Is Yield Improvement a Real Possibility?

Today it is possible to increase the yield with the combination of new sciences- based on genetically modified seeds and applying existing and traditional sciences – better use of fertilizer and improved irrigation systems. For example, in the US, new seed technologies have reduced diseases vulnerability of crops like maize and cotton. In India also us of BT cotton, a genetically modified version of cotton seed has resulted into very much improved results.

Some regions have apprehensions about the use of genetically modified varieties due to fears of unintended consequences, but most scientists so far have proven no adverse effects, even 10 years after adoption.

India’s crop yields are far below that of many regions. For example, India’s wheat yield at 2600 kg / hector is well below that of china (4100 kg / hector) and Europe (5000 kg / hector). Similarly, India’s rice yield at 3000 kg / hector is again well below that of china (6200 kg / hector), Europe (6400 kg / hector) and US (7500 kg / hector). India’s soybean yield at 870 kg / hector is far below that of Brazil (2500 kg/hector), Europe (2600 kg / hector) and US (2700 kg/hector). So, it is clearly a possibility to significantly improve crop yield in India. Honorable Minister of Agriculture Shri Sharad Pawar has also in his recent speech expressed concern over the slow pace of farm research in the country and exhorted scientists to raise productivity of crops to meet domestic demand and cut import dependence.

Long-term Measures by the Government

To counter the political implications of the poor farm growth and inflation risk, the government has planned or planning some long-term measures. The government has announced that a coordinated approach on agricultural indebtedness will be finalized in the near term to help the farming population and avert a further rural debt crisis in the country. According to the media reports, the government is likely to initiate a mega-farm loan-restructuring package covering bad and doubtful debt of about Rs300 billion (or US$7.5 billion) in the upcoming Union Budget to be announced in February 2008.

In the Union Budget (February 2007), the government increased its budgeted spending on irrigation by 54% and on Bharat Nirman program (covering rural infrastructure) by 38%. In addition, the government is targeting a net disbursement of USD 7.8 billion (0.4% of GDP) in the farm credit by the end of next year. The government is also relaxing regulations for private sector participation in agri value chain and many states have amended agri marketing acts paving way for direct transaction of private sectors with farmers. This coupled with emergence of the organized retailing is likely to be a significant catalyst for India’s farm sector growth.

India’s position in the world agro map

India has the second largest arable land (~ 162 million hectors, out of that ~ 140 million hectors is actually sown) in the world next only to USA and the largest irrigated land base of ~ 55 million hectors in the world. Due to such a large arable land base, India is the second largest producer of rice, wheat, sugarcane (for sugarcane it may be the largest for current year), fruits and vegetables; the largest producer of tea and a leading producer of edible oil seeds and coarse grains in the world. India also has second largest cattle head count and the largest producer of milk in the world. But, India is also a second largest populous country in the world (having population of ~ 1.2 billion people), so on demand-supply front, except edible oil for the most of the major agriculture items, India is largely self-sufficient, though it has started importing wheat to replenish it inventory.

But at present, the key question one should consider is – Is India prepared or capable of meeting all its future demand for food without restoring to imports from the rest of the world (and becoming food dependent country) and without having widespread inflationary effects? It is sure that rising per capital income on back of strong economic growth, exponential growth in middle income consumers, higher aspiration and changing food habits are likely to result into higher non-liner growth (compare to population growth) of food consumption in India. However, as far as the growth is concerned, India’s agricultural economy is stagnant on many (or almost all) fronts. Indeed in the last five years, the average growth in agriculture production has been below country’s population growth. Annual per capita food grain production has declined from 207 kg in 1995 to 186 kg in 2006. The rate of agriculture growth has fallen from 5% in the mid-1980s to less than 2% in the past half-decade.

