October 2004

Unshackling rural markets

R Gopalakrishnan, executive director, Tata Sons, explores the role of government and industry in unleashing the true potential of India's vast rural sector

R Gopalakrishnan
My first exposure to rural markets was through my HLL field training and an AGM speech by chairman VG Rajadhyaksha in 1969. Two years later in 1971, I learned about the Kapurthala experiment of HLL's Delhi branch. Since then I have travelled into and experimented with rural markets. After 35 years, I am in a reflective mood. Has the potential of the rural consumer really been releaed, let alone been tapped? I reckon that the answer is yes and no, depending on how you interpret the data. However, most people would agree that the true potential of rural markets is a long way away. The progress achieved smacks a bit of wasted opportunity rather than any shining success.

Commentators view rural markets from three perspectives. First, and most common, is a consumer marketing point of view – so many million people with a level of income and consumption, how can my company efficiently sell them products that we have or how can we make for them what they need? No doubt, this summit too will have such a focus. Second is an economic market point of view – what is their income, what does it take to increase their income and aspirations so that they can consume more products. Third is a social market point of view – a sort of CSR viewpoint; how can my company engage with the community to improve their lot? All are valid and interconnected.

In this paper, I will not comment on the CSR type, social market point of view at all. I will talk about rural markets from a holistic viewpoint – how can they become more engaged consumers, taking responsibility for their own future through local choices and entrepreneurship so that the rural market demand can develop more robustly than in the piecemeal way of the past? Apart from a passing reference to the consumer marketing aspect, I will avoid delving into rural consumer behaviour, distribution, media darkness, etc.

Poverty is a business
CK Prahalad1 rightly argues that poor people constitute a consuming market, that companies must reorient their attitude and business models to satisfy those consumers. "The poor must become active, informed and involved consumers because poverty reduction can result from co-creating a market around the needs of the poor," he states. This is achieved by creating in those consumers a capacity to consume based on three simple principles: affordability (single pack serve), access (distribution intensity) and availability (distribution efficiency).

Among the examples, he quotes the case of HLL's Annapurna Salt, a category I know something about, initially from HLL, later from a Tata perspective. His illustration of Annapurna Salt as co-creating a market around the needs of the poor is, in my view, misplaced. As he himself states, "Although many brands of salt are also iodised, HLL was the first to market salt on the iodised platform." The statement is correct, so the conclusion must be that Annapurna Salt has not co-created anything. In spite of expanding retail distribution artificially through huge trade margins, as Prahalad's case describes, Annapurna's market share is well behind the number one brand. I mention this not to reject his ideas, but to emphasise the dangers of intellectualising rural markets to a fault.

Unfortunately, poverty is itself a business, it keeps several politicians and economists busy. Two thousand years ago, Saint Tiruvalluvar said, "Thol varavum tholeyum kedekkum thokhai yaakha, nal kuravu ennum nachai," i.e., "Craving, the child of poverty, kills at once both pride and gentle speech". Today, I would like to argue a demand side view, i.e. how can we put money into the hands of rural consumers, thus increasing their propensity to consume?

Medieval India was characterised by a lack of policy2. Villages existed as little republics with almost no contact with the rest of the world. Local 'rajas' collected revenue and funded the state treasury that looked after the king, his staff and sustained the meagre administrative structure. Towns relied on trade and each town specialised in a few commodities. India came under British rule in 1858 and a policy regime was set up that was rooted in generating surpluses by way of stringent land revenues. After the industrial revolution, India became a source of raw materials and a market for manufactured goods. As early as 1912, Sir Ratan Tata, the son of Jamsetji, endowed a chair at the University of London to investigate the causes of poverty and suggest means for its alleviation. To this day, the Sir Ratan Tata Foundation continues at the London School of Economics.

