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Demand deep dive Part II—rural demand in
Tamil Nadu boosted by NREGA
In part II of our series investigating the strength of domestic consumption, we went to the
southern state of Tamil Nadu, in and around the town of Coimbatore. Just as in Gujarat, we found
consumer demand to be robust, more so in rural than in urban areas. The National Rural
Employment Guarantee Scheme (NREGA) is playing an important role in boosting rural
spending. Rising wages are preventing a slowdown in consumption despite rising prices, and in
turn, this is causing higher inflation. However, the rural job scheme does not appear to be
increasing agricultural productivity. We found important changes in consumption patterns—from
unbranded to branded, and from large to small ticket purchases affordable to a larger population.
Urbanization appears to have gathered pace in the region despite NREGA, which augurs well for
structural growth, in our view.
NREGA—boosting consumption not productivity
We went to a NREGA work-site in a village on the outskirts of Coimbatore, where about 50
villagers were digging to build a water channel. NREGA is one of the largest of its kind job
security schemes, which guarantees 100 days of employment to one member of every rural family.
According to the government, 55 million households have been provided jobs under the scheme.
In the project site we visited, attendance records were kept, wages were paid once a week, every
village household had at least one family member enrolled, and the administration appeared to us
to be smooth and efficient. The daily wages amounted to just over Rs100, and workers can
demand up to 100 days of employment, though most demand less.
We found some key positives from the scheme:
1. In this region, there appeared to be little pilferage. Funds are directly transferred to the village
panchayat (local government) and from there to the workers. We saw registers of workers
with thumbprints for attendance at the worksite and job cards for each worker.
2. We found evidence that this was boosting rural demand—the village shopkeepers are seeing
better sales of fast moving consumer products.
3. There were more women than men at the worksite, a fact generally observed in Tamil Nadu,
which is important for an equitable distribution of benefits and consumption abilities.
4. It was providing villagers with some insurance against the vagaries of agricultural income,
and thereby helping them smooth consumption demand.
On the negative side:
1. The scheme in the village, with its focus on unskilled manual labor, did not appear to be
creating the most productive assets. The water channel that was being dug did not have any
water in it, and was difficult to see it being the most important project for the village in
improving agricultural productivity.
2. The NREGA scheme is clearly bidding up wages. The scheme has set the floor for rural
wages, and there is little downward rigidity. Although the going wage for construction
workers in the region was higher at Rs300 per day, and for textile mills even more, some
complained that in-migration from other parts of the country, where daily wages are lower,
had slowed.
According to the Municipal Commissioner of Coimbatore who had in his previous job
administered the scheme, it has contributed to increasing purchasing power for the rural poor in
Tamil Nadu, and predominantly the work involved deepening water reservoirs, de-silting of
rivers, and building canals. He thought it was the government scheme that had worked the best in
rural Tamil Nadu. While the jury is still out on NREGA and requires a more in-depth study, what
our visit suggests to us is that in the region, the scheme is boosting consumption and creating
greater equality, but is not necessarily increasing productivity in agriculture, and therefore there
does appear to be some link between the scheme and higher food prices over the past few years.
Apart from rising wages pushing up inflation, the state of Tamil Nadu also raised its Value Added
Tax (VAT) last week to 14.5% from 12.5% which could also adversely affect prices in the state.
Coimbatore—a rising Tier II city and microcosm of south India
Coimbatore is a mid-sized town of just over 1 million in population, and the second largest city in
the big southern state of Tamil Nadu after Chennai. It is a relatively prosperous, industrialized city
which is a hub of the textile and education industries. We found the city to be well-planned, clean,
with the ambience of a large university town. The big engineering colleges in the city supply
software engineers to nearby Bangalore and Chennai, while in-migration from nearby villages
provides the labor for the textile industry. The city has strong links with the other hub of the
textile industry—Tirupur, which is 50 km away. Consumption demand here can be interpreted as
reflective of prevailing demand conditions in southern India.
Consumption patterns—think affordable, go for brands
Volume growth in the sales of major consumer goods has been of the order of 10%-15%
according to a large distributor in the region, with rural demand more robust than urban. A sure
sign of confidence in rural incomes is the demand for tractors. We met with a large vehicle
distributor who said that tractor sales growth in 2011 was upwards of 15%, on a higher base from
2010, a fact corroborated by aggregate tractor sales as well. According to the latest country-wide
survey data released on July 8, average rural monthly consumption increased by 66% between
2005 and 2009. Rising wages are pushing up demand and the ability to withstand price increases,
in unlevered households.