Net irrigated area has just grown from ~ 50 million hectors in 1990s to ~ 55 million hectors currently , capping the growth in available land for cropping (As irrigation makes it possible to take crop two times a year instead of rain dependent land where only one crop per year is possible). The average growth in land brought under irrigation decelerated to 1.5% during F1991-04 compared with 2.4% in the 1980s and 2.7% during the 1970s. The government spending on agriculture is also hovering around 0.5% of GDP since last couple of years. On productivity front also there is not much growth. The yield per hector of food grains is around 1700 kg / hector, almost stagnant for last seven years. The government's fertilizer policy has distorted the trend in fertilizer consumption and therefore the mix of soil nutrients, resulting in low productivity. The ideal usage ratio of nitrogen, phosphorus and potassium (NPK) is 4:2:1. According to the Planning Commission of India, this is one of the proven and well-documented reasons for stagnation in the productivity and production growth rate since the early 1990s. Another problem in India is fragmented land holdings – about 60% of the farm land is owned by small marginal medium farmers who are unable to benefit from power of scale and are more vulnerable to adverse weather conditions and high level of indebtedness.

Future demand by various estimates of per capital GDP growth suggest that by 2020 India will require 270 to 290 million tons of food grain against current production of ~ 212 million tons. This can only be achieved either through increasing the yield per hector (need to achieve yield of 2100-2150 kg / hector from current 1700 kg/hector) or by increasing area under irrigation (Only 40.3% of the farming land is irrigated). India’s solution to remain food sufficient economy lies in systematic efforts to achieve both.

Worldwide food prices have risen sharply and supplies have dropped this year… The changes represent an “unforeseen and unprecedented” shift in the global food system, threatening billions with hunger and decreased access to food…

United Nations Food and Agriculture Organization on its latest food outlook

Article Author Manish Marwah

Global food inflation is on the rise …

Global wheat, rice, maize and soybean prices have increased to new multiyear highs. The CRB food stuff index has rise 23.7% y-o-y in December 2007. The FAO’s food price index rose by 40% in 2007, on the top of the already 9% increase the year before, and the poorest countries spent 25% more in 2007 on imported food.

The prices of grain-fed meat, eggs and dairy products are also significantly up spurring wide spread inflation throughout the consumer food market.

In India, healthy buffer stock and the government’s efforts to restrict exports have helped in keeping domestic food prices (especially of grains and pulses) insulated so far (In fact, NCDEX agri index is currently quoting marginally down y-o-y). However, with a lag, some amount of pass-through of higher international prices in domestic food prices will be inevitable. In India, domestic demand supply situation is also very tight in certain agro commodities like wheat and edible oil, any adverse impact on output could potentially push up the domestic food inflation sharply (as on January 2008, area under acreage for wheat is down 2-3% y-o-y and for oil seed, it is down ~ 10% y-o-y).

Rising inflation and slow response to rising demand for wheat, pulses, rice and edible oil have caused a sense of urgency for food security in the country…. The rates of growth of agriculture in the last decade have been poor and are a major cause of rural distress… Farming is increasingly becoming an unviable proposition because of the nature of landholdings.”

Honorable Prime minister Dr. Manmohan Singh speaking at 53rd meeting on the National Development Council

Approach In Agriculture

AGRICULTURE, The Next Big Opportunity

Despite India's dominent position as a producer in word agriculture, India has a Meager 1.5% share of global agritrade.This is because both, productivity levels(yields) as well as the level of food processing in India,continues to languish below that of comparable geographies. Thus,the potential for growth in this sectior is huge and could in turn trigger growth of the intire economy, driving GDP growth. Recognizing this potential, the government has decided to step up investments in this sector, open it up to the private sector by premitting contract farming which should see the growth rate of the agricultural sector more than double over the next few years helping India achieve a GDP growth of 8%.

India occupies a dominant position in world agriculture. In India, 52% of total land is cultivable as against 11% which is the world average. Also, of the 60 soil types in the world, India has nearly 46. India thus has the second largest gross cropped area (160 mn hectares) and is a leading producer of cereal crops, pulses, tea, jute and allied fibres and fruits & vegetables. It also has the second largest livestock population in the world and is the largest producer of milk in the world. In fact, India accounts for 17% of the animals, 12% of the plants (including over 10,000 species of aromatic and medicinal plants) and 10% of fish genetic resources of the world.


