IIFL Rural India Q1 2010

8/6/2019 IIFL Rural India Q1 2010

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Country roars

National Rural Consumption Guarantee Act

1Q2010

Rural India


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Rural India

Did you know?

Governments rural employment spending

Government spend on rural programmeshas grown at 45% annually during the lasttwo years.

About 35% of the governments ruralspending is towards employment schemes,NREGA (National Rural EmploymentGuarantee Act) being the largest of them.

Wastage under NREGAat 2040%isperhaps the lowest among the

governments rural schemes. Forperspective, wastage under PDS, a biggerscheme, is over 73% as per thegovernments own estimates.

More than 70% of all rural householdshave NREGA job cards.

Almost a third of all rural households inIndia currently secure wages underNREGA.

Only 14% of households employed under

NREGA receive the full stipulated 100 daysof employment.

Seventy percent of all payout under theNREGA scheme is towards wages ofunskilled workers.

NREGA incentivises local governments tofind work under the scheme, by placing theentire burden of the unemploymentallowance payout on the state government,while the centre bears 75% of the payouttowards skilled wages and 100% of payout

towards unskilled wages.

Wages under the NREGA scheme can bepaid only into bank accounts of individualworkers. This will bring ever more villagersinto the banking system.

Direct transfer of funds to recipients bankaccounts has kept siphoning of funds muchlower than it would have been otherwise.

Rural infrastructure

Based on 2001 census, 78m of the 134mrural households were without electricity.Under the rural electrification programmestarted in 2006, the government isspending US$1bn per year, to provideelectricity to 3m rural households peryear. So far, 9.4m households have beenprovided electricity under this programme.

Almost 17% of Indias rural population

(rural population forms 73% of totalpopulation) remains unconnected byroads, a proportion down from 25% as of2000.

The XI Five-Year Plans target is to bring16m ha under irrigation, a significantacceleration from less than 10m hatargeted to be added during each of theprior three Plan periods.

Rural consumption

Aggregate rural consumption expenditurein India is ~30% more than aggregateurban consumption expenditure.

During 1999-2007, rural spending on non-food items grew at 2.5x that of foodspend.

Rural penetration of motorcycles, at 10%,is significantly lower than urban

penetration at 30%.

Rural penetration of toothpastes andshampoos is only 42% and 37%,respectively, in rural India.

Fifty-six percent of Bharti Airtels andVodafones net mobile subscriberadditions, and 40% of Idea Cellularsrevenues are from rural areas.


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Rural India

Rural factoids

Figure 1: NREGA accounts for a third of all govt spendingon rural schemes

Figure 2: NREGA spend has been focussed on irrigation

0

200

400

600

800

1,000

1,200

1,400

FY08 FY09 FY10

Bharat Nirman NREGA

National Rural Health Mission AIBP (Irrigation)

(Rs bn)

0

20

40

60

80

100

2006-07 2007-08 2008-09

Land development & others

Irrigation & w ater conservation

Rural connectivity

(% share of spending

under NREGA)

Source: Government Budget documents, IIFL Research Source: NREGA website, IIFL Research

Figure 3: Rise in labour wages and urbanisation has led tohigher mechanisation

Figure 4: Rural penetration is still low across consumptioncategories

0

1

2

3

4

5

1998-99 2000-01 2002-03 2004-05 2006-07

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Yield (LHS) No. of trac tors purchased (RHS)

(tonnes/ha)

42%37%

67%

90%

18%

77%

57%

80%

93%100%

0%

20%

40%

60%

80%

100%

Toothpaste Shampoo Hair oil Laundry Telecom

Rural penetration Urban penetration

Source: Department of Agriculture, Mahindra & Mahindra, IIFLResearch

Source: Census of India, IIFL Research

Figure 5: Rural population offers a potentially huge marketopportunity

Figure 6: YoY growth in MSP has accelerated since 2002 atan unprecedented rate

0

30,000

60,000

90,000

120,000

150,000

180,000

Rural 1989-

90

Rural 2001-

02

Rural 2009-

10E

Urban (2009-

10E)

Low income Middle income High income

(no. of. Households - '000)

-10%

0%

10%

20%

30%

40%

2003-04 2004-05 2005-06 2006-07 2007-08

Wheat Gram MustardseedPaddy Soyabean

Source: NCAER, IIFL Research Source: Census of India, IIFL Research


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Rural India

Racing across the countryside

Our visits to a number of states over a period of 12 weeks across the length and breadth of the countryrevealed the diversity in infrastructure, sources of income and standards of living across Indias ruralpopulace. For our visits, we chose states that met one of the following three conditions:

1) runaway success in NREGA implementation, to directly assess the schemes contribution to incomegrowth;2) large contribution to Indias agricultural output, to evaluate how severe the impact of rainfall

deficiency might be on farm income; and3) languishing in implementation of most rural reforms, to assess if these states have any scope for

improvement in the medium term.

We visited 18 districts across seven states in a 12-week period

Source: IIFL Research


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Rural India

Executive summary

Corroborative evidence from our visits to villages in sevenIndian states and our meetings with the rural developmentminister, Dr C P Joshi, make us optimistic on rural

consumption growth. Government spend on the rural sectoris already significant at US$27bn (FY10ii), and will almostdouble in the next three years, with emphasis on employmentgeneration (NREGA) and infrastructure upgradation. Growthin farm incomes is accelerating, thanks to rising productivity,better prices, reducing cyclicality, and improvinginfrastructure, especially road and mobile connectivity.Growth in rural consumption spend is set to accelerate. Thistheme will play out over a number of years, and for longer-term investors in consumption-linked sectors, returns fromearnings compounding will likely be substantial.

Rural Employment Guarantee: the pow erful change agent

The UPA governments flagship scheme, NREGA, which assuresevery rural household employment for a minimum of 100 days ayear, is leading to an increase in rural wages, greater incomevisibility, and decline in rural unemploymentthereby ushering inmuch desired social change. Spend on NREGA, which currentlycovers 30% of rural households, is set to jump to ~US$8bn in FY10(vs US$1.9bn in FY07), and is likely to almost treble from here byFY13. The government is also investing heavily in upgrading roadand education infrastructure. Cumulative government spend on ruralschemes will almost double in three years from the currentUS$27bn. Efficacy of this spend will also improve as true inclusivegrowth is enabled by the governments unique ID programme.

Rising farm incomes: another forceful accelerantIndias agrarian sector is on course for much faster income growththan at any time in the past. Productivity is rising on account of anumber of factors, especially improved mechanisation and increasingpower availability, a factor crucial for irrigation. Tractor sales, forexample, have grown at 10% annually in the past five years, vs3.4% annually in the previous ten. Yield growth acceleration and risein prices of soft commodities has ushered in buoyancy in incomes.Infrastructure quality is improving, albeit slowly, with a rising shareof irrigated land, and better road and mobile connectivity.Dependence on monsoons, while still high, is gradually waningdespite the highest rainfall deficiency in almost three decades, FY10

would still end with a 3% increase in farm incomes.

Consumption growth: can only get betterThe US$200bn annual consumption expenditure of 152m ruralhouseholds will accelerate, powered by rising farm and non-farmincomes. We estimate that the increased government expenditurein itself can potentially raise consumption growth by 15-20% fromthe current levels, over the next 3-4 years. Greater visibility andstability in incomes from employment guarantee will act as a furtherpsychological boost to rural consumption. With rural consumptionset to cross the tipping point, all consumption proxiesespeciallyFMCG and autoswill see growth rates in coming years trendingmuch higher than in the recent past. Our preferred large-cap proxieson this theme are Mahindra & Mahindra, Hero Honda, Bajaj Auto,ITC, and Hindustan Unilever.

G V [email protected]

(91 22) 4646 4676

Sangeetha [email protected](91 22) 4646 4644

Arnab [email protected](91 22) 4646 4661

Jatin Chaw [email protected](91 22) 4646 4654


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Rural India

Stocks to play the rural consumption tune

Figure 7: Plays on the rural consumption theme

PE EV/EBITDA**Company

Bloombergcode

Price(Rs)

Market cap(US$ m)

