India’s rural economy: The next frontier of growth and investment
This article features the views of Priyanka Khandelwal, Fund Manager at ICICI Prudential AMC.
Rural India is a very integral part of the India growth story because a large part of our working-age population is in rural India. Around 64 per cent of India’s population resides in rural areas and the rural economy contributes to nearly half of India’s GDP. In the last decade, several investments have been made by the Government of India to improve the standard of living in rural areas, so much so that a lot of people have been brought outside the poverty line.
But despite all the investments in improving social welfare, rural incomes at an aggregate level have not done well in the last few years because of very heavy dependence on agriculture for employment.
Since independence, India has seen reducing dependence on farm-related employment on the back of growing opportunities in manufacturing, construction-related jobs and even self-employment helped with the same. But in the last ten years, we did not see material improvement in the percentage of people employed in non-farm jobs.
Essentially, dependence on agriculture for livelihoods was high and because farm income growth was range-bound, overall real rural wage growth numbers have been benign. On the other hand, urban income growth has been relatively better which is why urban India has done much better in terms of income and consumption growth versus rural India.
However, the outlook for rural India could be different in this decade as the outlook for non-farm jobs looks better. The thrust that is being provided on growing India’s manufacturing sector for domestic needs, as well as exports, has the potential to improve the availability of non-farm jobs. The outlook for construction-related jobs is much better, also aided by improvement in the real estate cycle. There is a lot of effort that has gone in by the Government in terms of skilling initiatives, which prepares our labour force not only for non-farm jobs but also for self-employment.
The Government has also been supplementing household incomes as we have seen through Ladli Behna Yojana which augurs well for consumption and/or savings. Farm indicators are also looking good which augurs well for farm incomes in the near term.
As incomes improve for rural Indians, rural consumption has scope to pick up. But rural development should also accelerate.
- Financial inclusion is one theme that could benefit. As incomes grow, savings should increase in rural areas and looking at the potential for deposit accretion, the banking sector would look to go deeper into the country to expand its branch network. When incomes improve, people will start thinking about the future of their family and insurance penetration has scope to increase in rural areas.
- Farm mechanisation has the scope to increase. With rising literacy and skill development, the desire of the younger population to work in farm jobs can continue to come off. This could accelerate the pace of farm mechanization in India, as we have seen in several countries across the globe.
- Connectivity is another theme that benefits from rural development. With the amount of investment that has gone into improving road infrastructure and electricity availability in the last decade, sectors like telecom and autos could benefit. Affordable telecom tariffs and the availability of cheap smartphones have ensured that rural Indians are connected to the world which has resulted in growing awareness and aspirations in rural India. Also, considering that public transport infrastructure in rural areas is not that developed, with rising disposable incomes, two-wheelers and passenger vehicle sales can improve in rural India. Consumer financing is also improving in rural areas.
- Energy consumption should increase in rural areas, not just due to household consumption but also industrial consumption.
- Electricity availability in rural areas has resulted in higher penetration of consumer durables. Female participation in rural areas has improved in recent times, which will increase the need for convenience as household incomes improve. This augurs well for consumer durables as a sector.
- However industrial consumption of energy can increase in rural areas as manufacturing units are set up deeper in the country. Land prices in urban and semi-urban areas have materially increased in the last several years. Government investments in road infrastructure, electricity and water supply availability have strengthened the investment case of setting up manufacturing units in rural and semi-urban areas, which augurs well for the energy sector and employment opportunities.
When household incomes grow, people desire to live better, look better and feel better. Several consumption-related sectors benefit from this as we have seen in urban India in the last decade. The rural per capita incomes are also nearing the inflection point from which non-food consumption should pick up and companies that focus on serving these consumers could benefit from better growth prospects.
The Investment Opportunity
Our recently launched ICICI Prudential Rural Opportunities Fund seeks to capitalize on these growth drivers. The fund offers exposure to rural development and consumption themes, balancing contrarian and structural investment opportunities. It tracks the NIFTY India Rural Index, a well-diversified benchmark covering 11 sectors and 75 stocks, with a strong bias towards Large-Cap companies.
The fund emphasizes certain structural themes and underperforming sectors that have the potential to do well as rural growth accelerates. With its multi-sectoral and flexible approach, the fund aims to navigate the evolving rural landscape and deliver sustainable long-term returns.
Conclusion
India’s rural economy is at an inflection point. Decades of underperformance have created a ripe opportunity for growth across multiple sectors. As rural livelihoods and incomes improve, sectors tied to development and consumption are set to thrive. For investors, this represents a chance to tap into a broad-based recovery and participate in India’s journey towards balanced economic growth.
The ICICI Prudential Rural Opportunities Fund is a step towards channelling investments into this promising theme, aligning with the broader vision of a prosperous rural India.
Disclaimer: The opinions expressed above are of the author and may not reflect the views of DSIJ.