But India's share in international food trade is negligible. India accounts for less than 1.5% of international food trade. There are several reasons for this. Firstly, the agricultural sector is largely unorganized, dominated by small farms (in all 100 million, with farm size of less than 1.2 hectares divided into 3-10 separate plots), which constrains productivity levels or yield per hectare. Secondly, very little of the food that is produced is processed thanks to the food processing industry also being largely unorganized. Small players, which process less than 0.5 tons/day and aggregating around 9,000 units, account for bulk (~75%) of processed food output.


Thirdly, the value of wastages in food grains and fruits & vegetables is estimated at over Rs50,000 crore, as the food chain from the farmer to the consumer involves several intermediaries with multiple-point handling and long transit periods. And this in turn increases the cost differential between the mandi (wholesale) price and the market price to 60-100% or more. Fourthly, with government funding to the sector proving grossly inadequate and liberalization withheld, capital formation saw a negative growth.

These shortcomings constrained the growth of the agricultural sector, which has seen a deceleration from 3% in the 1980s to just 2% over the last 10 years, even while its counterpart the services sector grew at a rate of over 7.5%. Considering that agriculture accounts for 35% of India's GDP and nearly 65% of employment, even if the growth rate in agriculture were to double, it could spur growth in GDP to over 8%, both directly through increase in agricultural production as well as indirectly though growth in rural consumption.



India's gross cropped area of 160 mn hectares nearly equals the size of US farmland and is larger than that of Europe and China. But with only ~40% this land being irrigated, agriculture production has grown at a rate of just 2.7% per year over the last 40 years. It israte of just 2.7% per year over the last 40 years. It is estimated that a 1% increase in irrigated area generates a 1.6% increase in crop output and a RoI of 17%. Realizing this, the Indian government has been making a concerted effort to increase gross cropped area under irrigation including offering irrigation projects on BOT basis. It is also opening up the sector by allowing corporates to undertake (i) Contract Farming, (ii) Supply Chain Management, (iii) Agro Retailing and (iv) Food Processing on a larger scale.
To facilitate the same the government has asked states to change their APMC Act (which required all agricultural products to be sold only in government regulated markets) and linked credit flow to the same capital investment subsidy for renovation of godowns and setting up farm marketing infrastructure will only be given to states that have amended the APMC Act. Fourteen states and four Union Territories have already amended the APMC Act which allows farmers to sell their produce directly to buyers. Meanwhile, another six states have undertaken partial reforms and 13 states along with three Union Territories have initiated action on the reforms front.

Contract Farming

Despite India's leading position in world production, it lags behind in productivity (yields). In fact, though India ranks second in rice and wheat production, in terms of yield/hectare it ranks 52 (rice) and 38 (wheat). For pulses the productivity levels drop even further. Despite being the highest producer of pulses in the world, India ranks 138 in terms of productivity. To improve yields in agriculture, the government has allowed the private sector to undertake contract farming. This, the government believes will result in increase in seed replacement (from 12% to 20%), farm mechanization (from 25% to 40%), fertilizer (NPK) use (from 91.5 kg/ha to 160 kg/ha) and IPM coverage (from 5% to 15%) apart from improving cropping intensity from 134% to 145%. According to the Agricultural Ministry, reforms in the agricultural sector are likely to see total food grain production rise from 203.41m ton in 2000-01 to 320.0m ton by 2011- 12, registering an annual growth of over 4%, while for horticultural produce the growth would be even higher from 152.5m ton in 2000-01 to 300m ton in 2011-12, a growth of over 6% p.a.