In 1930, Will Durant3 speaking about India noted that "the economic drain out of the resources of the land…has reduced India to a land of famines more frequent, more widespread and more fatal, than any known before in the history of India or the world". The great Bengal famine4 of 1943 provided the backdrop to India's independence. Mahatma Gandhi said at Naokhali in 1946, "To the hungry, God is bread; the God of bread should prevail in every home and hut of the country." Jawaharlal Nehru aptly remarked soon after independence in 1947, "Everything else can wait, but not agriculture." This pronouncement got reflected in several public policy and investment decisions, particularly in the areas of irrigation, fertiliser production, land reforms and community development. The analysis of successive finance ministers' budget speeches reveals an interesting pattern. Here are four extracts from budget speeches over the years, arranged by year, I won't say whether increasing or decreasing. Please guess the period in which such a statement might have been made:

  • "…but neither in agriculture nor in industry, shall we be able to attain our objectives, if infrastructure…is not rapidly and efficiently developed…"
  • "…a strategy for greater absorption of labour in agriculture has to go hand in hand with faster growth of industry and balanced development of agriculture..."
  • "…investment expenditure in infrastructure facilities is being raised steeply so that bottlenecks coming in the way of further growth are removed..."
  • "...the annual budget is now something more than a simple account of government's housekeeping. Each budget marks a stage in the country's continuous development and has to be judged by the contribution it makes to this development…"

These are sequenced from the most recent to the older speeches – Jaswant Singh in 2003, Madhu Dandavate in 1991, HM Patel in 1979, Morarji Desai in 1960. Over 40 and more years, we have made the same noises, irrespective of the party in power or the finance minister presenting the budget. In management jargon, this is called good strategy and inadequate execution! After independence, we have developed a democracy where rulers are supposed to deliver prosperity to people even as they demand adherence to the policy and regulations formulated by them. Since the rulers are not adequately delivering prosperity, the people are not adhering to laws formulated by the leaders. How do you break the cycle?

I will touch upon four key vectors, which can unshackle rural markets.

Vector 1: Engagement in governance
A government's engagement with the governed can be authoritarian, ritualistic or authentic engagement5. Authoritarian engagement requires the government to use its powers comprehensively and unilaterally. It does not suit India.

In ritualistic engagement, the government refrains from using its powers comprehensively and constructively. It sees itself as the upholder of set methods and then depends on ritualistic processes to secure adherence to these set methods. It elicits passive compliance by both the government and the governed. Including the centre, state and PSUs, we have 20 million government functionaries as against 400 million working outside the government. We don't have a lean state, we almost have a mean state, where the citizen is a supplicant. For the citizen, the emphasis is on not getting caught doing the wrong thing. It is almost okay to do the wrong thing for private gain as long as the doer does not get caught. The thrust is on adhering to ritual without any emotional involvement in the outcomes. In India, there is a ritualistic engagement between government and people.

Authentic engagement involves the comprehensive and constructive use of power by a government but seldom in any unilateral manner. The use of power is uncompromisingly aimed at pursuing those goals that are important to the aggregate economy and to the economic and social wellbeing of the general public. Authentic engagement usually leads to an emotional involvement in the desired outcomes. It elicits trust and awe in the context of the methods and desired results.

India desperately needs authentic engagement between the government and the governed. The weaker and disenfranchised classes have politely disengaged themselves from further social and economic activity, and signal their apathy every so often by voting the incumbent government. However, the finance minister's budget speech in June 2004 and the prime minister's Independence Day address in August 2004 offer hope, including an opportunity to change the rules of engagement between the government and the governed. Only recently has the rural development ministry prepared a 55-page booklet called Gram Vikas – Programmes at a glance for our MPs. Why? To sensitise MPs and MLAs to become more aware of rural development and the problems of delivery mechanisms for programmes. It demonstrates the point that only lip service has been paid to Indian agriculture and the farmer for decades; it would appear that almost all political parties have failed to understand farmer-related problems6.

This is borne out by the history of farmers' agitations which began when Narayan Swamy Naidu blocked roads in Tamil Nadu in protest of farm power tariff hikes 25 years ago7. Since then, there have occurred just in western India, the Chakan agitation on onion prices (1980), the Nipani agitation on tobacco (1981), the Maharashtra milk agitation (1982) and the 18-year struggle against the monopoly procurement of cotton. Surely, there is a message in all this.

