ꦉThe disparity between India’s rural population and its contribution to the GDP, is evolving into a significant opportunity for identifying long-term investment destinations within Indian equities. Rural India, which accounts for two-thirds of the total population, contributes a mere 46% to the GDP. This imbalance presents a vast potential for growth, as rising incomes in rural areas are expected to narrow the gap with the urban counterparts, thereby playing a pivotal role in incremental GDP growth. The agricultural sector, in particular, is poised to gain momentum, boosting its share in the overall economic landscape.
ꦇIndia is projected to become a $5 trillion economy by 2027, ascending from its current position as world’s fifth-largest economy to the third. In the long run, India’s economy is anticipated to reach $35 trillion within the next two decades. The realization of these ambitious GDP targets will largely depend on how rural India’s growth unfolds over the time. Structural changes are gradually bridging the economic divide between rural and urban areas. As of 2024, urban GDP per capita stands at $4,269, compared to rural GDP per capita at approximately $2,000—a stark contrast that underscores the vast untapped potential of rural India.
ꦿConcrete evidence suggests that this gap is narrowing, with far-reaching implications for India’s GDP growth, enabling it to sustain a rate of over 6% in the long term. First, the quality of life in rural India is improving, thanks to a series of government initiatives aimed at revitalizing the rural economy. Programs such as Pradhan Mantri Gram Sadak Yojana and Pradhan Mantri Awas Yojana have made significant strides in infrastructure development. Since 2000, over 720,000 kms of rural roads have been constructed, and nearly all villages are now connected to the electricity grid. Enhanced connectivity, better housing, sanitation facilities and access to potable water are transforming the lives of rural households.
⛄As a result, the share of household expenditure on food has declined from 59% at the start of the 21st century to 46% in 2024, while spending on non-food categories has risen. This shift indicates increased demand for discretionary products such as consumer durables, two-wheelers, and premium FMCG goods. However, the penetration of consumer durables like refrigerators, televisions and washing machines remains significantly lower in rural areas, accounting for only 20% of the total purchases in this segment. Even if the rural penetration levels were to reach half of those in the urban areas, the resulting demand would unlock a vast market for consumer goods companies.
🐭Second, the government’s push to increase manufacturing’s share of GDP bodes well for the rural economy, creating ample job opportunities for rural workers. Agriculture currently accounts for approximately 16% of GDP while employing over 44% of the workforce, limiting the per capita income growth. Government initiatives such as "Make in India," the Production-Linked Incentive scheme, and the National Logistics Policy have spurred industrial development. New manufacturing projects have surged, with investments rising from ₹3.8 lakh crore in FY20 to ₹13.2 lakh crore by FY23.
🃏Finally, rising female workforce participation in rural areas is adding to the household disposable income, driving consumption, investment and the overall economic activity.
﷽Over time, the evolving rural economy is expected to bring the lifestyles of rural and urban households closer, mirroring trends observed in countries like China and other developed nations. This convergence underscores the rural economy as a cornerstone for long-term portfolio construction and a critical driver of India’s economic future.
