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 two-wheelers 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 2011-12for 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 R24,000 in 2009-10, from R14,000 in 2004-05 (see graph), growing at about 11% per yearfaster than the inflation rate of nearly 6% 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 all-India average in Maharashtra and Bihar (12.1%), Gujarat (12.2%) and Madhya Pradesh (11.4%). In contrast, discretionary rural household spending grew at the lowest rates in Andhra Pradesh, West Bengal and Karnataka.
Rural households saw a rise in their discretionary spending power between 2004-05 and 2009-10. This helped boost the ownership of consumer durables (see graph). 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% of total households, but had only 42% penetration in televisions in 2009-10 (against 76% in urban), 55% in electric fans (91% in urban), 14% in two-wheelers (33% in urban) and a mere 1% in motor cars/jeeps (7% 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.
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. 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 1,000 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.
Although access to electricity has improved significantly across rural households between 2001 and 2011, several states still have a long way to go (see graph). For instance in 2011, only 10.4% and 23.8% 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 (see graph). 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 fans amounts to almost 12 million in Uttar Pradesh1, 4 million in Bihar and 1 million in West Bengal.
In the 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% of rural Indian households. Considering that an average only 22-30% 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) appears to have resulted in a sharp pick-up in ownership of two-wheeler in the last five years. In Rajasthan, Bihar, Orissa, and Uttar Pradesh, although overall ownership of two-wheelers remains low, ownership has more than doubled between 2004-05 and 2009-10.
In times to come, in addition to higher income, improved access to electricity 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, air coolers, four-wheelers, and digital cameras.
Extracted from the Crisil report titled Braving infrastructure hurdles, rural consumer goes shopping