Business Today

The new go-to markets

Many of the cities where companies are planning investments are located in states which till recently were loosely called backward states. High population regions, traditionally characterised by poor social indicators, are emerging as consumption hot spots.

Shalini S. Dagar and Shamni Pande         Print Edition: March 6, 2011

Try this for a pop quiz. Where does biscuit major Britannia Industries plan to set up its latest plants? Where did auto market leader Maruti Suzuki clock 40 per cent growth in sales - one of its highest - in the nine months to December 2010? And in West Bengal, would the South 24 Parganas district, otherwise famous for the Sundarbans and the Royal Bengal Tiger, qualify as a consumption hot spot?

The answer to the first is Orissa and Bihar. The answer to the second, West Bengal and Orissa. And the third? An emphatic yes. Not exactly top-of-mind answers, these. So what explains this flurry of activity in areas often considered laggards in socioeconomic indicators?

Manpreet Singh Chadha, Director of multiplex company Wave, who plans to promote a 150,000 sq. feet, three-screen multiplex in what cynics may call back-of-beyond Uttar Pradesh - in Bareilly - may be well-placed to provide an answer. Chadha, whose family has been in the real estate and liquor business in the state, was encouraged to go to Bareilly on the back of a successful venture he pulled off in Moradabad, to which he traces his family roots.

States such as Bihar and Jharkhand are now crossing thresholds of per capita income associated with conspicuous consumption
"The idea was to give something that Moradabad does not have. Hence came the idea of a multiplex-cum-mall followed by fashion brands like Globus and affordable food and beverage under a secure environment," says Chadha. The bottom line, of course, was the robust monthly sales of the tenants at his mall. That logic of bridging a demand-supply gap in regions with high populations, just gaining a foothold on disposable income, which can act as ready consumers, sustains just as well in Bareilly - and indeed other such regions.

For instance, Kishore Biyani's Future Group, whose Big Bazaars are regular features in such modern retail formats, ventured into Bhubaneshwar way back in 2003. Eight years on, Damodar Mall, President, Director, Food Strategy, Future Group, simply calls it their "rockstar store".

Jagi Mangat Panda, Broadcast entrepreneur in Orissa
Entrepreneur Jagi Mangat Panda, who is the Managing Director of broadband cable network operator Ortel Communications, believes she has captured some of this upside. "Our advertising income has seen a growth of over 50 per cent for the past two years and top line growth has been over 25 per cent annually for the past three years," she says.

Panda attributes this to the higher spends by advertisers such as Nestle, Hindustan Unilever, Godrej and Emami in Orissa. "The past five years have seen exponential growth in the services sector. The number of banks, insurance, telecom, airline and IT companies has grown. The manufacturing sector, too, has seen growth with the setting up of several small-and-medium-size units. All this has led to a higher per capita income in the cities," she says.

Signs everywhere
Many of the cities where companies are planning investments are located in states which till recently were loosely called backward states. Characterised by large populations, poor development indicators and almost non-existent infrastructure some of these states were clubbed under the near-pejorative term BIMARU (comprising Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh, and sounding very similar to the Hindi word for "sick") states.

Shailesh Pathak, Former bureaucrat
That nomenclature no longer holds as states such as Rajasthan and Madhya Pradesh have surged ahead, with new constituents Orissa and West Bengal joining the ranks. Yet, it is this assorted bunch which is now showing the beginning of a ravenous binge - to consume more of packaged food, bottled water, consumer durables, fast moving consumer goods, telecom and financial services (See Demanding Their Share).

The auto industry, whose growth of 30 per cent has far exceeded expert forecasts, provides a neat snapshot. In the nine months to December 2010, market leader Maruti Suzuki clocked a 40 per cent growth in West Bengal and Orissa over the same period the previous year, while Bihar, Chhattisgarh and Jharkhand notched over 30 per cent growth. Rajasthan, too, chalked up 26 per cent more sales than last year, while in Uttar Pradesh and Madhya Pradesh sales grew in a healthy 18 per cent range.

Consumer durables major Samsung has a similar story to tell. Its sales in states such as Uttar Pradesh, Rajasthan, Bihar, Uttarakhand, Orissa, West Bengal and Madhya Pradesh are growing between 25 and 30 per cent over the previous year. To be sure, this growth is from a smaller base, but the pace of expansion has these states on the radar of most companies in India.

