WHILE the world debated and discussed the $570 billion fiscal stimulus package announced by the Chinese government, few noticed a unique and innovative policy decision from the government across the straits in Taiwan. The Chinese had drawn up a massive bill, largely funded by tax payers’, to be spent by the government itself in boosting the economic activity. Taiwan, on the other hand, decided to give back some money to its citizens to spend by themselves, thereby creating demand for products in local markets, which in turn could boost economic activity and job creation.

Under a new policy announced in December 2008, the island’s 23 million people regardless of age or wealth were given 3,600 Taiwan dollars or around $165 as shopping vouchers. “The programme is aimed at boosting the economy and is expected to contribute to a 0.64% increase in 2009 GDP,” explained Premier Liu Chao-shiuan. The core belief behind this programme was government spending is not effective due to leakages and delay in execution, whereas private spending is far more efficient in boosting economic activity, creating demand for goods and services and raising employment levels. The idea of the voucher and stimulating growth through private consumption has been powerful enough for even the governments of Japan and Germany to consider such a move.

In India, private consumption demand has been the key driver of economic growth, with private final consumption expenditure contributing over half of India’s growth in the past decade. In fact, almost 68% of India’s GDP is accounted by private consumption, as against 39% in China, making the case for stimulating the Indian economy by growing private consumption far stronger than anywhere else in the world.

Yet, most policy prescriptions in India have focused more on government spending and some tax rebates to selective industries. Rather than depending on policy prescriptions that have been tried before, it is time, we start exploring innovative measures that can positively affect the economic scenario in India. With a young demographic profile and growing urbanization, increase in private consumption can have a much longer and sustainable impact in creating demand and jobs across the country.

Given the right policy prescriptions, modern retail could also play a major role in stimulating private demand in India. Contrary to popular sentiments, this year has truly been an inflection point for modern retail in India. One of the biggest stumbling blocks for retail to develop in India was the rising cost structures, led by the rise in real estate prices. For the first time in many years, we are witnessing a scenario wherein real estate costs are falling and the retail business is becoming more and more viable. Along with it, people costs and operational costs are also stabilizing. There are distinct signs of consolidation about to take place in retailing in India.

As the share of modern retail grows, so will its impact on the domestic economy. By 2012, modern retail will directly employ over 1.6 million people at shop floors. Almost all of them will come from lower income groups and lesser educational backgrounds and who might not have found employment in other sunrise sectors in India. In addition, retail will create millions of more jobs in support services like security, mall and facilities management, construction and supply chains. Reports by consultancy major, McKinsey & Co, point out that for the government level, modern retail will help improve indirect tax collection by 1%, add to GDP growth and play a role in controlling inflation.

Cities in India have few public spaces for people to converge. With the growth of modern retailing, shopping malls and high streets have emerged as modern India’s public spaces where the middle class comes and spends time with their family.

Yet, the role and contribution of modern retail in India is yet to be acknowledged. Even when sectors as diverse as IT, hospitality, multiplexes and real estate enjoy various fiscal incentives from the government, modern retail is largely ignored by policy makers. In fact modern retail is viewed as a luxury, and imposed with more taxes, discriminatory power rates and stiff regulations.

As we step into a new year, we are also entering a new era of business and economic environment. A new era calls for fresh thinking, exploring new scenarios and new solutions. Whether it is through deficit-financed tax cuts that will put more money in the pocket of consumers, or through vouchers that encourage people to spend immediately, we have to explore ways and means to further boost private consumption. And as modern retailers acquire size and scale, we have to work on government advocacy that ensures modern retail plays a far more decisive role in the country’s economic growth and development.

Fathom this. Seventy per cent of India’s and 12 per cent of global population lives in rural India and contributes 50 per cent of the country’s GDP. Their population of 75 crore (750 million) is more than that of US, UK, France, Japan, Italy and Germany put together. In fact, as per Mckinsey, despite rising urbanisation, 63 per cent of India’s population will continue to live in the rural areas even in 2025.

Surging ahead in terms of growth

As per National Council of Applied Economic Research, rural market accounts for 55 per cent of LIC [Get Quote] policies, 70 per cent of toilet soap consumption, and 50 per cent of TV, fans, bicycles, tea and wrist watch consumption. So as a target market, it is attractive not only because of the size, but also because of impressive growth potential.

Rural GDP has been witnessing strong growth in the last four years (avg of 4 per cent) not only on the back of increase in minimum support prices for the agri-products but also due to availability of alternative employment opportunities.

Income_Distribution

Source: Business Today

In 2008, the rural areas grew at a robust rate of 25 per cent as compared to 10 per cent growth in urban retail market According to a McKinsey, rural India, would become bigger than the total consumer market in countries such as South Korea or Canada in another twenty years. It would grow almost four times from estimated size of $577 bn in 2007. While the per capita income is lower than urban areas, the customer base is thrice that of urban areas.

Resilient to slowdown

On account of negligible tax liability and little or no burden of loan repayments, the Indian rural population has a higher propensity to save. The rural areas account for 33 per cent India’s total savings. Being more conservative than their urban counterparts, the rural populace has not burnt their fingers in the real estate or stock market bust. Further, the rural income distribution pattern is also changing and the bottom is getting narrower.

While 18 per cent of rural India has earnings in the range Rs 45,000 to Rs 215,000 per annum, 58 per cent of urban population earns in this range. However, 27 m individuals form a part of this income bracket in rural areas while in urban areas it is about 29 m; of which large base is already tapped.

No of households (m)

Source : Ministry of Communications & Information Technology , India

As per the Associated Chambers of Commerce and Industry of India, the rural market is becoming increasingly attractive for FMCG, automobiles and organised retail businesses. Rural India accounts for more than 40 per cent consumption in major FMCG categories such as personal care, fabric care, and hot beverages.

FMCG sector in rural areas is expected to grow by 40 per cent as against 25 per cent in urban areas in the coming quarters. The size of retail market in India is estimated at US$ 280 bn of which the rural retail market works out to be $112 bn. This is expected to double in next 4 to 5 years because of the huge potential. Even auto companies in recent times are witnessing shift in trend as they are gearing to explore the huge market potential lying in the rural areas.

Source: Mint

As rural India becomes more lucrative and the government becomes more committed to its development, schemes like the rural employment guarantee, Bharat Nirman, focus on rural education, debt waiver plan and higher support prices will aid the rural demand. Although the penetration levels are still very low, the scope is huge. And India Inc. is not letting go of this opportunity.