Consumption patterns are also changing—the rural shop owner and the semi-urban retailer
prominently display the Rs1 (about US$0.02) sachet of shampoo and detergent. This is clearly
tapping the ‘fortune at the bottom of the pyramid’. Increasing sales and income for the rural shop
owner, allowing him to rise from humble means to constructing a big ‘farm’ house which we
visited, replete with modern amenities, and SUVs parked in the driveway.
The region’s consumers, it appears, are becoming more brand conscious. The local unbranded
products, despite being competitive in pricing, are facing an uphill battle from the brands. One
large distributor pointed out that the biggest shortfall is in branded noodles, milk tetrapacks, and
chocolates. Brand loyalty, somewhat surprisingly, appeared to be stronger in rural areas than in
urban areas.
Urbanization—picking up!
Urbanization is clearly evident in the region. The village retail store owner says that it is more of a
recent phenomenon, driven mainly by pull factors—jobs in the textile sector, rise in educational
attainment (the village had 100% primary and secondary enrolment), entrepreneurial opportunities
in the small towns, and also the ease of mobility due to better roads. According to the store owner,
more than 50% of his village has migrated since he was growing up in search of better
opportunities. NREGA is not having an impact on urbanization as those who can get better wages
in the towns are migrating, and the laborers under NREGA are mostly women and older people
with few outside opportunities. We believe urbanization will be a key driver of India’s growth
story. We estimate that some 640 million Indians may urbanize by 2050 and can potentially
contribute 1.8 percentage points to GDP growth annually (see India’s Rising Labour Force,
Global Economics Paper No. 201, July 28, 2010). The growth comes from urbanizing workers
being 3.5 to 5 times more productive in industry and services respectively compared to in
agriculture.
The Municipal Commissioner also pointed out that Coimbatore was seeing increased
suburbanization—richer town people moving to bigger houses in the suburbs due to better ability
to commute and rising land costs. This natural phenomenon accompanying urbanization is still not
widespread in India, but Coimbatore points to a trend to watch out for real estate developers and
service providers such as banks, and consumer companies.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Demand deep dive Part II—rural demand in
Tamil Nadu boosted by NREGA
In part II of our series investigating the strength of domestic consumption, we went to the
southern state of Tamil Nadu, in and around the town of Coimbatore. Just as in Gujarat, we found
consumer demand to be robust, more so in rural than in urban areas. The National Rural
Employment Guarantee Scheme (NREGA) is playing an important role in boosting rural
spending. Rising wages are preventing a slowdown in consumption despite rising prices, and in
turn, this is causing higher inflation. However, the rural job scheme does not appear to be
increasing agricultural productivity. We found important changes in consumption patterns—from
unbranded to branded, and from large to small ticket purchases affordable to a larger population.
Urbanization appears to have gathered pace in the region despite NREGA, which augurs well for
structural growth, in our view.
NREGA—boosting consumption not productivity
We went to a NREGA work-site in a village on the outskirts of Coimbatore, where about 50
villagers were digging to build a water channel. NREGA is one of the largest of its kind job
security schemes, which guarantees 100 days of employment to one member of every rural family.
According to the government, 55 million households have been provided jobs under the scheme.
In the project site we visited, attendance records were kept, wages were paid once a week, every
village household had at least one family member enrolled, and the administration appeared to us
to be smooth and efficient. The daily wages amounted to just over Rs100, and workers can
demand up to 100 days of employment, though most demand less.
We found some key positives from the scheme:
1. In this region, there appeared to be little pilferage. Funds are directly transferred to the village
panchayat (local government) and from there to the workers. We saw registers of workers
with thumbprints for attendance at the worksite and job cards for each worker.
2. We found evidence that this was boosting rural demand—the village shopkeepers are seeing
better sales of fast moving consumer products.
3. There were more women than men at the worksite, a fact generally observed in Tamil Nadu,
which is important for an equitable distribution of benefits and consumption abilities.
4. It was providing villagers with some insurance against the vagaries of agricultural income,
and thereby helping them smooth consumption demand.
On the negative side:
1. The scheme in the village, with its focus on unskilled manual labor, did not appear to be
creating the most productive assets. The water channel that was being dug did not have any
water in it, and was difficult to see it being the most important project for the village in
improving agricultural productivity.