Employment growth8 in rural India during the last 20 years has been 1.36 per cent pa, 2.03 per cent pa and a paltry 0.67 per cent pa during the periods 1983 to 1987, 1987 to 1993, and post liberalisation from 1993 to 1999. The corresponding employment growth in urban India has been approximately double that in rural India. Public investment in agriculture has fallen dramatically since the late 1970s and so has the share of agriculture in total gross capital formation. So what do agri-dependent people in the rural areas do? They move to non-agricultural rural employment if available, or migrate to the cities. No prizes for explaining the situation we see around ourselves! The need to move to authentic engagement in governance is shouting out loud.

Vector 2: Reforming agricultural marketing
Before 1700, the difference in per capita income between the richest and poorest countries was small. The average American in 1700 earned five times what the average Indian earned. Contrast this with the 1980 multiple of 105! Why? Everywhere, most people were employed on the farm, they all followed about similar farming techniques. The major differentiators were soil and climate. Therefore, their incomes were not hugely apart. If India and China accounted for half the world GDP, it was because they had half the world population!9

Technological discontinuities of three centuries created inequality in incomes because only some seized the emerging opportunities, thus altering dramatically the sectoral composition of their national economies and the workforce. Farm income is a negligible part of the GDP of developed countries though it is over-represented in their politics. The first reality that India faces is that the developed world protects its agriculture while preaching free trade in industrial goods and services. There is a second reality. Socialism has not been successful, in fact, it has collapsed. While market economies have not been free from problems, they acknowledge that inequality is inevitable and they should leverage rather than suppress it. By encouraging a spirit of adventure, the system encourages people to respond to opportunities through the natural human instincts of greed, optimism and herd mentality.

Global trends and urbanisation make agriculture look unattractive to intellectuals. It is the task of policy to bring it back to centre-stage in the nation's economic thinking. Why? Firstly, two thirds of the population earns one fourth of the national income from agriculture, making the per capita earning 0.4. One third of the population in the non-agricultural sector earns three fourths of the national income, making the per capita earning 2.2. The income ratio of five (2.2 divided by 0.4) was under three just prior to liberalisation and under two in the seventies. Continuously widening of the gap in per capita income between the agricultural and non-agricultural sectors has huge economic and social implications, especially when the non-farm sector is incapable of employing the poor from the farm sector. Unless we can enrich the poor through economic reform, the poor will become hostile to reform.

Secondly, the non-farm sector needs consumers and this requires policy to put money into their hands. Money can reach the poor through public investment in agriculture (rural roads, irrigation, marketing infrastructure) and employment (rural industries, public works). The absence of purchasing power is visible in the slack demand for goods, the most glaring being consumer products.

It is not enough merely to bring agriculture centre stage; we need to shift emphasis to the marketing aspect from the production aspect. Our traditional mindset is to focus on production. Today, the agricultural marketing system and infrastructure is incapable of profitably absorbing even the current output. What I state may seem self-evident and obvious. But it is not uncommon to miss the obvious!

Vector 3: Micronising democracy
Only about 40 per cent of India's agricultural area is irrigated. Most of the favourable locations for irrigation have already been developed, so future irrigation may exhibit lower marginal returns and greater environmental sensitivity. Greater attention will have to be paid to rain water harvesting and increasing the irrigation potential through micro-watershed development. There is also considerable scope to improve the efficiency of existing irrigation infrastructure through better and more participatory management practices. Watershed projects cannot succeed without full participation of project beneficiaries and careful attention to issues of social organisation.