Allowing corporates to undertake contract farming has seen the entry of large players like PepsiCo India Holdings, Bharti TeleVentures, HLL (which works in consortium with Rallis which provides agri-inputs and know how and ICICI which gives farm credit), Tata, DCM Shriram and McDonald's among others. In the case of PepsiCo, which has 75,000 acre of holdings across states on which nearly 200 farmers grow corn, tomatoes, basmati and potatoes, contract farming led to savings of 20-30% apart from ensuring steady and adequate supply of raw material for its food processing plants. In fact, PepsiCo's foray into contract farming in Punjab was on account of inadequate supply the company required 40,000 ton of tomatoes over 55 days to operate its tomato processing plant but the state could provide only 28,000 tons in one season (28 days).

However, the total area currently under contract farming covers only 7 million acres of the total cultivable land of 400 million acres, accounting for less than 2%. And even this figure drops to 200,000 acres if only corporate contracts are considered. While contract farming is attracting more players like Reliance Industries, retail chains like Big Bazzar and Metro, the challenge will be to integrate farmers as benefits of scale and technology can be achieved only on minimum 3-4 acre plots.

Supply chain management: key to profit maximization

The long supply chain starting from harvesting, packing, grading, transportation, storage, wholesale and finally retail sale involves very little value addition but huge losses in terms of wastage (15-25% is lost by the time the produce reaches the retail level). In value terms, the wastage in food grains (including post harvest losses) is estimated at over Rs50,000 crore a year. For fruits and vegetables (where post harvest loss is higher at 25-30%) it is estimated at over Rs 23,000 crores.

Further, despite little or no value addition, the price of the commodity increases by nearly 100% from the farm-gate to the retail stage, with neither the farmer nor the consumer benefiting. The share of the rice grower in the final price paid by the consumer is usually not more than 44-47%. And for fruits and vegetables the farm gate price as percentage of retail price is even lower at 25% compared to 70% in USA. According to a study conducted by Rabo India Finance, farmers share could increase to 33% of total revenues on an average after disintermediation in the supply chain, while consumers would save 10% of their spends on food if supply chain efficiencies were improved.

Terminal market complexes: As a step towards reducing wastage and increasing share of producers in price, the government has encouraged corporates to set up TMCs. TMCs offer multiple choice to farmers such as electronic auctioning and direct sale to exporters, processors and retail chains under one roof. In addition wastage is reduced as TMCs provide storage infrastructure (giving participants the choice to trade at a future date), logistics support including transport and cold chain services and cleaning grading and packing support to farmers. The TMCs would operate on a Hub & Spoke format with the TMC (the Hub) linked to a number of collection centers (the Spokes) located at key production centers. Corporates that have expressed interest to set up TMCs include Reliance Industries and ITC, which plan to invest between Rs60 crore to Rs120 crore on each TMC. In all, eight TMCs are likely to be set up in centres like Mumbai, Nasik, Patna, Chandigarh, Rai (Haryana), Bhopal, Nagpur and Kolkata. The area covered would vary from 200 acres (for Mumbai) to 55 acres (Kolkata). And the handling capacity in each TMC would range from 200,000 ton to 600,000 ton (for Mumbai) a year.

Information technology to aid growth

The Agricultural Ministry with the help of the National Informatics Centre has promoted on-lineagricultural markets for crops and horticultural produce.

Agmarknet: To ensure that farmers get a fair price for crops, the Agmarknet has sought to network all major agricultural producer markets, agricultural marketing boards and departments and wholesale markets in the country. Along the same lines it has also promoted Hortnet a horticulture informatics network (though this has been taken up on a turnkey basis with the hub having been set up at the National Horticultural Board, Gurgaon, to which 33 countrywide market centers of the Board areconnected. Prices and arrivals of fruits and vegetables are received by NHB on a daily basis from the 33 centres. To improve productivity at the farm level and help in efficient dissemination of information it has also set up a crops informatics network (Cropsnet), a plant protection network (PPIN) and a fertilizer informatics network (Fertnet).

