Rural India is a very integral part of the India growth story because a large part of our working-age population is in rural India. 64% of India’s population resides in rural areas, and the rural economy contributes to nearly half of India’s GDP. Over the last decade, several investments have been made by the Government of India to improve the standard of living in rural areas, so much so that a lot of people have been brought above the poverty line. However, despite all the investments in improving social welfare, rural incomes at an aggregate level have not done well in the last few years because of a heavy dependence on agriculture for employment.
Since independence, India has seen a reducing dependence on farm-related employment due to growing opportunities in manufacturing, construction-related jobs, and even self-employment. However, over the last ten years, there has not been a material improvement in the percentage of people employed in non-farm jobs. Essentially, dependence on agriculture for livelihoods has remained high, and because farm income growth has been range-bound, overall real rural wage growth numbers have been benign. Conversely, urban income growth has been relatively better, which is why urban India has fared much better in terms of income and consumption growth compared to rural India.
However, the outlook for rural India could be different this decade as the outlook for non-farm jobs looks better. The thrust provided to grow India’s manufacturing sector for domestic needs, as well as exports, has the potential to improve the availability of non-farm jobs. The outlook for construction-related jobs is much better, aided by improvement in the real estate cycle. Significant efforts by the Government in skilling initiatives are preparing our labour force not only for non-farm jobs but also for self-employment. The Government has also been supplementing household incomes, as seen through schemes like the Ladli Behna Yojana, which augur well for consumption and/or savings. Farm indicators are also looking positive, which augurs well for farm incomes in the near term.
As incomes improve for rural Indians, rural consumption has the potential to pick up. Rural development should also accelerate.
Financial inclusion is one theme that could benefit. As incomes grow, savings should increase in rural areas. With the potential for deposit accretion, the banking sector would likely expand its branch network deeper into the country. When incomes improve, people will start thinking about their family’s future, and insurance penetration could rise in rural areas.
Farm mechanization has room for growth. With rising literacy and skill development, the younger population’s desire to work in farm jobs could decline, potentially accelerating the pace of farm mechanization in India, as seen in several countries globally.
Connectivity is another theme that benefits from rural development. The significant investments made to improve road infrastructure and electricity availability in the last decade could benefit sectors like telecom and autos. Affordable telecom tariffs and cheap smartphones have connected rural Indians to the world, resulting in growing awareness and aspirations. Moreover, with underdeveloped public transport in rural areas, rising disposable incomes could lead to increased sales of two-wheelers and passenger vehicles. Consumer financing is also improving in rural areas.
Energy consumption is expected to rise in rural areas, not just from households but also from industrial units.
Electricity availability in rural areas has led to higher penetration of consumer durables. Improved female participation in the workforce will increase the need for convenience, benefitting the consumer durables sector.
Industrial energy consumption could increase as manufacturing units are set up deeper in the country. With urban and semi-urban land prices rising significantly in recent years, government investments in road infrastructure, electricity, and water supply have made rural areas more attractive for setting up manufacturing units, benefitting both the energy sector and employment opportunities.
As household incomes grow, people desire to live better, look better, and feel better. Several consumption-related sectors could benefit from this trend, as witnessed in urban India over the last decade. Rural per capita incomes are nearing the inflection point where non-food consumption should accelerate, offering better growth prospects for companies catering to these consumers.
The Investment Opportunity
Our recently launched ICICI Prudential Rural Opportunities Fund seeks to capitalize on these growth drivers. The fund offers exposure to rural development and consumption themes, balancing contrarian and structural investment opportunities. It tracks the NIFTY India Rural Index, a well-diversified benchmark covering 11 sectors and 75 stocks, with a strong bias towards large-cap companies.
The fund emphasizes certain structural themes and underperforming sectors that have the potential to perform well as rural growth accelerates. With its multi-sectoral and flexible approach, the fund aims to navigate the evolving rural landscape and deliver sustainable long-term returns.
Conclusion
India’s rural economy is at an inflection point. Decades of underperformance have created an opportunity for growth across multiple sectors. As rural livelihoods and incomes improve, sectors tied to development and consumption are set to thrive. For investors, this represents a chance to tap into a broad-based recovery and participate in India’s journey towards balanced economic growth.
The ICICI Prudential Rural Opportunities Fund is a step towards channeling investments into this promising theme, aligning with the broader vision of a prosperous rural India.