Therefore, when it comes to agriculture and rural India, it is high time we shifted the focus from central to local leaders, from national planning to empowering local administrators, from the sarkar being mai-baap to villages taking the future in their own hands. This requires leadership by humble politicians, like prime minister Manmohan Singh, who do not get overzealous about doing wrong things in the name of and by the authority of the people. I would like to quote just a few examples, though there are many, many other examples:

  • Anna Hazare's Ralegan Siddhi10 village in Ahmednagar District has demonstrated that miracles can happen through strong leadership and mass cooperation. Hazare based his social revolution on measures like enhancement of water resources through percolation tanks and bunds, tree felling, cattle grazing on farmland, compulsory shramdaan, etc.
  • Mohan Dharia's NGO Vanrai is facilitating 300 villages by giving local villagers direction and information about government schemes they can benefit from. In Gawdewadi village, for example, out of the total 888 hectares of land, 538 hectares are watered by surface irrigation through percolation tanks and nearby bunds. Earlier, they grew only bajra, groundnuts and green chillies, whose production was totally dependent on the rains. After these water-conservation efforts, they grow tomatoes, custard apples, pomegranates and mangoes.
  • In Aurangabad district (Gazaj village), the collector launched the Amrutdhara Jal Abhiyan11. She first sent the villagers to Dewas in Madhya Pradesh to study water conservation through people participation. On return, through shramdaan, the villagers built mud and concrete bunds to create artificial ponds. Now, farmers are able to raise a multi-crop selection from crops such as cotton, bajra, maize, bhindi, tomato, moong and palak!
  • In Sangli district, the collector has done similar things. She worked on the villagers to change their attitude from asking "How much will I get to what can I contribute?

Vector 4: The paradox of subsidies
One of the great paradoxes of Indian agriculture is the role of subsidies. Particularly in the 1990s, the policy approach has been to secure an increase in production through:
(a) input subsidies on power, water and fertilisers;
(b) output support prices.

The equity, efficiency and sustainability of the current approach are questionable.

These subsidies do not improve income distribution or the demand for labour. The boost in output from subsidy-stimulated use of fertilisers, electricity and water has the potential to damage aquifers and soils. Even worse, these subsidies crowd out public agricultural investment in roads, irrigation and power. The last blow is the mistaken belief that the subsidy fails to benefit the poor farmer because the fertiliser manufacturer pockets the money. This is political and administrative muddle-headedness of a high order. If proof is required, then one has to only ask why the fertiliser industry, a supposed beneficiary, would lobby for freedom from controls and subsidy.

Conclusion
It is true that rural markets are developing, that the rural consumer is getting more savvy and there are a bunch of techniques to be learnt on how to design products for them and how to reach out to them. Much of the rest of this Summit will, no doubt, be devoted to those subjects. I do not intend to deliver any depressing message, but I am sobered by the reality that we had about 165 million poor people in 1951, and today we have 250 million poor people, an increase of 50 per cent! Percentages of poor people mask the reality of these absolute numbers.

The engagement of governance, reforming agricultural markets, micronising democracy and rethinking subsidies are four key vectors of a long overdue agenda. In these actions lie the true liberation of India's rural markets.

References

  1. The Fortune at the Bottom of the Pyramid by CK Prahalad
  2. Indian Economic Transition by Amir Ullah Khan and Bibek Debroy
  3. The Case for India by Will Durant, Simon and Schuster
  4. 'Enhancing our Agricultural Competitiveness' by Prof MS Swaminathan, 6th JRD Tata Memorial Lecture, Assocham, 2003
  5. Yearning for Authentic Governance by G Ramachandran, Hindu Business Line, August 13, 2004
  6. View from the Fields by P Chengal Reddy, Times of India, July 5, 2004
  7. Unchanged quarter century for farmers by Sharad Joshi, Hindu Business Line, September 1, 2004
  8. Agricultural Policy and Rural Poverty Reduction by NC Saxena, Integrating the Rural Poor Into Markets, 2004
  9. Fortune Favours the Bold by Lester Thurow
  10. The Village Roadshow by Vinita Deshmukh, Indian Express, September 12, 2004
  11. Gritty Water Collectors by B Krishnakumar, The Week, September 19, 2004

Inaugural address by R Gopalakrishnan at the Rural Marketing Summit of FICCI on October 5, 2004, at Mumbai.

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