"Governments in these states are running a lot of employment generation schemes that are encouraging people to not leave the state and continue working there. This is having a positive impact on consumption," offers R. Zutshi, Deputy Managing Director, Samsung India.

Boom drivers
This consumption boom in the towns and cities dotting what was till now considered Laggard India is powered by sustained income growth. A look at the state gross domestic product or SDP shows an accelerating pace. Most of this growth in SDP is coming from the services sector - typically real estate, hotels and the transport sector.

"The income change story across India, propensity to spend, and confidence about the future is very visible in these places, especially in contrast to their past. We are quite bullish about Rajasthan, Orissa, Jharkhand, Chhattisgarh and Bihar," says Future Group's Mall. His experience is that the aspiration levels are higher in some of these states such as Orissa - perhaps a determined effort to break away from the past.

Agrees Hemant Mehta, Senior Vice President of marketing research company IMRB International. "Psychographically, the consumers in these towns are similar in their aspirations to people in the larger, affluent cities and metros - the quantity and depth of demand may vary, but it is there for the same things." Add to this the phenomenal rise in connectivity - through improved roads as well as telecom.

"Connectivity, whether through roads or through telecom has a huge benefit," says Shailesh Pathak, a former bureaucrat and infrastructure expert who has intimate knowledge of Chhattisgarh, Uttar Pradesh and Bihar. Pathak, however, reckons that this is not a case of trickle-down effect but "plug-in effect"- as in the sheer availability of many more economic avenues.

If satellite television has fuelled soaring aspirations, then a stable political environment has helped change things on the ground. Pathak who has been on both sides, government and private sector, believes that it is not surprising that many of the parties ruling these "laggard" states returned to power. "Finance follows politics. Many of these states have repeated chief ministers in the past decade. Continuity in governance certainly helps in prosperity," says Pathak who has been an infrastructure investor at ICICI Venture and private equity Indian Infrastructure Fund.

Agrees economist Bibek Debroy: "Purely empirically, at least in state elections, it has been seen that voters react most to roads and electricity." Whether it was improving infrastructure which led to a stable political economy or the reverse, the net impact has been an all-pervasive rising prosperity - evident in higher discretionary spending.

The bulging middle
As a result of this surge in consumption, one theme that is playing out in India is the integration of urban and rural areas. Villages are getting integrated and this has much to do with improved road connectivity.

"The big story is that of the 600,000 villages in India. While earlier only around 125,000 were integrated with the rest of the nation, now barring 125,000 which are very remote or have populations lower than 1,000, the rest are getting integrated," says Debroy.

Pathak quotes the famous theory of banking veteran K.V. Kamath while saying that luxury and conspicuous consumption comes in around a per capita income of around $1,000 (Rs 46,000), whereas demand for better governance kicks in at a per capita income of $1,500 (Rs 69,000) and above.

While the initial consumption boom after liberalisation happened in the more economically advanced states, the laggards are now catching up
Many of the "laggard states" are now crossing precisely these important thresholds of income. So, in a sense, the chimerical middle class of the early 1990s when liberalisation began is probably roaring to life now. Of course, in the short term, inequality is growing. For instance, for the purpose of financial inclusion, banks take cognisance only of villages with a population of more than 2,500, leaving those with a smaller population unbanked.

Debroy worries about the increased marginalisation of such outposts, which also do not have access to connectivity. There are large tracts in the mineral belt of Jharkhand, Orissa and parts of Chhattisgarh where such conditions prevail. That, perhaps, is where real deprivation lies and why Maoists rule.

Much of the contours of this unfolding story will be provided by the census data and National Sample Survey a few years down the line. Economist Debroy, for instance, says, "Our perspective will change completely when the new data which incorporates changes after 2003 is published."

But, if what consultancy firm McKinsey & Co. predicted in 2007 about India's consumption growth quadrupling by 2025 holds true, then a large part of that growth will certainly emanate from these laggards. Clearly, the party has begun only now.

Youtube
  • Print

  • COMMENT
BT-Story-Page-B.gif
A    A   A
close