November 2012

CRISIL Insight

Braving infrastructure hurdles, rural consumer goes shopping

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Last updated: April 30, 2012

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Braving infrastructure hurdles, rural consumer goes shopping

Consumer durables have become more affordable to rural households in recent years, due to rising discretionary spending and relatively low levels of price rise in durables. As a result, at least one in every two rural households owned a bicycle, an electric fan and/or a mobile phone in 2009-10. Despite rising affordability, the pattern of penetration of consumer durables varies distinctly in rural India - even between states where household discretionary spending is at similar levels. This clearly indicates that even though higher income is a necessary factor, it is not the sole factor, influencing consumers decisions to purchase durables. Here, adequate access to infrastructure electricity and road connectivity holds the key. Loss of potential demand, due to poor access to infrastructure, is significant. According to CRISIL estimates nearly 12 million additional rural households in Uttar Pradesh and 4 million more in rural Bihar would have owned electric fans by 2009-10, had there been better access to electricity. Further, each of these two states would have had 5 million more households owning a television set. In contrast to relatively poor electricity access, an improvement in road connectivity between 2004-05 and 2009-10 appears to have resulted in a sharp pick-up in ownership of twowheelers in several states including Bihar, Orissa and Rajasthan.Therefore, apart from raising rural incomes, boosting rural infrastructure will help unlock the true demand potential for consumer durables. Our recent insight titled Sustaining the rural consumption boom, (August 2012), pointed out that rural spending outpaced urban spending between 2009-10 and 2011-12 for the first time in nearly 25 years. Through our follow-up insight, we explore the inter-state differences in the two most critical factors, influencing rural demand for consumer durables. These are discretionary (non-food) household spending and access to infrastructure (electricity and road connectivity). While the study uses state-level consumption expenditure data available up to 2009-10, we expect similar trends are likely to have persisted in subsequent years too as rural wages have continued to rise at a fast pace. Discretionary spending of a typical rural Indian household rose to Rs 24,000 in 2009-10, from Rs 14,000 in 200405 (Figure 1), growing at about 11 per cent per year faster than the inflation rate of nearly 6 per cent per year over the same period. Kerala and Punjab bagged the top spots, in terms of the highest discretionary rural household spending, witnessing higher growth over an already high base seen in 2004-05. However, certain other states that were relatively less well-off in 2004-05, also witnessed a surge in discretionary spending. Among the less well-off states, discretionary rural household spending per year grew at a higher rate than allIndia average in Maharashtra and Bihar (12.1 per cent), Gujarat (12.2 per cent) and Madhya Pradesh (11.4 per cent). In contrast, discretionary rural household spending grew at the lowest rates in Andhra Pradesh, West Bengal and Karnataka.

CRISIL Insight

Figure 1: Rural household discretionary spending, 2009-10

Kerala Punjab Haryana Rajasthan Maharashtra Gujarat Uttar Pradesh Madhya Pradesh Tamil Nadu Andhra Pradesh West Bengal Karnataka Bihar Orissa
(Rs) Discretionary spending per year growth

55,228 46,337 11.5 41,700 9.0 28,504 10.5 26,772 12.1 25,717 12.2 25,177 8.7 22,193 11.4 20,793 10.3 19,367 2.1 18,199 6.8 18,115 7.8 16,846 12.1 14,375 10.7 All-India
Rs Spending per year growth

14.5

24,287

10.9

Note: Per year growth is between 2004-05 and 2009-10. Source: CRISIL estimates based on National Statistical Survey Organization (NSSO) data

Rural households saw a rise in their discretionary spending power between 2004-05 and 2009-10. This helped boost the ownership of consumer durables (Figure 2). During this period, consumer durable ownership grew well over the all-India average, in states such as Bihar, Orissa, Rajasthan, and Uttar Pradesh, albeit from a relatively low base. Even as the ownership of consumer durables has increased among rural households in recent years, it remains low compared to their urban counterparts. Rural India accounts for about 68 per cent of total households, but had only 42 per cent penetration in televisions in 2009-10 (against 76 per cent in urban), 55 per cent in electric fans (91 per cent in urban), 14 per cent in two-wheelers (33 per cent in urban) and mere 1 per cent in motor cars/jeeps (7 per cent in urban). Therefore, if rural income/wages grow at a similar pace, as seen over last few years, these markets should offer significant opportunity to durable manufacturers.