FY09 FY10 FY11 FY09 FY10 FY11

Consumption

ITC* ITC IN 254 20,550 29.5 23.7 20.2 19.6 15.5 13.2

Hindustan Lever* HUVR IN 265 12,444 23.5 25.6 22.0 4.4 4.2 3.4

Nestle India* NEST IN 2,550 5,287 43.7 34.2 28.3 17.4 14.0 11.6

Asian Paints APNT IN 1,796 3,703 43.3 27.3 24.0 19.8 17.2 15.4

United Spirits UNSP IN 1,380 3,501 NA 42.3 27.9 26.9 18.6 14.8

Dabur* DABUR IN 165 3,102 36.5 29.0 23.8 30.5 22.7 18.5

Godrej Consumer GCPL IN 274 1,826 40.1 26.2 22.1 39.6 23.4 19.9

Marico* MRCO IN 104 1,368 31.3 24.8 20.0 13.1 9.9 7.9

Titan TTAN IN 1,429 1,364 38.7 30.6 24.8 20.5 18.7 15.5

Britannia Inds.* BRIT IN 1,688 867 19.9 18.6 15.4 12.2 12.0 9.4

Emami* HMN IN 499 773 35.9 26.3 19.2 6.2 2.7 2.0

Kansai Nerolac KNPL IN 1,060 614 27.8 19.4 16.7 16.8 11.0 9.5

Autos

Maruti Suzuki* MSIL IN 1,568 9,742 38.3 17.2 14.8 30.0 12.0 9.5

Hero Honda* HH IN 1,725 7,406 26.5 15.7 14.3 16.0 9.7 8.3

Bajaj Auto* BJAUT IN 1,749 5,442 34.9 14.5 13.1 20.0 8.4 7.2

TVS Motors TVSL IN 71 362 NM 24.8 15.0 56.1 11.7 9.7

Telecom

Bharti* BHARTI IN 328 26,758 15.0 14.7 15.8 7.9 7.7 7.5

Idea* IDEA IN 58 3,897 21.0 30.4 55.0 9.8 10.7 9.1

Farm equipment

Mahindra & Mahindra* MM IN 1,116 6,717 25.6 16.7 16.3 17.9 11.4 10.7

Kirloskar Engines KKOE IN 161 672 27.0 NA NA NA NA NA

Greaves Cotton GRV IN 287 301 31.5 16.4 13.0 13.3 9.0 7.0

Escorts ESC IN 132 299 37.2 26.8 22.8 9.9 NA NA

Farm inputs

United Phosp.* UNTP IN 177 1,667 13.6 15.6 13.8 8.5 7.8 7.6

Tata Chemicals TTCH IN 320 1,617 11.6 12.9 11.2 7.6 7.7 7.1

Jain Irrigation* JI IN 855 1,389 47.6 24.1 19.3 8.7 7.4 6.5

Monsanto MCHM IN 1,665 309 19.5 21.6 17.9 NA NA NA

Rallis India RALI IN 955 266 17.8 13.6 10.3 9.5 8.2 6.6

Advanta India ADV IN 555 201 18.5 21.1 14.4 11.4 10.6 8.8

Banks

State Bank of India (Cons) SBIN IN 2,291 31,413 12.5 12.7 10.7 2.0 1.7 1.6Punjab National Bank PNB IN 926 6,302 9.4 7.9 6.7 2.2 1.8 1.5

Source: IIFL Research. * Refers to IIFL estimates; the rest of them are based on Bloomberg consensus estimates. ** For banks, the lastthree columns are P/BV multiples. Prices as at close of business on 4 January 2010.


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Rural India to see sustained govt supportIn our opinion, the thumping success of the UPA governmentin the 2009 general elections was in no small measure due torural schemes such as NREGA, PMGSY (rural roads) and SSA(free education). We estimate that cumulative governmentspending on these rural schemes will increase by 2.7xbetween FY07 and FY10 to US$27bn, and then furtherincrease by US$23bn to reach US$50bn in FY13. NREGAwould be the largest contributor to this jump, going from~US$8bn in FY10 to US$21bn in FY13. This increase would bedriven by more even implementation across states (currently,

just five states account for 65% of the spend).

Significant acceleration seen in govts rural spend

Government spending on rural programmes has registered a CAGRof 45% in the last two years (FY07-09), as shown below. In

calculating the total rural spend, we have assumed that 50% of thePDS spend is aimed at rural areasa reasonable assumption, asPDS is designed to provide heavily subsidised food grains to belowpoverty line (BPL) families, the bulk of whom live in rural areas.

Figure 8: Central Govt Budgetpriority areas are employment, roads, education

(US$ bn) FY05 FY06 FY07 FY08 FY09

Rural Employment (including NREGA) 1.4 2.5 2.7 3.0 7.8

Other rural schemes 1.1 1.2 1.3 1.7 2.7

Roads and bridges (PMGSY1) 0.5 0.8 1.1 2.3 3.2

Education (MDM2

and SSA3) 1.3 2.1 3.2 4.2 4.5

PDS4

(taken at 50% focussed on rural) 2.5 2.5 2.6 3.4 4.6

Total 6.8 9.1 10.9 14.6 22.9

Growth 35.1% 19.8% 33.5% 57.0%

Source: Govt of India Budget documents, IIFL Research. Rural spend on PDS taken at 50%of actual spend; for instance, the actual in FY09 was US$9.2bn. NREGA actual expendituretaken from NREGA site (includes wages and material, central and state expenditures).

Figure 9: Agriculture and rural infrastructure have seen significant improvement

Particulars CAGR FY94-2004 CAGR FY04-08

Agricultural GDP 2.8% 3.5%

Agricultural capital formation 6.6% 9.9%

Total capital formation 8.8% 16.4%

Agricultural exports growth 11.5% 20.2%

Total exports growth 15.4% 21.5%

Road connectivity at the end of the period


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Rural India

What is NREGA?

The National Rural Employment Guarantee Act(NREGA) gives every rural household a right to 100days of guaranteed employment from the

government.Figure 10: Afforestation work under NREGA


Key highlights

All adult rural citizens are guaranteed 100days work: NREGA is applicable to any adultmember of a rural household, irrespective of hiscurrent income. The only requirement is that theperson should be a local of the village (thisincludes those who may have migrated to work incities). There is an entitlement of 100 person-days of employment per household.

Household is the unit: A household means anuclear familyfather, mother, children and anysubstantial dependents. Household could alsomean a single-member family.

Minimum wages, unemployment allowance,timely payment: Wages are to be paid as perthe Minimum Wages Act in each state, but cannotbe below Rs100 per day. Unemploymentallowance has to be paid to those who qualify butcannot be provided work. Money must be paid toworkers within one week, and not beyond 15 daysin any case.

Employment near place of stay: Employment

to be provided within 5km of the workers village;if the work is farther beyond, an extra 10% to bepaid.

Minimum wage-to-material ratio p rescribed:A 60:40 wage-to-material ratio has to bemaintained in NREGA.

Theoretical maximum annual spend onwages + material is US$350/HH: Themaximum payout on wages is Rs100/day for 100days per household per year. Additionally, aminimum 60:40 wages-to-material ratio has to bemaintained. Hence, the total annual expenditureby the government can be US$350/HH, out ofwhich US$215/HH can be in direct wages and therest in material.

How is it different from a typical governmentwelfare scheme?

Demand-based, not allocation-based:Most government schemes are allocation-based, whereas NREGA is demand-based.

People have a right to 100 days ofemployment per household, and allocation inthe scheme has to be increased if higherdemand for work comes through.

Unemployment allowance to incentivisestates to generate work: Unemploymentallowance ensures that work is available, asstates have to bear the entire unemploymentallowance.

All payments through bank accounts:Money to be paid directly into the workers

accounts in banks or post offices. This willensure that there is a clear trail of money. All

documentsjob cards, muster rolls, etcareopen for audit.

Funding for NREGA: Central and Stategovernment shareThe key cost elements for NREGA are wages forunskilled and skilled labour, material costs andunemployment allowance in case no work isallotted to people willing to work.C e n t r a l g o v e r n m e n t f u n d i n g : 100% ofunskilled labour; 75% of skilled labour; 75% ofmaterial; 0% of unemployment allowance.S t a t e g o v e r n m e n t f u n d i n g : 0% of unskilledlabour; 25% of skilled labour; 25% of material;

100% of unemployment allowance.

How has the scheme fared?

Phase I: NREGA was launched to cover 200districts in FY07. An allocation of Rs112bnwas made, and the expense was Rs88bn.

Phase II: NREGA was expanded from 200districts to 330 districts in FY08. An allocationof Rs120bn was made, and the expense wasRs159bn.

Phase III: NREGA was rolled out to all 596districts in FY09. Allocation was Rs160bn andexpensewas Rs272bn.

Figure 11: NREGA job cardabout 70% of all ruralhouseholds have job cards



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NREGA, which is arguably one of the largestemployment benefits schemes worldwide, currentlyemploys 45m householdsabout 30% of the ruralhouseholds in Indiaat an estimated spend of~US$8bn for FY10. Of these, only 14% of ruralhouseholds have fully realised the promised benefitsof 100 days of employment, a number which Dr C PJoshi, Minister for Rural Development, aims to raiseto 4550% in the next few years.

NREGA has been the most talked-about schemeof your government and has added to ruralprosperity. Do you think the programme can be

sustained for long in its current form?As of now, NREGA is largely augmenting incomes andpurchasing power in rural India, but not addingsignificantly to productivity assets. However, tosustain NREGAs success, we have to focus onproductivity gains. Also, people employed underNREGA today are largely illiterate and completelyunskilled. We need to gradually upgrade these peopleto semi-skilled and then skilled to improve the natureof work. Also, we need to give employment to theeducated youth in rural areas under NREGA. Hence,we are in the process of revamping NREGA to make itsustainable for the long term.

How do you propose to improve NREGA in termsof productivity gains from the w ork?A large part of agricultural land in rural India is rain-fed and not irrigated. This results in high dependenceon monsoons, and we see a big impact on productionwhen the monsoon fails, like it did this year. Earlier,NREGA did not include irrigation and water harvestingon private land as eligible for payouts under thescheme. We have now allowed work on private landof small and marginal farmers. The government isthinking of expanding the scope of NREGA to allowirrigation and water harvesting work on private landof large farmers as well. The overwhelming majorityof agricultural land in India is held by large farmers.

Thus, we can see large gains in irrigation and waterharvesting in rural India through NREGA. Forinstance, take Bihar, which has very fertile land, good

rainfall, and large rivers, but lags in a big way inproductivity, owing to poor irrigation and waterharvesting infrastructure. This will significantly help

improvement of agricultural productivity in future.Execution of NREGA has not been uniform.While states like Rajasthan have seen very goodexecution, others like Bihar are lagging behind.Yes, the execution has been very different acrossstates. The 45m households that have been givenemployment under NREGA are predominantly fromthe states of Rajasthan, Madhya Pradesh, and AndhraPradesh. Almost two thirds of the Rs400bn allocationfor NREGA is being spent in just four or five states.Large states like Bihar, UP, West Bengal, Jharkhandand Orissa, which have the highest population of poorpeople in rural India, are lagging behind in NREGA. It

is here that we need to really ramp up.