The success of introducing IT in agricultural marketing can be gauged from the fact that Agmarknet, which has set a target of connecting 2810 market nodes in the 10th plan, has already connected 2408 nodes.

E-choupal: ITC has also made a significant contribution to the growth of e-markets. ITC's echoupal network is today the largest network in the country with over 6,000 kiosks in operation. It has already connected more than 30,000 villages across six states and is growing at a hectic pace, entering 30 new villages a day. In recognition of its contribution to the field of information technology, the company recently received the prestigious Development Gateway Award, an international award recognizing outstanding achievement in the application of information and communication technologies.

Time to Revisit

The Indian economy is booming, stock markets are buoyant, homegrown entrepreneurs are spreading their wings, exports are growing, and consumerism isrising. In this scenario, it is definitely worth revisiting the issue of full Capital Account Convertibility (CAC). Most likely, CAC would improve the business environment, giving Indian industry access to lost-cost capital and the economy more options for asset allocation, bringing in higher inflows and improving the confidence level among foreign investors.

But is the time right?
But is the time right?When Global imbalances are worsening, commodities are in strong bull cycle, interest rates are rising all over the globe, inflation is looming and asset markets sky rocketing, will introduction of full CAC will bring desired results?

Answer lies in India’s approach…Though RBI is revisiting the issue of capital account convertibility again after 1997, it will still favor a phased roll out of full CAC in India - probably a time horizon of next 3-4 years- due to its concerns over inflation, quality of credit growth, rising interest rates and some asset markets. The finance minister too does not foresee a full convertibility of rupee before 2009 when India’s revenue deficit could have been be wiped out and fiscal deficit could have been brought down to 3%.


The things have changed.The fundamentals of Indian economies has changed significantly since RBI first appointed S S Tarapore Committee in 1997 to study Capital Account Convertibility (CAC) issue taking guidance from 1997 Union Budget Speech. At that time, the GDP was growing at lackluster pace of 5% against 8.1% projected for 2005-06. The center’s gross fiscal deficit was also hovering around 5% against 4.1% today. Compare to foreign exchange reserve of USD 26 billion (covering 7 month import) in 1997; India’s foreign exchange reserve currently stands at more than USD 150 billion. Non-performing assets of banks, then at double digits (~14% in 1997) too have come down to below 5% today and to allow greater flexibility to banks the Cash reserve ratio has been lowered from 9% in 1997 to 5% in 2005.


India’s manufacturing exports has also grown from USD 35 billion in 1997-98 to USD +100 billion in 2005-06 whereas its IT & related services exports has grown from less than USD 2 billion in 1997-98 to USD +23 billion in 2005-06. Not only that, India has emerged as one of the most significant global players in IT/ ITES related exports. India is also gaining momentum in manufacturing exports mainly in the areas of Textiles, Auto ancillaries, Engineering and Specialty chemicals. India’s +1 billion population, with young age bias, rising income & growing middle class have also fueled consumption led growth making Indian economy more resilient.


Though in 1997 Tarapore Committee came out with a report laying pre-conditions for CAC by year 1999-2000, the issue of CAC was put on the back burner due to precipitation of financial crisis in South East Asia soon after (blamed to CAC of those countries). Recently RBI has again appointed a committee to set out the framework for fuller CAC, in response to the government’s declaration of revisit the CAC issue. Due to significant improvement of India’s macro fundamentals, most of the pre-conditions laid by 1997 Tarapore committee has already been achieved. (See “Road Map to CAC”)

Progress so far

Though East Asian Crisis put the government’s plan to adopt full CAC on hold, India has achieved a significant progress towards partly CAC since 1997.some of the measures recommended by Tarapore Committee in 1997.For, example, Tarapore Committee recommended that Indian Corporates should be allowed to invest up to USD 50 million in direct investment abroad, where as per present guideline, Indian Corporates can make overseas investments up to 200% their net worth under automatic route. And see the way this facility is used by Indian corporates today: Just in one quarter (first quarter of 2006), Indian companies have acquired more than USD 3 billion worth foreign entities. The overseas borrowings / fund raising by Indian corporates have also been liberalized up to certain extent but with few restrictions like overall cap, company level cap, minimum maturity, and end use. The FDI route is also now open for most of the sectors (retail trading, atomic energy, lottery business, gambling, agriculture and plantations being exceptions) with sectoral cap on few sectors.