Figure 2: % of rural households owning consumer durables

55.2 47.1 38.4 41.7 2004-05 54.9 2009-10

25.6 13.9 7.7 0.8 1.4 Electric fan Bicycles TV Two wheelers Motor car/ jeep

Source: NSSO and CRISIL Research

Even as rising purchasing power of rural households fuelled demand for consumer durables between 2004-05 and 2009-10, the state-wise ownership pattern of durables differ markedly, even between states that have a similar level of discretionary rural household spending (Figure 3). For instance, rural areas in Bihar, Karnataka and West Bengal have similar levels of discretionary household spending, however, Bihar and West Bengal report much lower ownership of consumer goods (such as electric fans and two wheelers). Similarly despite similar levels of discretionary spending in Gujarat and Uttar Pradesh, ownership of electric fans per 1000 households is far less in Uttar Pradesh.

This makes it evident that affordability alone is not enough to raise the ownership levels of consumer durables. Poor access to infrastructure is a major deterrent to raising penetration levels of these goods. This is especially of concern in rural areas where incomes are expected to continue rising rapidly. Improved road connectivity raises demand for vehicles, whereas power availability elevates demand for electrical goods. Figure 3: Similar discretionary spending levels; diverse pattern of durable penetration, 2009-10
Discretionary spending (LHS) Rs 28,000 24,000 20,000 16,000 12,000 8,000 4,000 0 Gujarat Uttar Pradesh West Karnataka Bihar Bengal 200 0 600 400 Electric fan Two wheelers Households 1,000 800

Where infrastruture has made a difference

Although access to electricity has improved significantly across rural households between 2001 and 2011, several states still have a long way to go (Figure 4). For instance in 2011, only 10.4 and 23.8 per cent of rural households had access to electricity in Bihar and Uttar Pradesh respectively. States where rural households have low access to electricity reflect far lesser ownership of electrical goods, relative to states with similar level of discretionary spending (Figure 5). As per CRISIL Researchs estimates, loss of potential demand for consumer goods, between 2004-05 and 2009-10 in states with poor access to electricity, translates into millions of units. With higher rural electrification, almost 5 million additional households each in Bihar and Uttar Pradesh, and about 4 million more in West Bengal, would have purchased television sets during this period. Similarly, lost demand for electric 1 fans amounts to almost 12 million in Uttar Pradesh , 4 million in Bihar and 1 million in West Bengal.

Note: Electric fan and two-wheeler indicates penetration/ownership per 1000 households Source: NSSO and CRISIL Research

Figure 4: Access to electricity in rural households

Punjab Kerala Tamil Nadu Andhra Pradesh Haryana Karnataka Gujarat Maharashtra Rajasthan Madhya Pradesh West Bengal Orissa Uttar Pradesh Bihar

2011 0 20 40 60 80

2001 100

Source: Census 2001 and 2011

1 The methodology for calculating lost demand assumes that had electricity access been similar, the level of ownership of electric goods would be similar for two states with similar level of discretionary spending (assuming that cultural/weather differences do not matter) refer to table 2 in annexure for examples.

CRISIL Insight

Figure 5: Access to electricity and ownership of electric fans

Discretionary spending (LHS) Access to electricity % of rural households

Ownership of electric fans per 100 households

Rs 60,000 40,000 20,000 0

West Bengal Tamil Nadu Madhya Pradesh Andhra Pradesh Uttar Pradesh Karnataka Maharashtra Rajasthan Orissa Haryana Gujarat Punjab Kerala Bihar

per cent 100 80 60 40 20 0

Source: NSSO, Census 2011 and CRISIL Research

In future, while rural households in relatively poor states could enjoy higher affordability levels towards purchase of consumer durables, improving access to electricity will play a more critical role in expanding penetration of these goods. This will especially hold in states such as Bihar, West Bengal and Uttar Pradesh where higher incomes, in addition to improvement in infrastructure will be key drivers of potential demand. Higher incomes and access to infrastructure will create huge potential demand for durables in these states which house nearly 33 per cent of rural Indian households. Considering that an average only 22 to 30 per cent of rural households in these states, own a television or an electric fan, rising incomes and improved access to infrastructure, could exponentially raise demand for these items.