Almost 2/ 3rd of the Rs400bnallocation for NREGA is being spentin 4-5 states. Large states likeBihar, UP, West Bengal, Jharkhandand Orrisa, which have the highestpopulation of poor people in ruralIndia, are lagging behind inNREGA.

So, what steps are being taken to improveNREGA in these large states?We are working on it. I am in discussion with thestate governments on this matter. We have identifiedspecific districts where we need to focus on first. I amhopeful that once we allow NREGA on private land ofall farmers, more work will be available and henceemployment under NREGA will improve in thesestates also.

Q&A with C P Joshi, Minister for Rural Development


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How do you propose to give work to educatedyouth under NREGA?We are planning a Rajiv Gandhi Seva Kendra inevery village panchayat. These centres will havecomputers and Internet connectivity. We will be ableto provide employment to educated youth in these

centres to do various kinds of jobs on computers.

How big can NREGA become in five years time?According to available data on NREGA, 70% of ruralhouseholds have job cards, but only 45% haveavailed of any employment, and only 14% of these45m have availed of the full 100 days of employmentguaranteed under NREGA. Thus, we have a long wayto go. As we discussed, large parts of North and EastIndia are lagging in NREGA employment. I believe atleast 45-50% of households should be able to availthe full 100 days employment under NREGA in a fewyears time compared to 14% now.

Currently, only 14% of thoseemployed under NREGA havereceived 100 days employment; wewant to increase this to 45-50% inthe next few years.

You spoke of skill upgradation of the poor in

rural India. How do you plan to achieve this?We are embarking on a major skill upgradation

programme in rural India that will drive long-termproductivity. Over 30% school students in rural Indiadrop out of school before completing their 10th classexams. We are setting up institutes to train thesestudents in specific vocational skills such as electricalrepairs, plumbing, and carpentry. Today, every villagehas electrical borewells, electrical white goods,motorcycles and furniture, which need regular repairand maintenance. Thus, these trained youth will getemployed in the rural areas itself. To begin with, eachof the 621 districts is getting one such institute withcentral government funding. We will expand thenumber of institutes in future to cater to a very large

number of rural youth. Currently, Rs230bn on bankcredit is made available to rural skilled manpower forstarting their own work. However, this amountremains mostly unutilised, as there has been nomajor effort to impart vocational skills to rural youth.

What about rural infrastructure? What are yourplans to improve rural roads?My ministry is running the PMGSY (Pradhan MantriGram Sadak Yojna). Under this scheme, we are nowconnecting all villages with population of 500 or morewith roads. We will soon connect all villages withpopulation of 250 or more. We have allocatedRs500bn to this programme.

What is your vision for rural India?I believe rural India will see a huge change in timesto come. Our focus is on strengthening the

grassroots. Almost a quarter million panchayats inIndia are struggling to meet basic needsdrinkingwater, roads, good schools, hospitals. The poorpeople in rural India have potential, but opportunitiesare limited. We are striving to give them opportunity,which should make them a lot more resourceful. I amvery happy to see that a young leader like RahulGandhi has rural India as his topmost priority. Here isa young leader who is experiencing rural India himselfand then looking for solutions. I am very hopeful thatthe positive change in rural India will continue for along time.


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Rural India

NREGA progressing at a brisk pace

Figure 12: Spending rising steadilyNREGA is a pet project of the government

4.95.8

3.4

1.9

0

1

2

3

4

5

6

7

8

9

2006-07 2007-08 2008-09 2009-10 (till Nov)

8.0

(US$ bn)

Source: NREGA website, IIFL Research

Figure 13: Wage payouts have risen by 11% annually over FY07-10ii

Actual w ages paid per person per day (Rs)

70

79

87

96

50

60

70

80

90

100

FY07 FY08 FY09 FY10ii (till Nov)


Figure 14: Most of NREGA expense goes toward unskilled labourers wages

Break-up of NREGA expense

Un-skilled wages

70%

Semi-skilled

wages

2%

Raw materials

25%

Others

3%


NREGA spend by thegovernment has grown at

75% annually during FY07-09, and by 31% YoY in

1HFY10

NREGA has focusedsubstantially on

remunerating unskilledlabour70% of all payouts

go towards these


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Rural India

Figure 15: Over 70% rural households have NREGA job cards

-

15

30

45

60

2006-07 2007-08 2008-09 2009-10 (till Nov)

0%

20%

40%

60%

80%

100%

Households provided employment (LHS) % of rural HHs issued jobcards (RHS)

(m)


Figure 16: there is still huge scope to increase days of employment per HH

43 4248

0

20

40

60

80

100

120

2006-07 2007-08 2008-09

Average no. of days per HH pa Guaranteed min no. of days per HH pa


Figure 17: So far, NREGA penetration has been highly uneven

State FY08 FY09 Apr-Oct 2009

(US$ m) % YoY (US$ m) % YoY (US$ m)% YoY

(over Apr-Oct)

% of rural householdsreceiving employment

under NREGA

Rajasthan 314.3 113 1,311.6 317 867.1 16 68

Andhra Pradesh 443.4 206 630.6 42 565.3 41 40

Uttar Pradesh 403.9 143 759.3 88 504.6 76 13

Tamil Nadu 109.9 241 213.6 94 250.9 75 36

Madhya Pradesh 615.3 55 756.4 23 234.1 -48 23

Karnataka 80.4 -17 76.1 -5 226.2 706 24

Bihar 224.0 48 280.1 25 198.4 31 18

West Bengal 213.7 155 200.1 -6 176.5 86 24

Jharkhand 226.1 49 285.5 26 175.4 11 24

Chhattisgarh 298.3 110 305.2 2 156.6 -18 26

Assam 116.8 -7 202.9 74 107.3 20 28

Gujarat 17.4 -5 41.7 139 73.7 307 16

Orissa 123.8 -21 144.3 17 66.5 12 9

Maharashtra 40.2 8 76.9 91 46.5 -1 4

Kerala 17.7 199 47.8 169 30.0 87 9

Uttarakhand 20.4 97 28.9 42 27.9 201 22

Punjab 6.4 20 15.4 141 13.0 259 4

Haryana 11.1 46 23.4 110 11.2 25 3Others 121.2 151 398.2 229 251.2 83

TOTAL 3,404.2 77 5,798.0 70 3,982.2 31 30

Source: Govt of India, NREGA Website; IIFL Research. *Penetration is defined as the % of rural HHs employed under NREGA.


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Rural India

NREGA seems responsible for 25% jump inlabour rates: NREGA is perceived to have causeda ~25% rise in labour rates YoY across the board

in every state we visited. This is despite thepayout under NREGA usually being at least 10-15% less than the stipulated Rs100/day/ HH.Apart from leakages, the reasons also includepayouts being prescribed as a function of workaccomplished, and sub-optimal deployment oflabour in such work.

NREGA activity slows down during the busymonsoon months as farm activity picks up;nevertheless, various farmers associations havemade representations to the government torestrict NREGA activity during the harvestingwindow, to help keep labour rates under control.

Improvements possible in awareness,implementation: Seventy-three percent of ruralhouseholds (HHs) in India have NREGA job cards;but of these, only 45% are receiving employmentunder the programme. Awareness levels areabysmal in the poorest states, Uttar Pradesh (UP)and Bihar. For instance, in UP, we found that onlyBPL families are considered eligible for NREGA,whereas the Act allows all rural families toparticipate. Also, people are not aware that theyare entitled to 100 days of employment, thoughthey know about the scheme in general. Mostpeople are also unaware that there is anunemployment allowance if employment is notprovided. Next, awareness of what qualifies asNREGA work is poor and inconsistent, both on thepart of rural poor, as well as government officialsadministering the scheme. Finally, farmers aregenerally unaware that routine agricultural workcan be classified under NREGA and the farmerand farm labourers can get additionalcompensation for little additional work.

Figure 18: Efforts for increasing awareness in Rajasthanhave yielded handsome results

NREGA likely to have a skill-buildingorientation in future: In most villages wevisited, the BDOs (Block Development Officers)

waxed eloquent about NREGA. But villagers oftenderisively described NREGA work as digging upearth and filling it back up. NREGA does notseem to be creating relevant assets (roads,bridges, etc), as by definition, activities managedby contractors are given lowest priority underNREGA (for curbing leakages). One result of thisis that skilled labour is largely absent in NREGAwork. In our meetings with government officials,we understood that this is being activelyconsidered by the government and is likely to beamong the changes to NREGA in FY11.

Significant rural income upsides possible,

provided the right hands steer the wheel: Inour analysis, NREGA can potentially increase ruralhouseholds income by 2025%. The key factor inthe process is the local Development Officer.Whether the DO is enthusiastic, apathetic orcorrupt, determines whether NREGA is successful,sluggish, or full of leaks.

Government officials we spoke to were fully awareof leakages. In Rajasthan and Karnataka,anecdotal evidence pointed to 20%, but in Bihar,a very formal leakage mechanism has beeninstituted, yielding 40%. The more zealousamong the DOs were of the opinion that a

measured approach to plugging leakages wouldbe appropriate than a crackdown. An example isthe current stipulation that workers be paid bycheque, not cash. Well-intended as this conditionis, it has made the payment cycle longer.Gradually, the government may permitcontractors to participate in NREGA work whileensuring that leakages dont get out of hand. Thiswill raise the skill levels in the programme.

