumers to spend more," said K Ramakrishnan, managing director, South Asia, worldpanel division at Kantar.

He added that migration is also making its way with rural household size with more than five members observing decline over the years.

Kantar expects rural growth of 6.1% in FY25 compared to 4.2% in urban areas for FMCG excluding wheat and atta categories.

The average monthly per capita consumption expenditure in rural areas has increased from ₹579 in 2004 to ₹3,373 in 2023. In comparison, urban expenditure has gone up from ₹1,105 to ₹6,459. Yet, both consumption and spending in rural areas is about 40% lower compared to urban areas, said Kantar. To be sure, the average number of packs bought has more than doubled over the past two decades.

Two quarters ago, sales growth of fast-moving consumer goods (FMCG) in villages outpaced that in cities for the first time in nearly three years, an early indication of demand recovery, helped by a lower base and price cuts to offset hyperlocal competition. Rural demand had been dragging down overall growth in the past few years along with underperforming urban markets, until November last year.

Companies said there has been an overall recovery in sequential quarters with some green shoots in rural markets as well but they need to see a longer-term trend to assess demand sustainability.

"On a two-year compound annual growth rate, rural growth is still slightly behind and lagging urban but we see that changing in the recent past. The second green shoot we see is that many of our very highly rural focus portfolios, probably also helped by hot summer, such as hair care, low-unit price packs, personal wash and laundry portfolio, have also clocked positive volume growth," HUL MD Rohit Jawa said after the company's earnings announcement.

Over the past decade, sales of branded daily needs goods in the nation of 1.4 billion people have increasingly relied on rural India, which is home to more than 800 million people whose purchase behaviour is largely linked to farm output. Rural demand, which had been rising at twice the rate of urban areas, started declining last year and was growing slower than in cities until the December quarter.

Companies expect the recent budget's push will help boost rural consumption and also increase discretionary spending. "The government's decision to allocate ₹2.66 lakh crore for rural development, including rural infrastructure, and its continued focus on rural infrastructure development are big steps in the right direction. These measures would further boost consumer sentiments in the hinterland, which is already showing green shoots of revival," said Mohit Malhotra, chief executive officer at Dabur.