Similarly, lack of good road connectivity adversely affects penetration levels of two-wheelers and motor cars/jeeps in rural areas. While several factors including availability of finance determine penetration of two-wheeler and motor car in rural areas, an improvement in rural road network would enhance demand for these goods. In fact, an improvement in road connectivity in several states (as measured by growth in length of roads under Pradhan Mantri Gram Sadak Yogana - PMGSY) appears to have resulted in a sharp pick-up in ownership of two-wheeler in the last five years (Figure 6). In Rajasthan, Bihar, Orissa, and Uttar Pradesh, although overall ownership of twowheelers remains low, ownership has more than doubled between 2004-05 and 2009-10. Figure 6: % change in two wheeler ownership, discretionary spending and PMGSY roads between 2004-05 and 2009-10
Discretionary spending growth Growth of PMGSY roads (LHS)

Growth in two-wheeler ownership

1400

160.0 120.0

700

80.0 40.0

0
West Bengal Madhya Pradesh Andhra Pradesh Uttar Pradesh Tamil Nadu Rajasthan Kerala Orissa Maharashtra Karnataka Haryana Gujarat Punjab Bihar

0.0

Note: States have been sorted according to lowest to highest two wheeler ownership in 2009-10. Growth in roads constructed under PMGSY is charted on the left axis; growth in discretionary spending and two-wheeler ownership on the right axis. Source: NSSO, Basic Road Statistics of India, and CRISIL Research

In times to come, in addition to higher income, improved access to electricity (Table 1) and roads will be key determinants of demand for consumer durables in rural areas across many states. Access to finance will also be a critical enabling factor as household demand for higher value items sees a pick-up. Rural households in richer states such as Kerala and Punjab are likely to move further up the ladder, and purchase more high-end durables, such as refrigerator, aircoolers, four-wheelers, and digital cameras (Annex table 3).

Table 1: Ownership per 1000 households, 2009-10 and future demand drivers

Replacement demand and move towards higher quality product/brand

Note: *political effect. Electric fan and television indicates penetration/ownership per 1000 households Source: NSSO, CRISIL Research

CRISIL Insight

Annexure
Table 2: Indicative lost demand per 1000 households
Better Infrastructure proxy*
Karnataka
(Proxy for Bihar & West Bengal)

Rural ownership per 1000 households, 2009-10

Lost demand per 1000 households relative to the proxy state**

Bihar 371 308 47 40 West Bengal 257 90 30 22 Uttar Pradesh 187 490 7 84

Bihar Television Electric fan VCR/VCP/DVD player Refrigerator 139 179 34 3

West Bengal 253 397 51 21

Uttar Pradesh 277 349 86 31

Gujarat
(Proxy for Uttar Pradesh)

510 487 81 43

464 839 93 115

Note: *State with similar household spending level but higher access to electricity, ** Difference in ownership from the proxy state Source: NSSO, CRISIL Research

Table 3: High- spenders: Further rise in incomes to boost demand for high-value durables
Kerala
2009-10 ownership pattern per 1000 households Average Ownership Ownership in Top 10%*

Punjab
Average ownership Ownership in Top 10%*

Haryana
Average ownership Ownership in Top 10%*

Refrigerator

322

690

562

830

316

629

VCR/VCP/DVD player

315

633

226

439

78

239

Audio/video disc/cassette

235

464

201

427

71

212

Washing machine

105

361

135

351

140

428

PC/Laptop

71

271

25

127

18

61

Motor car jeep

69

243

73

292

35

137

Air conditioner, cooler

17

69

346

578

357

651

Note: *The ownership pattern of the top 10 per cent of households, with the highest consumption levels as of 2009-10 reflect potential for increase in the average ownership of such high-value consumer durables going ahead. Source: NSSO, CRISIL Research

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