Wednesday, May 26, 2010

The Discovery of ‘Rural’ India

It’s the microfinance institutions that make millions step into consumerism each year, graduating from the economics of necessity to the economics of gratification

India has one of the largest networks of bank branches in the world, but the hundreds of millions of poor in the country are largely out of it. With 52,000 commercial bank branches, 14,522 branches of regional rural banks, 100,000 cooperative bank branches and growing, the country is teeming with institutions that should be able to meet the credit needs of the people who are starved of formal credit. Microfinance institutions (MFIs) came as godsend to try and transform themselves into successful mini-entrepreneurs, which in turn is pushing consumerism in rural India.

Rural India stands a testimony to the growing consumerism. India’s 700 million villagers now account for the majority of consumer spending in the country, more than $100 billion a year. Millions step into consumerism each year, graduating from the economics of necessity to the economics of gratification, buying themselves motorcycles, televisions, transistor radios, et al. As per NCAER, rural households form 71.7% of the total households in India. Spending in this segment is growing rapidly and consumption patterns are closing in on those of urban India. According to MART, rural India buys 46% of all soft drinks sold, 49% of motorcycles and 59% of cigarettes. In fact, this trend is not limited to utilitarian products: 11% of rural women use lipstick. No wonder then that a leading mobile company recently announced plans to roll out a micro-financing offer in 12 states to make mobility more accessible to rural markets and notably, to the female population in rural India. Conducted across over 2,500 villages, the microfinance scheme of the mobile company allows easy payment scheme on handsets to women consumers at a weekly installment of Rs.100 over 25 weeks. Although the level of affordability in rural India is low, MFIs are creating a virtuous circle of higher income, higher productivity & higher consumption.

India, home to 25% of the world’s poor, holds great potential for microcredit. There has been an explosion of MFIs, usually set up by NGOs. A decade ago, India had only 400 MFIs with 200,000 customers between them. Today, we have around a thousand such institutions. Commercial banks, too, have started participating in the movement and the result is that microfinance now serves around 17 million people. This is narrowing the chasm between India’s flourishing cities and rural hinterland.

Spread across 650,000 villages, with an average population of 1,100, rural villagers were long imagined by city dwellers as primitive, impoverished and irrelevant, something to drive past on the way to something else. Millions of poor women are today using small loans to rewrite their present and future. The movement has made them more confident than ever helping them to explore new horizons, new dreams. The most active states are Andhra Pradesh and Tamil Nadu. Other states where such self-help groups are making a dramatic difference are Karnataka, Himachal Pradesh and Uttarakhand. But poor women, who are in the forefront of the micro credit movement, use the small loans to jumpstart a long chain of economic activity from this small beginning.

Corporate India has carefully timed the announcement of the discovery of the rural Indian market. For the last quarter of the FY09, the country’s business and financial press has run a number of articles to explain how rural markets for consumer products are doing very well, how companies which have products for hinterland have done their balance sheets much good, and how the economic slowdown can be successfully beaten by selling to the rural India. A FMCG company realised the power of rural India. Project Shakti was born out of this realisation, and it has become a case study for business schools and evolved beyond its original goals.

Certainly, the opening of this new frontier of consumer demand from 700 million people could tip India’s role in the global economy from seller to buyer, from a vendor of outsourced skills to a source of consumers for the world’s wares. And that’s the reason why MNCs, from Coca-Cola to Nokia, appear increasingly keen to understand Indian villagers!

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Source : IIPM Editorial, 2010.

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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