However, capital account is still restricted for banks and individual to a large extent. For individuals, there are caps on spending limits for various purposed like foreign travel, foreign education, overseas medical treatment, etc. Individuals too have limited options to invest in overseas assets as the annual limit is US$ 25,000 per individual for overseas investment. Banks are also not allowed to raise fund through ECBs and only allowed to borrow upto 25% of tier I capital that again with certain restrictions. Along with restrictions on borrowings, there are restrictions on assets side too with banks’s money market investment restricted to USD 10 million and debt market investment restricted to USD 25 million.


Why fiscal discipline is important Success of CAC depends on balanced flow of forex, and for developing countries like India, it means attaining the right balance between exports and consumption led growth, and ensuring adequate investment in infrastructure and new capacities. (See “How India’s forex requirement is balanced”)

It has also become an imperative for India to invest continuously in infrastructure and capacities to attain the higher economic growth. India is relying on three main sources for its investment needs namely foreign investment, domestic savings, and government. Though foreign portfolio investment strong so far in India, foreign direct investment has not picked up compared to other Asian countries. Domestic savings were at 29.1% GDP in 2004-05 but due to strong consumption led credit off take, significant portion of domestic savings are diverted away from investment In this scenario, government’s role to fund India’s investment requirement, particularly in infrastructure sector, is very important. And that is where importance of fiscal discipline comes in to play. The large revenue deficit means increasingly borrowing to finance current expenditure of government rather than investing in growth. It holds the economy back by crowding out private investment, imposing heavy burden on the budget and using the resources that can be directed towards development needs. (See “How India’s Public debt/GDP compares with others”). That is why though our deficit has come down, our finance minister is also not foreseeing a full convertibility of rupee before 2009 when India’s revenue deficit could have been be wiped out and fiscal deficit could have been brought down to 3%(See “Central Government’s fiscal and revenue deficits”).


Benefits
Experience of few emerging markets suggests that a move towards full CAC could result into large capital inflows and can trigger appreciation of the exchange rate. Strong inflows can definitely have positive effects on economic growth but it also requires a very healthy financial system. Two obvious benefits of a CAC will be reduction in cost of capital and access to larger capital for India corporate At a time when India requires an imnvestment of US$ 1.5 trillion over the next five years to accelerate its growth to +10% from the current 8%, higher capital flows are definitely welcome.


Full CAC will also allow Indian corporates having operations in multiple countries to effectively hedge their risks. Full CAC will also open overseas asset markets for Indian investors/companies thus can provide them with more options and better portfolio diversification. In fact with cross border integration of global markets, capital controls over longer periods are infact costly, ineffective and distortive. A gradual appreciation of Rupee coupled with removal of infrastructure bottlenecks and productivity increase will sustain India’s competitiveness in exports markets coupled with reduction in import bill thus having positive effect on the trade deficit. A gradual appreciation of Rupee will also have a positive effect on inflation and government’s oil subsidies as oil accounts for 30% India’s import. However there are certain external risks which India faces and can result into strong capital out flow (See “Factors that can spoil party”).

Conclusion
A full capital account convertibility will definitely be a welcome move that expected to result into larger inflows of foreign savings and investments at a time when India is needing it the most. But fiscal discipline and safeguards are needed to be in place before that happens.

Article Author: Manish Marwah

Whats Driving Indian Consumerism

India’s baby boomer generation has grown up and unlike their parents who experienced guilt pangs every time they spent money, this generation has no such qualms and believes in living it up. One can attribute this largely to the fact that today’s consuming class has not only grown up in the post liberalization era but also has more choice too, both in terms of job opportunities as well as lifestyle choices.