NREGA a far bigger success than PDS (PublicDistribution system): That NREGA has beenspectacularly successful becomes evident whenone looks at the Public Distribution System (PDS).PDS seeks to ensure availability of essentialcommodities like wheat, rice, sugar and keroseneto the poorest in the society (BPL families) ataffordable prices. India has persisted with thescheme for over 50 years, and PDS perhapsoccupies pole position in terms of wastageonlyan estimated 27% of the US$11bn in foodsubsidies reaches the intended beneficiaries. Inthe states we visited, especially Uttar Pradesh,BPL was a coveted status, especially as it wouldbring PDS benefits in its wake. The truly poorpeople were bitter and cynical about whether PDSwould ever bring them any succour.

NREGA: field visits reveal challenges as well as upsides


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The NREGA goose can lay a few more golden eggs

We estimate that NREGA spend will increase by ~2.5x in the nextthree years to US$21bn. Our estimate is based on the followingfactors.

1) Significant headroom left in penetration and per-daypayout

Cur ren t p ayou t i s US$50 pe r emp loyed HH, 1 / 7 t h o f p e r m i t t e d m a x i m u m : Average income accruing from NREGA is currentlyUS$50 annually per rural household, as against the governmentstarget of US$350 per household (including spend on labour andmaterial). This gap is due to: a) low penetration (only ~30% of ruralhouseholds receive employment under NREGA); b) low payout perday (Rs87/day vs the stipulated Rs100/day); and c) fewer days ofemployment (48 days per annum vs the stipulated 100 days).

On ly 14% o f househo lds ge t t i ng em p loymen t unde r NREGAwere p rov ided 100 days o f emp loymen t : Firstly, NREGA hasreached only ~30% of the rural population in India (45m HHs out of152m rural HHs were employed under the scheme). Within these,only 6.5m households (14% of those who were employed underNREGA) were provided the stipulated 100 days employment in FY09.Thus, annual days of employment per employed HH averaged just48, vs the stipulated 100 days. As such, there is considerablepotential for improvement, through an increase in penetration (3xfrom current levels) and number of days of employment (2x fromcurrent levels).

Ave rage payou t pe r day was Rs87 , aga ins t the manda ted Rs100: The total wage payout for FY09 was US$4bn, whichtranslates to a per-day wage payout of Rs87/day vs the stipulatedRs100 per day. Upsides here are unlikely to be huge, since thepayout relates to work done, and the work groups are usuallyoverstaffed, thus reducing the per-capita payout. That said, wereckon that the current per-day payout of Rs87 will climb at least tomatch inflation.

2) Government focus on laggard states will increase NREGAspending

The governments commitment to the scheme is already evident, asstates that have been laggards during the initial phases of theschemes rollout have witnessed significant acceleration in theirrollout plan during the past year.

There is significant scope to

ramp up the scheme,through an increase in

awareness, penetrationgrowth, and rise in share ofhouseholds deriving 100%

benefits


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Figure 19: In FY10, states that lagged in NREGA penetration have led growth

-

60.0

120.0

180.0

Rajasthan

Jharkhand

Andhra

Pradesh

Karnataka

Gujarat

Punjab

FY09 spend per HH (US$ m)

Leader states

Laggard states

0%

200%

400%

600%

800%

Rajasthan

Jharkhand

Andhra

Pradesh

Karnataka

Gujarat

Punjab

Apr 09 - Oct 09 YoY grow th

Leader states

Laggard states

Source: NREGA Website; IIFL Research

During our visits, we found several instances of subjectivity in theinterpretation of NREGA guidelines by administrative officers. For

instance, in DK district of Karnataka, we were told that NREGAbenefits are available to all rural families, and that NREGA supportcan be used to back regular agricultural development activity suchas water harvesting. On the contrary, in Uttar Pradesh, we were toldthat NREGA is only for BPL (below poverty line) families, and thattractors cannot be used in NREGA work. Such arbitrary andinconsistent interpretations of the schemes scope are moreprevalent in NREGA laggard states, and are likely to be acted uponby the government.

3) Expanding NREGA beyond small farmerscreating long-term irrigation assets:

We believe NREGA has the potential to create farm assets of greaterrelevance such as tanks, reservoirs and water-harvesting facilitiesassets that will promote irrigation and reduce dependence onmonsoons and hence curb volatility. Currently, the scheme is limitedmainly to small farmers. We understand from conversations withagriculturists that only one third of the total land under cultivation inIndia is owned by small farmers. Once NREGA-backed facilityupgradation begins to include larger farmers too (with suitabledesign amendments to ensure that the gains reach the needy poor),the farm sectors exposure to the volatility of monsoons could betempered.

The government is thinking precisely on these lines (see interview of

Dr C P Joshi, Minister for Rural Development). Hence, the schemewill likely expand rapidly to increase its practical utility and progressbeyond the Keynesian circumference of digging up roads and fillingthem back in, which is the instant recall villagers often have whenasked about NREGA work.

4) Emphasising skill-building for labourers, implying that theaverage payout per day can rise:Currently, the programme de-prioritises contracted work to minimiseleakages; this, we suspect, keeps high-skilled labour away fromNREGA. As per the Ministry of Labour and Employment, of the12.8m annual addition to Indias labour pool of ~410m, only 3.1mare skilled, presenting NREGA with a huge opportunity to influence

skill-building. The government is likely to change the design of theprogramme suitably (this also finds mention in the policy documentof the Ministry of Labour).

Poor level of awareness andinterpretation in the

laggard states likely to beironed out by the

government over time,resulting in spending

increase on NREGA

Both rural development andlabour ministries are

emphasising theconvergence between

NREGA and skill building


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NREGA spend will reach US$21bn by FY13

Increase in penetration: We assume an increase in NREGApenetration from the current 45m families to 79m families. This isbased on the reasoning that the government will bring down thevast gap in penetration between Rajasthan (76% of rural HHs) and

the remaining states. Indeed, from our conversation with Dr Joshi,we learn that he is aiming for precisely thisto establish greateruniformity in NREGA benefits for different states. Currently, the restof the country is languishing at 26%, and we assume this will rise to50%, thus reaching 79m HHs including Rajasthan.

Increase in amount of work days per household: In FY09,NREGA work averaged just 48 days per HH, as against the stipulated100 days per year per HH. Only 6.5m HHs (14% of those employedunder NREGA) got the full 100 days of employment, a proportionthat Dr Joshi aims to raise to 45-50%. Our assumptions are in linewith Dr Joshis target; as such, we estimate average days of

employment per HH will increase to 66.

Increase in payout per day @10% annually: Finally, assumingan annual increase of 10% between FY09 and FY13, per-daycompensation (inclusive of spend on material) will rise from Rs127 inFY09 to Rs186 by FY13. We reckon that 10% YoY growth isachievable, given that actual wage payout grew at 11.6% annuallyduring FY07-09.

To summarise, our assumptions for FY13 are:

increase in HHs getting employment from 45m to 79m; increase in proportion of employed HHs getting the full 100 days

to 50% from the current; and inclusive of materials, increase in daily payout @10% pa.

Figure 20: Assuming 50% of HHs get full employment, and wages rise in line withinflation, NREGA spend should reach US$21bn in FY13

Item FY09A FY13ii

HHs (m) 45 79

Days per HH 48 66

Number of days (m) 2,147 5,250

Daily payout inclusive of material cost (Rs) 127 186

Aggregate spend (US$ m) 5,798 20,758

Source: IIFL Research; US$/INR = 47.0 for both years.

Thus, we see that NREGA spend can increase by US$13bn overestimated FY10 levels to US$21bn.

NREGA spend will increase2.5x between FY10 and

FY13 driven by acceleratedpenetration and a 10%

annual rise in payout rate


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Nandan Nilekani left Infosys, a company he co-founded, to give an identity to every Indian,literally. As Chairman of the Unique

Identification Authority of India (UIDAI)whichaims to provide a unique identification numberfor all residents of I ndiahe holds the status ofa Cabinet minister. Excerpts of a chat withNandan:

Can you explain the strategic significance of thisproject from a rural inclusion perspective?In our society, a small minority have benefited fromeconomic reforms because they have had access tocertain fundamental needs, like health, education,

infrastructure, water, and jobs. But the majority doesnot have that access. A stable society cannot becreated with such unequal access. Giving an identityis a significant part of that access. Of course, youneed good roads, food and health centres, but givingaccess is crucially important. When everybody gets aunique number, access to such fundamental needswill improve.

For instance, this number would facilitate the openingof bank accounts or telephone connections, byhelping in customer verification. Customers have tofill the know your customer (KYC) form. We can help

in reducing the KYC cost. Our aim is to enableauthentication based on fingerprints within fiveseconds.

How would the Unique Identity numbers beassigned?Everybody gets a random number. Mostly, thenumbers would be 16-digit (12 plus 4) Once a personhas a UID number, their basic identity linked to theirbiometrics is established. We are only going to storeyour name, date of birth, sex, address, photo,fingerprints, your UID number and maybe one or twodetails. You will continue to have all your existingdocuments such as PAN card. Additionally, you willhave this UID number, which will be common acrossthe board, including your PAN card, passport, andration card.

