• Improved access to credit and new income streams are driving consumption in rural India.
  • Digital technologies, such as AI and blockchain, are being used to offer products in rural areas.
  • A collaborative model that unifies physical and digital will unlock opportunities for inclusive growth.

Growth in consumption across emerging economies is projected to come largely from rural areas. Take India: consumption per capital in rural areas, is slated to grow by 4.3 times in just 10 years; compared to 3.5 times in urban areas, according to a report by Bain & Company and the World Economic Forum.

Unlike many ageing nations, India will continue to remain a young nation, with a median age of 31 by 2030, and a large part of this young population will be in rural areas.

This shift in consumption is already manifesting itself. The rural economy contributes about 46% to the national income, despite increasing urbanization in the last decade.

The rural economy, however, continues to be an informal one, largely cash-oriented with unstructured cash flows. Most of the rural working population is typically the “Earn and Pay” segment, largely excluded from formal employment opportunities and predictable cash flows.

They earn their livelihood in cash and therefore prefer to spend and discharge their liabilities in cash itself. Moreover, given the lack of adequate banking facilities in rural areas, cash continues to be the preferred mode of transaction.

Things are changing on the ground. Once predominantly agrarian, the rural economy is getting increasingly more diversified, with the non-agricultural sector contributing to about two-thirds of household incomes.

Additionally, those living in rural India are no longer as isolated from their urban counterparts as before, thanks to improved internet access. There is a whole generation of mobile-first rural Indians who have leapfrogged generations of technologies to the mobile phone.

The combination of youth, connectedness, education and multiple income generation opportunities is leading to a surge in rural aspirations, and manifesting itself in new consumption choices. Physical and digital connectivity, however, continue to remain constraints.

The government and regulatory bodies have rolled out several policy and financial initiatives aimed at inclusive rural growth. Aadhaar, a unique biometric identifier, zero balance Jan Dhan savings bank accounts, direct transfer of social benefit payments, and the digital payment infrastructure BHIM are just some of them.

In 2014, 53% of adults in India had a bank account, according to the Global Findex. With the government’s push towards Jan Dhan bank accounts, this number has increased to 80% in 2018.

Increase in access to credit for the unbanked and the under-banked under the MUDRA (Micro Units Development and Refinance Agency) programme is another initiative that provides credit at low rates to micro-finance institutions and non-banking financial institutions, which in turn extend credit to Medium, Small & Micro Enterprises. These initiatives are definitely huge steps, but touch just a fraction of the rural population. India has the world’s largest rural population, of 893 million people.

Emerging technologies

Digital technology and improved infrastructure are key parts of the larger puzzle. New digital technologies like big data analytics, machine learning, blockchain, cloud computing and artificial intelligence (AI), are increasingly deployed to offer products beyond cities and in rural areas. At the same time, improved access to credit and multiple income generation streams are driving consumption.

The financial requirements of rural customers are varied depending on geographical, occupational and cultural factors, local customs and aspirations. What is common, however, are constraints that arise from unstructured cash flows, which limits access to credit; an inherent lack of trust in digital transactions; digital and financial illiteracy; and a strong preference for a face-to-face, touch-and-feel experience.

India's rural customers are not yet ready to go completely digital, as far as finance is concerned. Some human touch is still needed and desired in almost every financial transaction. While this will most likely change, as more people become increasingly comfortable with technology, the journey is ongoing. Phygitalisation of the rural ecosystem therefore is potentially the immediate solution to accelerate rural inclusion.

Governments, regulatory bodies, financial service providers and fintech companies need to collaborate to enable this. The first step is to facilitate digitalization of rural incomes. This will encourage digital payments, improve efficiency, increase speed of payments, reduce cost of disbursement, enhance security, lower the incidence of associated crime, and increase transparency.

Equally important is making it possible to convert digital income into cash. Given the scarcity of banking facilities, this will require building a network of trusted entities on the ground to enable assisted access to digital funds.

These entities will have to be equipped to facilitate small amount transactions at higher frequency, saving account holders the trouble of travelling long distances to a physical bank branch. Given the preference of rural customers for human interactions, an assisted model will help them get increasingly comfortable with digital.

Attention to issues related to safeguarding digital payments and digital identities are also important. Putting in place consumer protection rules is critical to safeguarding people from fraud, especially rural women and low-income groups, who are most likely to be financially inexperienced.

This underscores the importance of targeted financial literacy and capability training, which can have a positive impact in such areas by increasing savings and promoting financial skills. Several corporates have been pushing the cause of financial literacy through their Corporate Social Responsibility programmes, thereby supplementing the efforts made by the government and regulators.

The dynamic between physical and digital financial services companies is shifting from disruption to collaboration. The competitive advantage of traditional financial services providers lies in their knowledge base, their experience, their existing payment transactions infrastructure, and their compliance and risk operations, which are difficult to replicate easily. Fintechs can put new technologies to work in order to shrink distances, expand customer segments, offer customized experiences, and bring in efficiency.

A collaborative and mutually beneficial model that unifies the advantages of both physical and digital is therefore the answer to address the real challenges on the ground more effectively, in turn unlocking opportunities for inclusive growth, thus creating sustainable economies and societies that leave no-one behind.