Better economics (India is the fourth largest economy in terms of Purchasing Power Parity in the world) and the country’s growing eminence as a cheap and par excellence service provider, is seeing to it that global companies flock to India to grab a share of the growing consumer pie. Moreover, as markets in the developed nations are simultaneously getting saturated, India’s 250 million, and growing middle class is a big lure for global behemoths.

India’s ’Demographic’ DanceIndia is just the right age and is currently the youngest nation in the world with 65% of its billion plus population under the 35 years age group. What’s more>, a large percentage of this youth is urban. As a result, India’s urban/total population today stands at around 30% and is tipped to touch 37% by 2016, which is comparable to the urban-total/ population levels in East Asia. Further, the median age for India’s youth is also one of the youngest in the world. As against 35 years in USA, 41 years in Japan and 30 years in China, the median age for India’s youth is roughly 24 years.

According to a study conducted by the Asian Development Bank, the proportion of population in the consuming age (15-54 years) is also likely to increase from 58% in 2006 to over 60% in 2010, while the dependency ratio (share of non-working to working population) is likely to decline from 62% in 2003 to around 55% in 2010. In fact, as a higher percentage of population moves into the consuming class, the growth in consumption expenditure is likely to exceed growth in per capita income (12% y.o.y. for next five years).

Increase in consumption is also a direct fallout of increase in urbanization, as the average per capita urban income is twice the per capita income in rural India (See Table 1.0). Given that the average monthly per capita consumption expenditure for urban India has nearly doubled in the last decade and the fact that urban India accounts for nearly 42% of consumer expenditure (per capita consumption is 90% higher than that of rural India), one can easily attribute the rising consumerism to growth in urbanization.

A stronger rural India with growing capacities to consume is also fueling demand for products and services.Nearly 70% of India’s population lives in villages and rural consumption is directly linked to agricultural income. A supply deficit scenario is driving the firm trend in global cereal prices as stock levels are closed to 20-year low levels. Price trend of other agro commodities are equally or more firm. A combination of firm agro commodity prices, better irrigation and huge government thrust on the agriculture sector has resulted into rising farm income of rural India along with strong return of rural demand. Increased corporate participation and better infrastructure have also resulted in a meaningful impact on farm income and thus rural consumption demand. Increase in income levels: In the last five years there has been a perceptible increase in the number of households in the middle income and higher income categories. Almost simultaneously, the number of households in the lowest-income bracket has witnessed a sharp fall (See Table ). If that was not all, with rising disposable incomes and lifestyles in transition, the spending pattern of the average Indian is also changing. The top three income categories (See Table ) those earning above Rs. 180,000, those earning between Rs135, 000-180,000 and those earning between Rs. 90, 000-Rs. 135,000 will account for nearly 50% of the total income pie by 2010, a sharp increase from 28% in 2002. And as a recent KSA Technopak survey on spending behaviour of more than 10,000 urban households in India indicates, consumers in the last couple of years have started spending more on lifestyle categories like eating out, movies and entertainment (See Table ).