What is the biggest challenge in this?The most obvious one is the technology build-up.Nowhere in the world is there a database of over a

billion with bio-metrics. The largest bio-metricdatabase is maybe ~120 million. This is 10x ofanything else in the world. Moreover, we areproviding online authentication, which is not doneanywhere else. This will be cutting-edge technology.

But more than size, the challenge is in eliminatingduplicate numbers. There is no established databasein the country that can serve the purpose of a uniqueID.

Then parallel processing capabilitylet us assumethat a few years from now, there are 400 million

records in this UID system. Every new entryandthere will be millionshas to be compared with all the400 million records, a massive task.

Nextcoordination and logistics. Within the next fewyears, one billion people, including children, have tocome to some enrolment point and give theirfingerprints, face picture and possibly an iris scan.

Lastly, this touches every government department,every central ministry, state governments,panchayats, and every municipality. A few hundredgovernment agencies must play by one set of rules.

These are massive challenges.

In terms of time schedule what is the plan?We aim to issue the first set of numbers in 12-18months.

How have you staffed this project?I have got very good response from around the world.We are creating a very unique organisation, which ispartly staffed by people from the system, like IASofficers. Then we have a whole set of teams who havecome from outside, like people in technology, law,marketing, and civil service. We have to blend these

two groups together.

If the government changes will the projectcontinue?The UID initiative has got widespread support. I havemet chief ministers from the non-Congress partieswho have requested me to do the needful right now.UID is improving the quality of public spending andgiving benefits to the poor. Why would anyoneoppose it?

I n ou r v iew, e f f i cacy o f a l l gove rnmen t spend in the ru ra l sec to r w i l l imp rove , as

the U I D p rog ramm e enab les t r u e i nclus i ve g row th and reduces leakages .

Unique ID: inclusive growth must start with identity


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PDS: an instructive study in contrast

That NREGA has been spectacularly successful is evident from acomparison with the Public Distribution System (PDS). PDS seeks toensure availability of essential commodities like wheat, rice, sugar,and kerosene to the poorest in the society (BPL families) ataffordable prices and is supported by a network of around half amillion fair price shops (FPS), which reaches more than 160mhouseholds in India, supposedly the largest distribution network ofits kind in the world5. India has persisted with the scheme for over50 years, despite the fact that the scheme perhaps occupies poleposition in terms of wastageonly an estimated 27% of theUS$9.2bn in food subsidies reaches the intended beneficiaries.

PDS suffers from wastage of an estimated 73%, owing topoor supply chain (36%), diversion (22%), and otherinefficiencies (15%): Benefits of PDS have not translated into thedesired results. A recent study (2005) conducted by Planning

Commission of India highlights the shortcomings of the PDSprogramme. The study reveals that:

about 58% of the subsidised food grains released from theCentres pool do not reach the intended BPL families, largelybecause of corruption;

of the above 58%, around 36% of the total food-grains releasedare lost because of leakages in the supply chain and another22% is lost because of diversion to non-BPL category (APL); and

inefficiencies in cost and other aspects of the PDS result in only27 paise of every rupee spent by the government reaching thepoor.

In our visits to rural India, especially in Bihar and Uttar Pradesh, wenoticed that PDS had resulted in the BPL card becoming a covetedprize, the lure being the PDS benefits to which BPL families areentitled.

5 Arvind Virmani and P V Rajeev (2001-02) in a discussion paper Excess Food Stocks,PDS and Procurement Policy

With over 70% w astage,the Public Distribution

System has not quitedelivered

A poorly designed system ofchecks and balances has

left the system susceptibleto widespread fraud

Distribution a joint centre-state responsibility: PDS is operatedunder the joint responsibility of the central and the state governments.The central government, through FCI (Food Corporation of India), hasassumed the responsibility for procurement, storage, transportation, and

bulk allocation of food grains to the State governments. Other than FCI,the central government has also entrusted the responsibility of food-grain procurement to 11 states, which procure on behalf of the centralgovernment. The operational responsibility, including allocation within astate, identification of families below the poverty line, issue of rationcards, and supervision of the functioning of Fair Price Shops (FPS), restswith the state governments.


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Rural India

Figure 21: Despite wastages, food security schemes spend has been on the rise

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1980 1985 1990 1995 2000 2005 2010

Food Subsidy as % GDP

Source: Government of India budget documents; IIFL Research

Figure 22: States with >50% leakagesBihar occupies pole position, againState Off - take by

states 2003-04(Kg/BPL

family/p.a)

Off - take by

identified BPLFamilies (Kg/BPL

family/p.a)

Food grains not

reaching the poorhouseholds

(Kg/BPL family/p.a)

% Reaching

Bihar 138.1 12.2 125.9 8.9%

Punjab 364.2 38.3 326.0 10.5%

Karnataka 480.8 139.9 340.9 29.1%

UP 285.2 92.7 192.4 32.5%

All India Average 27.0%

Source: Planning Commission (Government of India), IIFL Research

Specifically, in Biharwithout doubt the state with the highest levelsof wastage and corruptionleakages under PDS are 91.1%, whereasthe most pessimistic estimates of NREGA leakages stood at 40%.

Figure 23: Rural families queue up to receive theirquota of subsidised food


Despite such blatantmisuse, government spend

under the scheme hascontinued to grow


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Rural India

Rural education: a major focus area

The major schemes are:

(a)Sarva Shiksha Abhiyan (SSA; Education for all) and

(b)Mid-day Meal Scheme, whichis designed toprovide free mid-day meals to children studying in government schools.

These two schemes have a budgetary outlay of US$2.8bn andUS$1.7bn respectively for FY10.

SSAfree education to almost 200m children: Launched in2002, SSA is the governments main programme to make free andcompulsory education for children in the 614 age group afundamental right. It aims to cover almost 200m children, by settingup new schools and strengthening existing ones, as well as ensuringadequate and properly trained teaching faculty. SSA provides forfree text books for backward classes, besides emphasising computer

education. SSA has achieved creation of more than 185,000 newschools, 700,000 new classrooms, annual training to almost 4mteachersno mean feat. Furthermore, it has achieved schoolenrolment level of 96% of eligible students in the target age group,and 81% of primary students move to upper-primary grades.

But a lot still remains to be done

46% of students drop out because of financial or other difficultiesbefore grade VIII.

About 35% of schools have a pupil-teacher ratio of more than40:1which means less than two teachers per section in primaryschools or less than one teacher per section in upper primaryschools.

Only 17% of all schools (including almost 1m governmentschools) have computers.

Figure 24: Achievements of the SSA include free text books to 66m childrenItem Cumulative targets

including 2007-08Achievement (upto 30 September

2007)

% cumulativeachievement

Opening of new schools 275,585 186,985 77.8%

Teachers appointed (m) 1.134 0.81 71.4%

Construction of school buildings 216,237 170,320 78.8%

Construction of additional classrooms 812,738 713,179 87.8%

Enrolment in EGS/AIE* centres (m) 18.567 8.828 44.3%No. of children receiving freetextbooks (m)

69.1 66.4 96.1%

Functional academic resourcecentres:

Block level 6,413 6,385 99.9%

Cluster level 71,381 68,137 95%

Source: Government of India, IIFL Research. * Education Guarantee Scheme / Alternateand Innovative Education

185,000 schools set up(total government schools

number 0.95m) since 2002,but only 17% have

computers


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Rural India

Mid-day Meal Scheme reaches out to 120m children: Launchedin 1995, the programme aims to provide daily meals to children. Itcovers all children studying in government, local body andgovernment-aided primary and upper primary schools and theEmployment Guarantee schemes/Alternative and InnovativeEmployment Education centres of all areas across the country.

Nutritional standards of mid-day meals at upper primary stage havebeen fixed at a minimum of 700 calories and 20 grams of protein,through 150 grams of food grains (rice/wheat) per child per schoolday. The programme is projected to benefit almost 120m children in0.95m government-run and government-aided schools.

Free meals not the only reason for attendance going up: Inthe states we visited, we got a mixed picture of the success of thisscheme. In a few villages in Bihar, we were given to understand thatthe only reason for poor families sending children to school was toavail of the mid-day meal, and that thinly stretched teachers wereso preoccupied with preparation of safe meals that they could

scarcely do justice to their main job of teaching. In an equallybackward area of Uttar Pradesh, on the other hand, we saw childrenexhibiting remarkable interest, studying under trees to escape a hotsun and poorly ventilated classrooms.

There was evidence on the ground in several states we visited thatthe government is investing purposefully in rural literacy.

Road connectivity: the backbonePMGSY: Pradhan Mantri Gram Sadak Yojana (Prime MinistersRural Roads Programme)

improving connectivity of rural habitations providing alternative work for landless labourers

To address the problem of rural road connectivity, the governmentlaunched the PMGSY in December 2000. The key objective was toprovide connectivity through good all-weather roads to allunconnected habitations with population of more than 500 persons.The programme was divided into two phases, with the first phaseconnecting habitations with population of 1,000 and above, and thesecond phase connecting those with population of 500-1,000.

Direct evidence of road construction and completion on the

lives of villagers Landless labourers earned substantially higher per-day wages in

road-building work (at times up to Rs400/day) than farm wages(average wage of Rs100/day)

Small farmers were able to sell cash crops (potatoes and othervegetables) directly into nearby markets, thanks to improvedroad connectivity. This improved yield on their land, coupled withelimination of middlemen, has in effect more than doubled theeffective sale price.

Large farmers deployed their tractors in road-building (paybackperiod for tractor loans only from road-building use was fiveyears)

Cumulatively, 56% of the sanctioned funds of ~US$20bn havebeen used.

