Go to the Village. Only then Will You Know the Rural-Urban Divide

It’s true everyone is gaining from growth, but the gap between cities and villages is increasing. The need is to narrow this over time

Thirty lakh crore. That, in rupees, is the order of magnitude of the Indian household markets. I prefer to call it the Rs 30 trillion market and I wish that some day we, as a nation, migrate to counting in millions and billions rather than in lakhs and crores. For the internationally-inclined, Indian households spend or save about $750 billion in a year. Consumer spending has been rising rapidly enough to spur corporates into an investment binge. Private consumption expenditure been growing by over 6 percent per annum in recent years in real terms i.e. after removing the spurious effects of mere inflation. This is about twice the growth rates seen earlier. Consumerism is in. Surprisingly, the debate of whether this extraordinary rise in consumerism is creating a rural-urban divide or not is conspicuous by its absence. The per capita incomes in rural India are about one-third the levels in urban India. And I believe that this difference is rising. No one is complaining because an overwhelming majority is gaining from this growth story, albeit at different rates. It is interesting to note several large companies building aggressive plans to penetrate the hinterland in search of the consumer’s pockets. ITC’s e-choupal, Hindustan Unilever’s Project Shakti and ICICI’s micro-finance initiatives are among the famous cases that have wagered large shareholder funds on strategies to harness the rural markets.

These are staggering initiatives and, I believe, quite risky unless the implementation is focused and accounting very tight. Because rural India is a thinly-spread and rapidly depleting market. As the bigger villages transform themselves into small towns, and the larger towns migrate to cities, the purchasing power in the remaining villages would fall to lower levels (than the current one-third of urban incomes) as these would be the relatively smaller and isolated villages.

ITC chairman Yogi Deveshwar often talks ofcost barriers over the short to medium term that inhibit investments in socially inclusive initiatives. He further laments that markets have failed to reward corporate socia responsibility. With due respect to ITC’s (and several other similar large corporates’) initiatives I guess it need not cost other corporates millions before they learn this rude lesson. Markets are not interested in altruism unless it involves someone else’s money. And Deveshwar’s expectation of fiscal help is equally futile. It is possibly time for a subtle shift in strategy. It is sub-optimal for a company to have a rural strategy. It is wiser for it to have several appropriate regional strategies that combine rural and urban areas. The rural-urban divide is deceptively simple. It is too sharp, too widespread and too diverse. Compare rural Bihar to rural Punjab to understand what I mean.

An appropriate strategy to tap the Indian consumer market would be to divide the nation into roughly equal-sized homogeneous and continuous regions. State boundaries do not work. They are unequal in size and a mix of diverse regions — compare Konkan and Western Maharashtra with Vidarbha or south Gujarat with Saurashtra and Kutch. A homogeneous region would be one that has roughly similar agro-climatic conditions, and similar levels of urbanisation and female literacy.

Within each such homogeneous region, there is a substantial ruboff effect of rural and urban regions upon each other. If a crop does well in a region, it improves the purchasing power in both rural and urban regions because families are usually spread over both. Similarly, if employment in a city or a town increases because of new businesses, it has a trickledown effect on the surrounding villages since labour is attracted into the towns from the surrounding areas. Neighbourhood effects work. Eventually, this implies a convergence of income levels within the region. Over time, variation in income levels within a homogeneous region would narrow. Corporates need to ride this natural phenomenon and accelerate this convergence. In the current booming times, even sub-optimal strategies would yield results. However, when the markets enter the rough patch, a finely calibrated regional strategy would stand a better chance of providing sustained growth