To keep pace with the burgeoning demand of the Indian middle class, over 200 malls are expected to come up over the next three years across the country, while over 50 million sq. ft. of retail space is likely to be added in 2007. The booming organized retail sector is in turn attracting top global brands to India. From clothes to accessories, foods & groceries to jewellery, projects have been lined up that are expected to increase organized retail penetration levels to 10% by 2010. Allowing FDI in telecom has already had a positive effect on the economy: teledensity (earlier below 1% for five decades) went up to 10% in just a single decade. With competition hotting up, tariffs came down and introduction of mobile services saw a sharp increase in mobile subscribers. The recent government initiatives of allowing 100% FDI in real estate development and 51% FDI in single brand outlets has already opened up the sector for many global hopefuls and is likely to have powerful impact on the sectors. And enabling the consumer to spend more and more are the numerous consumer finance schemes that have gained acceptance among the consuming classes. At an individual level, borrowing constraints have reduced substantially with banks/finance companies becoming aggressive lenders. Today, finance is available for almost all kinds of purchases whether large purchases (like a house) or small ones (like a television set). Low interest rates and narrowing down of the gap between deposit and lending rates is also aiding growth in consumerism. The rise in usage patterns of credit cards by the consuming class has also helped to bring a change in spending patterns. In addition, change in other supply dynamics like emergence of multiplexes, resurgence of radio, entry of large corporates in agri space, privatization of airports, increased public private participation in infrastructure projects are also supporting demand driven by domestic consumerism.
Crystal Gazing into the FutureOf course, growing disposable incomes and rising demand will automatically help all sectors of the Indian economy to ultimately ’rise & shine’, but who are the ones on whom immediate impact will be felt? Already the auto industry, consumer durables, telecom and retail banking have benefitted from rising consumerism in India and will continue to be benefitted in the future also. But, organized retail, the entertainment sector and others are now on the verge of boom. Riding the boom in aspirational products, organized retail has been booming. Retail sales which have been growing at an average annual rate of 7% during 1999-2002 are set to grow at an even faster clip of 8.3% annually during 2003-08, which is even higher than the estimated growth in consumer expenditure. Given that organized retail accounts for only 2% of the total retail market as against developed countries where most of the retail trade is conducted through organized retail outlets, there is enormous scope for organized retail to grow. At current growth rates, it is estimated that organized retail will account for 10% of the total retail pie by 2010. Strong growth for lifestyle related aspirational products/services is also predicted with increased ability & willingness to pay and availability of diverse choices (like multiplexes, low cost air, etc) to the consumer. Some of the categories that are likely to witness higher growth rates are multiplexes, organized retailing, restaurants, specialty electronics, branded jewellery and air travel. The Rs 300 billion Indian entertainment industry is also set to double in the next five years with all supply dynamics moving in a unidirectional manner. The growing penetration of C&S and a growing advertiser base in the broadcasting space, emerging platforms like Direct to Home (DTH), IPTV and consolidation of cable operators in the media distribution space, easy access to funds and corporatization of the movie production industry, digitization of cinema and emergence of multiplexes has already spawned a boom in entertainment business. Now, with FDI/FII investment of 26% allowed in the broadcasting, the number of channels have increased from a paltry few to over 200 channels and from limited transmission period of six hours to round-the-clock transmission. FDI/FII investment of 49% in cable services and 20% in DTH ventures should bring about more changes in this space. The FMCG industry estimated at Rs 450 billion is also the next big beneficiary of the boom in consumerism. Thanks to lifestyle changes and globalization, the traditional perception regarding packaged food being either stale or unhygienic is changing. Emergence of modern retail formats and better supply chain management has already made the agri sector an attractive investment opportunity to large conglomerates like Bharti and Reliance, among others. With growing consumerism, FMCG companies, which have finished their capex phase, are now building brands aggressively. Given the consumer’s preference for lifestyle segments - skin care, cosmetics and health care are the sectors to bet on in the FMCG space, while in processed foods - juices, ready-to-eat staples and refined edible oil are the areas likely to generate the highest returns. Last but not the least,the high cost structures and poor infrastructure that retarded the growth of India’s aviation sector in the past, is fast disappearing. Regulatory changes (abolition of IATT and reduction of excise duty on ATF) and competition have helped drive costs down making air travel more affordable. In fact, reduced fares have increased demand from leisure travelers (a segment that is likely to grow at a faster rate than the business traveler segment that dominated air travel until now) and the sector is likely to grow at a rate of 20% for the next five years.
Still not convinced of India’s potential? Check this…
Organized retail USD 35 billion by 2010 and USD 90 billion by 201 Entertainment business Rs 600 billion by 2010
Lifestyle related spending Rs 2500 billion by 2010
Airline traveler more than 50 million by 2010
Consumer space to treble from here by 2015
Need we say more!