An infrastructure push to consumer spending

Nov 23 2012, 06:14 IST
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SummaryAffordability alone is not enough to boost purchases of consumer durables. Poor access to infrastructure is a major deterrent. This is especially of concern in rural areas where incomes are expected to continue rising rapidly.

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 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 2011-12—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 R24,000 in 2009-10, from R14,000 in 2004-05 (see graph), growing at about 11% per year—faster 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

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