Connectivity and well-being may get priority over food in rural India

Mumbai |New Delhi: Incremental spends on mobile telephony, education, and healthcare could overtake additional expenditure on food in rural India, where consumers are ascending the maturity ladder and could collectively spend about $65 billion more a year on connectivity and well-being.

Last year, India’s villages spent about $150 billion on food, mainly fresh items and dairy, with branded packaged food accounting for just 10% of the total expenditure. Food accounts for more than half of India’s total rural consumption, but connectivity and well-being (healthcare and education) could take precedence over staples in terms of incremental spends by 2022, Goldman Sachs says.

Its latest report on consumption patterns says rural consumers could spend an additional $30 billion each on connectivity and well-being (education and healthcare).

To be sure, consumer companies focused on rural India aren’t factoring in a contraction in expenses on staples just yet. “Rural markets continue to be stressed for now, but we do expect consumption to be fuelled…, aided by forecasts of a normal monsoon and the government impetus,” Dabur chief executive Sunil Duggal said. “However, we don't expect consumers to cut back on staples and daily consumption needs to spend on things like mobile talk time.”

Goldman Sachs expects mobility and connectivity expenditure in the hinterland to increase to $49 billion in 2022 from $19 billion, driven primarily by higher vehicle costs, fuel costs, and expenses towards using mobile communication devices.

The rural population makes up the overwhelming majority of India’s workforce but consumption growth there has been tepid over the past five years compared to the fast rates seen in 2007-12. With the government’s increased emphasis on boosting incomes in the countryside, and following two years of healthy summer rains, Goldman Sachs said rural spending will double to 8.5% per annum over the next five years and contribute more meaningfully to the country’s economy.

“With over half of household spending in the countryside going on food, we expect packaged food and beverages to grow faster than other large staples categories like personal care and home care,” Aditya Soman and Aditya Gupta wrote in the report. “We see the outperformance to be driven by an improvement in food packaging technology, better transport infrastructure and a focus on cost reduction by consumer companies.”

While the rural working population is more than twice that of urban population, the overall rural income pool is only 38% of the urban income pool. As a result, urban India is a much larger opportunity. As consumption is concentrated in a few large cities, urban India is significantly less expensive to serve than rural India where the population is spread over 640,000 census villages.

Also, there is a significant increase in rural competition, with improvements in supply chain increasing the number of players in many markets.

Retailers are then competing by offering products below the maximum retail price to attract consumers, leading to a subtle shift in pricing power away from the traditional consumer brands. But affordability is stretched even for basic products. Yet, companies remain upbeat.

“Rural consumption is directly dependent on rural incomes and with the government talking about multiple sops for rural markets, we expect consumption to grow in the mid to long term,” said RS Sodhi, managing director of diary giant Gujarat Cooperative Milk Marketing Federation (GCMMF), the maker of the Amul brand of milk, ice-cream and cheese.

Measures to enhance rural incomes include setting the minimum support price (MSP) for crops at 1.5 times the cost of production, liberalisation of agricultural exports, increase of institutional credit for the agriculture sector, doubling of allocation for food processing and health protection coverage of Rs 5 lakh for 100 million poor and vulnerable families.

A large proportion of the rural population is dependent on daily wages leading to less disposable income at any point of time, and hence lower ticket purchases. The Goldman Sachs report said this has meant that most price-points common in urban India are relatively unaffordable.