The roads programme hasled to an increase in wagesof non-farm labourers and

ensured better farmrealisations

Children in Hardoi, UPpoorlyventilated classrooms not aproblem

Source: IIFL Primary Research


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Rural India

We estimate that ~17% of Indias rural population (ruralpopulation forms 73% of total population) remains unconnected,a proportion down from 25% as of 2000. Along with connectivity,the quality of roads has improved, thanks to extensive up-gradation.

Figure 25: PMGSY programme is attempting to even the disparities out

State % population connected % habitations connected

Assam 35.0% 37.0%

West Bengal 39.3% 41.2%

MP 52.5% 42.6%

Bihar 56.9% 33.2%

Jharkhand 67.7% 53.2%

Orissa 70.9% 51.2%

Chattisgarh 75.4% 47.4%

UP 78.1% 66.6%

Rajasthan 82.0% 79.0%

Gujarat 94.7% 84.9%

Kerala 94.7% 91.2%Maharashtra 97.6% 89.6%

Tamil Nadu 97.7% 98.5%

Punjab 98.6% 96.5%

AP 99.0% 94.8%

Karnataka 99.7% 99.9%

Haryana 99.8% 99.6%

All India 76.5% 69.2%


Figure 26: Progress on PMGSYwe are on the road but by no means at the end of it



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Rural India

Rural Electrification: power to the masses

RGGVY (Rajiv Gandhi Grameen Vidyutikaran Yojana RuralElectrification M ission)

Based on 2001 Census, 78m of 134m HHs in India then had noelectricity. Under the Rural Electrification programme started in2006, the government is spending US$1bn per year to provideelectricity to 3m rural HHs per year. So far, 9.4m HHs have beenprovided with electricity under this programme.

Rural Electrification (RE) is viewed to be critical for accelerating ruraldevelopment. Provision of electricity is essential to cater to therequirements of agriculture and other important activities, includingsmall and medium industries, khadi and village industries, coldchains, health care, education, and information technology.

The RGGVY Policy aims at:

provision of access to electricity to all households by year 2009;

high-quality and reliable power supply at reasonable rates; and

minimum lifeline consumption of one unit per household per dayas a merit good by year 2012.

Rural Electrification Corporation Limited (RECL IN), a PSU, is thenodal agency, facilitating loan financing as well as coordinating withstate governments and state utilities.

The Ministry of Power defines an electrified village as one that has:

a) basic infrastructure such as distribution transformer anddistribution lines in the inhabited locality as well as a minimumof one dalit basti/hamlet where it exists;

b) electricity available in schools, panchayat office, health centres,dispensaries, community centres, etc;

c) at least 10% of the total number of households in the villagewith electricity.

Figure 27: Majority of the HHs in rural India remain unelectrified

Item Amt

A Total villages in India per 2001 Census 638,000

B Un-Electrified villages per 2001 Census 119,750

C Total rural HHs per 2001 Census (m) 134

D Unelectrified HHs per 2001 Census (m) 78

E Cumulative HHs electrified in scheme as of March 2009 9.4

F Targeted HHs to be electrified in 2009-10 3.0

G Cumulative funding by Govt (US$ bn) 3.6

H FY10 budgeted estimates (US$ bn) 1.0

Source: Government Budget documents, IIFL Research

Over 9.5 million householdshave been electrified since

2006


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Rural India

All taken, government to increase rural spend byUS$23bn from FY10 to FY13

We assume that non-NREGA rural spend will grow from US$20bn inFY10 to US$30bn in FY13 (15% CAGR). This is much lower than thefour-year CAGR of ~30% over FY05-09. Together with the additionalspend of ~US$13bn on NREGA, the cumulative increment ingovernment spending in the rural economy would amount toUS$23bn by FY13.

Figure 28: Incremental rural-focussed government spending between FY10 andFY13 should be US$23bn

(all figures in US$ bn) FY10ii FY13ii Incremental w.r.t FY10

NREGA 7.3 20.8 13.5

Other Rural (@ 15% CAGR) 19.6 29.8 10.2

Total 26.9 50.5 23.6

Source: Government Budget documents, IIFL Research

which should translate to US$19bn consumptionboost

Personal income in India has averaged ~80% of GDP over the pastfour years (FY05-08), while household savings have averaged ~24%of GDP over the same period. This translates into a householdsavings rate of ~30% of personal income, implying that on average,for Rs100 of income, individuals and households end up spending(consumption) Rs70 and saving Rs30. The NSSO surveys clearlystate that estimating rural savings rate is difficult; in the absence ofhard data, we assume conservatively that rural savings will at leastbe 20%, lower than the average savings rate, and hence the total

consumption spend from the above US$23bn would be ~US$19bn.Note that this does not include ripple effects of other schemes suchas rural electrification, which can have a significant consumption-boosting impact.

Will this hurt the fisc?

With government finances under considerable stress, it is natural tobe sceptical about prospects of substantial increases in governmentspending. An increase of US$23bn over three years would amount to~0.7% of GDP annually. In our view, the current government islikely to manage the fiscal deficit targets for FY11 along with this

increased spending on the key rural schemes. Some of the largeitems that can contribute to the reduction in fiscal deficit for FY11are as follows.

1. FY11 w ould not have large expenditures such as farm loanwaiver and Pay Commission arrears: The FY11 budget wouldbe free of some large expenditure items, among them farm loanwaiver and VI Pay Commission arrears. The governmentexpenditure would be lower by ~Rs300bn on this count, cuttingthe deficit by 0.5% of GDP.

2. Revenue buoyancy from indirect tax rate increases: Thecut in indirect tax rates introduced in the budget for 2008, as

part of the fiscal stimulus package, is likely to see a partialrollback. We estimate this would improve revenues by Rs300bnand bring down fiscal deficit by ~0.5% of GDP.

US$13bn increase in FY10-13 period plus a non-NREGA

government spend

increasing at 15% annually

Rural savings rate assumedat 20%, compared to

national average of 30% ofpersonal income

Focus on disinvestment andlower spend on othergovernment schemes

should keep Indiasfinances intact for FY11


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Rural India

3. Increased disinvestment proceeds: Increased visibility ondisinvestment as a revenue source will further reduce the strainon government finances. We estimate the central governmentcould raise ~0.4% of GDP by way of revenue from disinvestmentannually over the next 2-3 years.

4. 3G auctions likely to add to government receipts: Thegovernment is likely to net Rs300bn from 3G auctions, whichwould be knock off deficit to the extent of ~0.5% of GDP.

5. Corporate tax collections likely to rise: With most companiesseeing a strong pick-up in business, the government would see agood pick-up in corporate tax collections.

All things considered, the government should comfortably be able tomaintain the rural spending momentum.


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Rural India

Figure 30: Farm output growth accelerated since 2001; yield growth steady

-1%

0%

1%

2%

3%

4%

5%

6%

1981-86 1986-91 1991-96 1996-2001 2001-08

Yield grow th CAGR Acreage grow th CAGR

Source: Department of Agriculture, IIFL Research

Momentum for irrigation penetration has more tailwinds

Although Indian agriculture remains highly dependent on seasonalrainfall (monsoon), focus on improving agriculture infrastructureincluding irrigation and warehousing, has increased significantlyduring the tenure of the UPA government. Whereas it took over 30years to bring 15% of the cropland under the irrigationinfrastructure (1985-2000), and the next 5% has taken less thanseven years.

Figure 31: Less than 50% of crop land in India is irrigated

Net irrigated land

20

25

30

35

40

45

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

(%)


The XI Five-Year Plans target is to bring 16m ha under irrigation(including major, medium and minor irrigation works), a significantacceleration from less than 10m ha targeted to be added duringeach of the prior three Plan periods. This will also be the highestincrease in irrigation potential since the VII Plan Period, when ~11mha was brought under irrigation.

Irrigation penetration haswitnessed a massive ramp-

up in recent years


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Rural India

Figure 32: The XI Plan targets adding 2x the area under irrigation vs prior Plans

Incremental area under irrigation across plans (mn ha)

0

4

8

12

16

20

I II III IV V VI VII VIII IX X XI

Source: Planning Commission, IIFL Research

NREGA is also likely to act as a tailwind to the increase in irrigation

infrastructure, as the scheme plans to encompass activities such asirrigation infrastructure creation on private lands (as against the FiveYear Plan targets of creation of canals/reservoirs on publicproperty). Even under the existing scheme, irrigation has remaineda major focus area (accounting for >60% of all activities undertakenunder NREGA).

Figure 33: Irrigation, which is a focus under NREGA, will gain momentum

0

20

40

60

80

100

2006-07 2007-08 2008-09

Rural connectivity Irrigation & water conservation Land development & others

(% share of spending under NREGA)


Pricing grow th to offset volume weakness in farm income

In addition to the UPA governments thrust on increasing spendingon rural employment and infrastructure development, the focus onincreasing farm income also ranks high in the governmentspriorities. As compared to the 5.2% annualised growth during FY97-2003 in food-grain MSP, prices have been raised at 8.7% annuallyduring 2003-2009. Other categories including oilseeds and pulseshave also witnessed 2-3ppts increases in growth during the past fiveyears.

