20 highlights
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In the developed world, rural consumers generally buy larger bottles of shampoo or oil or body wash, or larger soaps.
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Indian textbooks on marketing management or rural marketing are instructive reading here. They will tell you that the “sachet revolution” was India’s “disruptor innovation” in the 1980s, and its pioneer was one Chinni Krishnan from Cuddalore, Tamil Nadu. Those were the days when a shopkeeper in the village would cut a Lifebuoy soap into six pieces and sell them at a price little more than one-sixth that of the full soap.
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Krishnan’s solution was simple: Instead of letting the shopkeeper sell it loose, why not pack it small in the factory itself? The villager cannot pay, say, ₹60 for a large shampoo bottle because her daily wage or income does not allow her to. But she can certainly afford the same shampoo at ₹1. Thus, Chik shampoo was born in 1983, produced by Krishnan’s CavinKare and sold at 50 paise per sachet.
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The point I want to illustrate in this newsletter is neither the innovation (“buy less but more often”) nor the business model (“profit at the bottom of the pyramid”) of sachet products. I want to talk about why the sachet was needed in the first place and why FMCG companies continue to depend on them even after close to four decades.
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There is no doubt that India is a large market, but the largeness is drawn from its larger absolute population and not from a higher per capita income. Over the past 74 years, the failure to create a large home market is a historic failure of the Indian state compared with neighbours such as China and eastern counterparts like South Korea.
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If you move out of marketing textbooks and start reading serious economists, they will tell you that the sachet is a problem, and not necessarily an innovation or disruption.
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Unless incomes in agriculture rise rapidly, a large home market for non-agricultural goods cannot be created.
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Export markets can never be substitutes for a strong home market, partly because global markets are not open and partly because the volumes are not large enough.
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Due to these reasons, and more, public policy in backward economies has focused on creating an agricultural surplus by removing barriers to increasing production and raising public investment in agriculture and rural infrastructure. While raising public investment is a fiscal question, the removal of agrarian barriers to production is a political question. Almost every economy that succeeded in raising industrial growth had an agrarian revolution.
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In the post-war period, economies like Japan, South Korea and Taiwan completed land reforms i.e., redistributed land from a handful of monopolizers to the masses of tenants and the landless. Land reforms freed the demand constraints, raised purchasing power in rural areas and laid the basis for industrial growth in these economies.
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In India, however, land reforms were a failure except in abolishing statutory landlordism and outside of a few states. Coupled with poor public investment, this meant that aggregate demand in rural India remained trapped in a vicious cycle of low investment, low productivity and low income.
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Thus, one reads glowing reports of how rural India is a “fast-growing market”. But high growth rates are deeply deceptive if the base is low. Also, many of the expansions in rural markets are consequences of naturally changing human habits. For instance, if neem sticks were used to brush teeth in the past, toothbrushes and toothpaste are used now. To wash utensils, washing powder and liquids are replacing coconut fibre and brick powder. These trends, too, show up as higher rural demand.
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However, none of these reports talks about the absolute levels of rural consumption, which are low by any standard—absolute and global.
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In 2011-12, a person spending just ₹27 a day in rural areas was considered as living below the poverty line. However, even at this destitution line, 217 million of India’s rural population were below the poverty line.
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Moreover, the extent of poverty in rural areas rose in the last decade. Between 2011-12 and 2017-18, monthly per capita consumption expenditure, for example, fell by 8% in rural India.
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In other words, India now has 270 million rural poor compared with 217 million a decade ago.
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Yes, these numbers do show that rural India has the potential to emerge as a large market. However, this potential will remain a mirage unless socioeconomic conditions in rural India are substantively transformed. Such a transformation will not be served by slick marketing strategies, or what some fashionably call “disruptions”. The solution also does not lie in technocracy or digitalization. The solution is political and institutional in nature—for a structural problem where power relations play a foundational role. To begin with, it is a question of redistributing wealth in rural areas, which are marked by one of the highest inequalities anywhere in the world.
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In sum, even after 74 years of independence, poor rural demand continues to be a major drag on India’s economic growth. This is not true of countries like China or South Korea—countries that began the journey of development along with India in the second half of the 20th century. For these countries, rural demand was a driver of economic growth.
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In India, however, disposable incomes are low not just because of low gross incomes, but also because of the expenditures households must incur in multiple spheres of life. In modern welfare states, education and healthcare are supposed to be free. Free education and healthcare release a part of gross incomes for consumption spending and raise overall demand. However, if households must pay for these basic needs, their disposable income would shrink, pulling down overall demand.
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Official data shows that out-of-pocket expenditures of households form at least 70% of their total expenditure on healthcare.