2. The NREGA scheme is clearly bidding up wages. The scheme has set the floor for rural
wages, and there is little downward rigidity. Although the going wage for construction
workers in the region was higher at Rs300 per day, and for textile mills even more, some
complained that in-migration from other parts of the country, where daily wages are lower,
had slowed.
According to the Municipal Commissioner of Coimbatore who had in his previous job
administered the scheme, it has contributed to increasing purchasing power for the rural poor in
Tamil Nadu, and predominantly the work involved deepening water reservoirs, de-silting of
rivers, and building canals. He thought it was the government scheme that had worked the best in
rural Tamil Nadu. While the jury is still out on NREGA and requires a more in-depth study, what
our visit suggests to us is that in the region, the scheme is boosting consumption and creating
greater equality, but is not necessarily increasing productivity in agriculture, and therefore there
does appear to be some link between the scheme and higher food prices over the past few years.
Apart from rising wages pushing up inflation, the state of Tamil Nadu also raised its Value Added
Tax (VAT) last week to 14.5% from 12.5% which could also adversely affect prices in the state.
Coimbatore—a rising Tier II city and microcosm of south India
Coimbatore is a mid-sized town of just over 1 million in population, and the second largest city in
the big southern state of Tamil Nadu after Chennai. It is a relatively prosperous, industrialized city
which is a hub of the textile and education industries. We found the city to be well-planned, clean,
with the ambience of a large university town. The big engineering colleges in the city supply
software engineers to nearby Bangalore and Chennai, while in-migration from nearby villages
provides the labor for the textile industry. The city has strong links with the other hub of the
textile industry—Tirupur, which is 50 km away. Consumption demand here can be interpreted as
reflective of prevailing demand conditions in southern India.
Consumption patterns—think affordable, go for brands
Volume growth in the sales of major consumer goods has been of the order of 10%-15%
according to a large distributor in the region, with rural demand more robust than urban. A sure
sign of confidence in rural incomes is the demand for tractors. We met with a large vehicle
distributor who said that tractor sales growth in 2011 was upwards of 15%, on a higher base from
2010, a fact corroborated by aggregate tractor sales as well. According to the latest country-wide
survey data released on July 8, average rural monthly consumption increased by 66% between
2005 and 2009. Rising wages are pushing up demand and the ability to withstand price increases,
in unlevered households.
Consumption patterns are also changing—the rural shop owner and the semi-urban retailer
prominently display the Rs1 (about US$0.02) sachet of shampoo and detergent. This is clearly
tapping the ‘fortune at the bottom of the pyramid’. Increasing sales and income for the rural shop
owner, allowing him to rise from humble means to constructing a big ‘farm’ house which we
visited, replete with modern amenities, and SUVs parked in the driveway.
The region’s consumers, it appears, are becoming more brand conscious. The local unbranded
products, despite being competitive in pricing, are facing an uphill battle from the brands. One
large distributor pointed out that the biggest shortfall is in branded noodles, milk tetrapacks, and
chocolates. Brand loyalty, somewhat surprisingly, appeared to be stronger in rural areas than in
urban areas.
Urbanization—picking up!
Urbanization is clearly evident in the region. The village retail store owner says that it is more of a
recent phenomenon, driven mainly by pull factors—jobs in the textile sector, rise in educational
attainment (the village had 100% primary and secondary enrolment), entrepreneurial opportunities
in the small towns, and also the ease of mobility due to better roads. According to the store owner,
more than 50% of his village has migrated since he was growing up in search of better
opportunities. NREGA is not having an impact on urbanization as those who can get better wages
in the towns are migrating, and the laborers under NREGA are mostly women and older people
with few outside opportunities. We believe urbanization will be a key driver of India’s growth
story. We estimate that some 640 million Indians may urbanize by 2050 and can potentially
contribute 1.8 percentage points to GDP growth annually (see India’s Rising Labour Force,
Global Economics Paper No. 201, July 28, 2010). The growth comes from urbanizing workers
being 3.5 to 5 times more productive in industry and services respectively compared to in
agriculture.
The Municipal Commissioner also pointed out that Coimbatore was seeing increased
suburbanization—richer town people moving to bigger houses in the suburbs due to better ability
to commute and rising land costs. This natural phenomenon accompanying urbanization is still not
widespread in India, but Coimbatore points to a trend to watch out for real estate developers and
service providers such as banks, and consumer companies.
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