Given NREGAs focus onirrigation, we expect a

further catalyst to increasethe penetration of irrigation

over the next few years


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Figure 34: MSP hikes in all major soft commodities have accelerated by 2-3ppts

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Foodgrains Oilseeds Pulses

1997-2003 2003-09


Figure 35: Market prices of grains and oilseeds have risen by 50-100% in five yrs

75

100

125

150

175

200

225

Nov-04 Jul-05 Mar-06 Nov-06 Jul-07 Mar-08 Nov-08 Aug-09

(Rebased to 100 at Nov 04) Soyabean

(yellow)

Sugar

Rice (lr-8)

Wheat

(Dara)


Figure 36: Market prices of commercial crops have rallied by >50% in just a year

40

60

80

100

120

140

160

180

200

Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Jan-09 Aug-09

Rebased to 100 (Aug 2004)

Cotton

Sugar


Minimum support price (MSP) for key crops has become a politicallysensitive issue in India. Given that the UPA government enjoyed therich political dividends of MSP hikes (being voted back to power witha wide margin), we believe that political reasons will continue todrive an elevated level of pricing growth (through MSP hikes) during

the next four years (ie, the remaining term of the currentgovernment).

Political compulsions andthe need to maintainacreage for food grains are

strong reasons forexpecting MSP to continue

increasing


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Costs increase lower than price rise, thanks to subsidyFarmers key cost heads are seeds, fertilisers, agro-chemicals,labour, power and transportation costs. Farm costs have remainedmostly stable, excluding labour and power, owing mainly togovernment intervention in the form of subsidies.

Labour prices have seen a significant increase: Labour cost(which account for 30-40% of costs) has witnessed an increasein most stateslabour-deficient states such as Punjab andHaryana have witnessed a very high (20-30% YoY) spike incosts. NREGA has resulted in an overall increase in labour wagerates across the country. We believe that cost increases onaccount of labour wages (driven by NREGA) will continue to be aheadwind, as NREGA ramps up further.

Fertiliser prices largely stable for the past five years:Spend on fertilisers, which is the second-largest cost head (10-20% of total costs) are fully supported by subsidies, and cost tofarmers has remained stable in the last five years (up a modest3-5% YoY). We expect these costs to see similar low growth

rates going ahead. Seeds have seen no major price increases: Seeds, which

account for ~10% of farmers total costs, are not directlysupported by government intervention. However, most farmersin India depend on seeds developed and distributed by the stateagricultural universities. The private sectors share of farmersseed usage is low (except in cotton, in which GM seeds areallowed). Hence, seed costs have remained stable, as these costsare indirectly subsidised through government support to stateagricultural universities.

Agrochemicals prices declined in 2009, in line with globalprices: Agrochemicals (which account for 5-15% of farmers

total costs), unlike fertilisers, are not covered by governmentsubsidies. Prices of these are fully linked to global chemicalprices. Farmers have benefited from a steep decline in agro-chemical costs during 2009, since international prices ofchemicals have corrected by 40-90% YoY.

Power costs increased during FY09 as power deficiency insome states forced high usage of diesel for pump sets: Theusage of power in farming increases significantly when monsoonsfail, as there is need to pump ground water for irrigation.However, power-related costs will remain a more sporadicinfluence on inflation, depending on the monsoons. Barring sucha deficiency in rainfall, we do not foresee any material cost

pressure on account of power in most parts of the country.

Pow er supply, a critical input, should improve furtherAvailability of power has picked up somewhat during the past coupleof years, and we estimate it will see a significant ramp-up incapacity by 2012. Our energy analyst estimates that 45,000MW ofadditional generation can happen by then, and a further 100,000MWby 2017. Availability of power will remain a key trigger for increasingyields as well as acreage.

Few cost heads have spikedin recent yearsexcept

labour and powersofarms profitability has seen

a steady increase


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Figure 37: Power capacity to register at 8% annually

Pow er capacity

143148

163

186

198

211

100

120

140

160

180

200

220

FY08 FY09 FY10 FY11 FY12 FY13

(GW)

Source: Government documents, IIFL Research

Figure 38: Though power deficit is high in states strong in agriculture, some ofthem (mainly Punjab, Tamil Nadu) have made agriculture a priority sector for power

Power supply / demand for Apr-Oct 2009 Demand ( MW ) Supply ( MW ) Deficit %

Haryana 6,133 5,678 7.4%

Punjab 9,786 7,407 24.3%

Rajasthan 6,487 5,500 15.2%

Uttar Pradesh 10,856 8,563 21.1%Gujarat 10,406 9,515 8.6%

Madhya Pradesh 6,766 5,970 11.8%

Maharashtra 18,981 14,292 24.7%

Andhra Pradesh 11,325 10,294 9.1%

Karnataka 7,196 6,352 11.7%

Kerala 3,045 2,852 6.3%

Tamil Nadu 10,158 9,675 4.8%

Bihar 2,249 1,495 33.5%

West Bengal 5,381 5,349 0.6%

Others 7,512 8,667 -15.4%

All India 116,281 101,609 12.6%

Source: Central Electricity Authority, IIFL Research

Pow er availability insulatesfarmers from impact of poormonsoons, by enabling easy

usage of ground water

Why is power critical in farming? Historically, Indian farmers

have suffered from power deficiency. Less than 50% of Indiaspopulation gets electricity. In this population, power supply deficitis 12.6%, according to the Central Electricity Authority. Indianfarmers are eligible for free power (on paper), though with such asteep power deficit, they are typically last on the priority list.

In our visits, we found that in Punjab and Haryana, power isavailable for almost eight hours per day, with the result thatfarmers were better insulated against bad monsoons. On thecontrary in Bihar (8% of Indias population but 1.5% of the powersupply), we found that small farmers are a sorry lot. For anaverage realisation of ~Rs7,000/acre, farmers would normally

need to invest ~Rs5,000 per acre on seeds, fertilisers and labour,thus managing a surplus of Rs2,000/acre. However, inability toaccess power has resulted in an additional cost of Rs5,000/acrefor using diesel to pump water from borewells, converting thesurplus into a deficit of Rs3,000/acre.


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Cold storageswe need a lot more

Cold storages are primarily used to store fruits and vegetables, meatand marine products, floriculture, etc. The business model of coldstorage owners is based on charging rentals for the facility.

Rentals at the cold storage we visited were Rs130/quintal per season

for 50 quintals or more. The cold storage had a capacity of 60,000 quintals with loading in

March (when the summer starts) and unloading in October (coldstorage is not required in the winter months).

Given the power shortage, cold storages have to rely on generators,which increases their costs and final rates to customers.

There is only one cold storage facility in the whole of Bhojpurdistrictgrossly inadequate for the region.

Considering that the output per acre is around 100 quintals per acreand typically in every village we visited, land under cultivation wouldtypically be 600 acres or more (translating to an output of 60,000quintals), available cold storage capacity seems grossly inadequatefor even a village, let alone an entire district.

According to a study by Assocham, about 30-40% of agriculturalproduce goes waste every year.

Figure 39: There is a huge shortfall of cold storages in India



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Figure 41: Reservoir levels this year have inched close to that of 10-yr avg levelsafter the spell of rains towards the end of the kharif season

0

20

40

60

80

100

120

2-

Jul-09

9-

Jul-09

16-

Jul-09

23-

Jul-09

30-

Jul-09

6-A

ug-09

13-A

ug-09

20-A

ug-09

27-A

ug-09

3-S

ep-09

10-S

ep-09

17-S

ep-09

24-S

ep-09

1-O

ct-09

8-O

ct-09

15-O

ct-09

This year Last year 10-year average

Water stock in reservoirs (BCM)

Source: IMD, IIFL Research

Is dependence on monsoon fading?

With monsoon rainfall in India in 2009 being the most deficient in decades,the key issue is whether rural incomeswhich are highly levered toagricultureare sustainable. Rainfall during the monsoon season (July-September) was 23% below the long-term average (LTA), which makes

this years deficiency the highest since 1973.

Rainfall deficiency was high this year in most parts of North and CentralIndia. The worst affected area is North-western India, where rainfall was36% lower than the long-period average. Parts of South India and WesternIndia have seen normal rainfall.

Figure 40: This monsoon has been the worst in over 35 years, North-western India has seen the highest rainfalldeficiency

(30)

(20)

(10)

0

10

20

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

Southw est monsoon - All India average (deviation from long

term average)

(%)

0%

20%

40%

60%

80%

100%

120%

Northwest

India

Central India South

Peninsula

Northeast

India

Rainfall as a % of long term average

Northwest has had the worst

Source: Indian Meteorological Department, IIFL Research

Yet, rainfall may not play truant as it has during the pastDespite such a significant decline in rainfall, we do not anticipate a material

weakness in rural incomes (and consequently consumption spending), onaccount of two factors:

(a) P ick-up in monsoons towards end of the seasonTwo key aspects that can positively affect the rabi crop are reservoir levelsand the late rainfall in September. Reservoir levels recovered considerablyin September and October, and are now only 5% below the 10-yearaverage for the country. This would mean normal irrigation in reservoirwater-dependent areas during the rabi season. Rainfall in the first half ofOctober was also very good, with most areas recording more than 20%excess rainfall in the duration.


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Figure 43: -8%YoY volume growth to be offset by +11%YoY pricing growth

Volume (YoY) Pricing (YoY) Income (YoY) Weightage

Total foodgrains -10% 18% 6% 35.6%

Cereals -10% 15% 4% 26.4%

Coarse cereals -15% 25% 7% 4.9%

Pulses -4% 25% 20% 4.4%

Total oilseeds -10% 5% -6% 8.4%

Total horticultural crops -5% 8% 3% 37.9%

Others -7% 10% 2% 18.0%

Total prodn (excl sugarcane) -8% 11% 3% 100%


History also supports strong rabi output pattern despite weakness in kharif.Over the past 30 years, there have been over 10 occasions when there wasconsiderable divergence between growth in the rabi and kharif cropswithout any significant base effect. Though the causes for such divergencewould be different in each year, the data does show that the rabi crop canbe reasonably good even in a bad kharif year, given the aforementioned

factors.

Figure 42: Kharif and rabi output trends do not necessarily mirror each other

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

1978-79

1982-83

1985-86

1987-88

1990-91

1991-92

1993-94

1994-95

1998-99

2002-03

2004-05

Kharif production grow th Rabi production grow th

Source: Department of agriculture, IIFL Research

(b) Rainfall deficiency was in areas with strong irrigation & poweravailability

The North-west regions which witnessed the highest deficiency this yearsaw almost NIL impact on its output during this kharif season, as irrigationpenetration (>80%) and a strong political willpower to ensure uninterruptedpower supply during the peak sowing seasons ensured stable acreage and

yields. For instance, Punjab and Haryana are estimated to have witnessed a4%YoY growth in paddy output this year, vis--vis a 20%+ YoY decline inpaddy in other parts of India.

Farm incomes should still grow 3% YoY , supported by pricesWe estimate that total crop output (excluding sugarcane) will decline by 8%YoY during 2009-10 (based on the governments first advance estimates forkharif crop, and our assumption that most rabi crops will decline by 2%YoY, while paddy grown during the rabi season will decline by 5% YoY,given its water-intensity). Based on current mandi-level prices, despite the8% decline in agri output that we estimate for this year, a much larger 11%YoY increase in prices will offset the volume weakness - thus supporting anoverall 3% YoY increase in farm incomes.


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Government schemes can boost ruralconsumption CAGR by ~175bps

The US$200bn annual consumption expenditure of 152mrural households w ill accelerate, powered by rising farm andnon-farm incomes. We estimate that the increasedgovernment expenditure in itself can potentially raiseconsumption growth by 15-20% from the current levels, overthe next 3-4 years. Greater visibility and stability in incomesfrom employment guarantee will act as a furtherpsychological boost to rural consumption. With ruralconsumption set to cross the tipping point, all consumptionproxiesespecially FMCG and autoswill see grow th rates incoming years trending much higher than in the recent past.

Rural consumption: substantial, and accelerating

By our estimates, at US$200bn (FY10ii), the annual ruralconsumption expenditure is 30% more than urban consumptionexpenditure in India.

Figure 44: We estimate rural consumption in 2010 to be ~US$200bn

Item Value

Rural population (m, FY07) 800

Rural MPCE (Rs, FY07) 695

Rural annual consumption (US$ bn) 142

FY05-FY07 rural MPCE CAGR% 11.5%

Rural population (FY09) 818

Est rural consumption (US$ bn, FY09) 180

Incremental NREGA spend in FY09 3.5

All-India rural consumption FY09 183.9

Rural consumption FY10ii (assuming 10% growth over FY09) 202.3

Source: Government of India, IIFL Research. Population data taken from Census 2001.MPCE data taken from NSSO. NREGA spend taken from NREGA website.

Figure 45: Rural consumption expenditure is higher than urban

0

100

200

300

FY02 FY03 FY04 FY05 FY06 FY07 FY14

Rural Consumption Urban Consumption

(Indexed to FY02: rural consumption = 100)

Source: NSSO, Census of India, IIFL Research

The potential number of people in the consuming class (defined ashouseholds with annual income >US$1000) in rural India is ~2x the

size of urban India (121m HHs in rural India vs 65m in urban Indiaabove the given threshold levels).

Despite the apparentpoverty in rural I ndia, rural

consumption expenditureoutstrips total urban

consumption expenditure inIndia

What is MPCE?

MPCE stands forMonthly Per CapitaExpenditure. Thenumber is estimated bythe NSSO on the basisof a large on-the-ground survey overrural and urban India.The last survey wascarried out for theperiod 2006-07, andinvolved a sample of

33,146 rural householdsand 30,583 urbanhouseholds.


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Figure 46: Consuming HHs in rural India 2x the number in urban India

0

30,000

60,000

90,000

120,000

150,000

180,000

Rural 1989-90 Rural 2001-02 Rural 2009-10E Urban (2009-10E)

Consuming class (>Rs45000 per household p.a)

Low income (


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Figure 48: NREGA will rise from the current measly 5.6% of rural PCE

State MPCE Per-capita NREGA spend NREGA %

Rajasthan 767.4 147.8 19.3%

Andhra Pradesh 727.1 59.3 8.2%

Madhya Pradesh 514.9 38.9 7.6%

Karnataka 624.3 44.4 7.1%

Tamil Nadu 728.8 40.8 5.6%

Assam 721.3 31.5 4.4%

Uttar Pradesh 653.2 28.0 4.3%

Bihar 541.3 20.4 3.8%

West Bengal 629.8 20.5 3.3%

Orissa 458.6 12.2 2.7%

Gujarat 796.6 15.3 1.9%

Maharashtra 776.1 5.2 0.7%

Kerala 1,250.3 7.7 0.6%

Haryana 1,012.7 5.6 0.5%

Punjab 1,198.1 5.6 0.5%

Source: IIFL Research. MPCE data taken from 2007, the last year for which available; monthlyNREGA spend taken for period April to Oct 2009.

Rajasthan leads the way inNREGA implementation

Understanding consumption psychology of a labourer

Figure 49: Dharmendra Prasad, who makes Rs1,500 a month, bought asecond-hand mobile phone worth Rs3,000


Dharmendra typically gets work for 10-15 days per month at anaverage rate of Rs100/day, up from Rs70-80/day a year ago. He ispart of a 14-member family, in which four members are earning

members (two have been working in factories in Kolkata for the lastseven years, and the other two are labourers).

Both the labourer brothers have NREGA job cards. They are bothhappy with NREGA, which they say has resulted in an increase inwages. They were otherwise not getting enough work, as farm workwas low during the year because of the poor monsoon.

In spite of earning only ~Rs1,500/month, he had spent Rs3,000 onbuying a second-hand Nokia phone (pictured above). While he spentRs150-200/month on his mobile phone, he did not spend any moneyon purchasing toothpastes (instead, he used a datun, or tree bark).


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Rural consumption growth to accelerate by ~175bps

Rural consumption spending is indeed poised to take off. Merelyconsidering the first derivative impact of the incrementalgovernment spending (US$23bn over the next three years) shouldaccelerate rural consumption by 175bps.

This is based on the following building blocks:

Rural savings rate being 20% (significantly less than the nationalaverage of 30%).

Only the impact of government spending in excess of thehistorical rural consumption CAGR of 11% being considered forestimating consumption acceleration.

Figure 50: Additional rural spend will add ~175bps to consumption growth rate

All fig in US$ bn Amount

Estimated FY09 rural consumption 183.9

Incremental government rural spend 23.6

Projected incremental Govt rural spend at PFCE growth rate 9.9

Excess spend over PFC growth rate 13.8

Consumption impact @80% 11.0

Rural consumption (Est FY10) 202.3

Annualised acceleration of rural PCE (bps) 178


Non-food consumption acceleration will besubstantially higher

Growth in rural consumption spending will not be uniform acrosscategories. Food items, which comprise over 50% of rural MPCE, willgrow slower, while non-food items would see faster growth. This isbecause of the low penetration and consumption levels of most non-food categories at present, leaving large scope for an increase.

During FY99-07, rural MPCE grew at an estimated 4.6% annuallyand food spending growth lagged at 2.8% annually, while non-foodgrew at 6.8% annually.

Figure 51: Non-food spend has grown at ~2.5x food spend in rural areas;consumer goods grew 1.8x of rural MPCE growth

Rural consumption grow th (1999-07 CAGR)

0%

2%

4%

6%

8%

10%

12%14%

MPCE

Food

N

on-food

Fuel

Clothing,

f

ootwear

E

ducation

Medical

C

onsumer

goods

C

onsumer

s

ervices

Source: NSSO, IIFL Research

Available consumptionheadroom much higher in

the relatively under-penetrated non-food

categories

During FY99-07, spendingon food lagged at 2.8%CAGR vs. non-food spending

which grew at 6.8%


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While it is hard to estimate the exact split of consumption spendingon each category, it is safe to assume that spending on non-fooditems, which constitute ~48% of total consumption spending, willgrow significantly faster than overall consumption spending. In thepast eight years, categories such as consumer goods have grown at1.8x the pace of total rural consumption growth.

Figure 52: Food formed over 50% of the rural MPCE in 2006-07

MPCE contribution 2006-07 (Rural India)

52%

10%

7%

3%

7%

5%

8%

8%

Food

Fuel & Light

Clothing, Footwear

Education

Services

Medical

FMCG

Others

Source: NSSO, IIFL Research

FMCG, automobiles would be key beneficiariesWe believe the acceleration in growth of rural MPCE will be mostbeneficial to the FMCG and automobile sectors in India. Thesesectors already derive substantial portions of their sales from ruralareas, but have considerable scope to increase rural penetration,which lags behind penetration in urban areas.

FMCG: direct beneficiary for income grow th at the bottom ofthe pyramidThe strength in sales of consumer goods in rural India as reflected inthe MPCE data is also reflected in the 13% annualised growth overthe last three years in the FMCG sectors revenues from rural India.This has been a key driver for the acceleration in the FMCG marketsoverall growth over 2007-09 to 15-20%, from much slower growthin prior years.

Figure 53: FMCG value growth in rural India

IIFL Rural India Q1 2010

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