High-tech sector eyes India's rural market

By Indrajit Basu

The roads are dusty and unpaved; electricity is erratic and its quality inferior; the residents seldom finish school and to most the use of hi-technology starts with a television and ends with a mobile phone - just for talking. Yet ask the heads of dozens of technology companies in India and they will tell you that foremost on their list of strategic moves is to head into rural India.

From multinational high-tech consumer durable companies to Chinese mobile-phone makers; from global information technology giants such as Microsoft to back-office service providers; global telecom and biotechnology companies, and even India's IT-sector lobbyist, the National Association of Software Services Companies (NASSCOM), are stepping out of the cities and moving into the villages and towns of rural India.

Each has different imperatives and objectives, but all say that the growing influence of rural India on the country's society and economy is too big to ignore. Over 740 million people - about 65% of India's population - live in some 600,000 villages and small towns, and according to a recent survey by Indian Revenue Service, more than half of the 145 million rural households in India earn between US$300 and $1,400 a year.

And although only estimates of the present size of the rural markets are available, according to a survey by the global advisory firm Mckinsey & Co, carried out in April last year, India's rural markets have the potential to reach $500 billion by 2020.

But that's old news. After all, the realization that rural India holds huge potential dawned on people about two decades back, when fast-moving consumer product companies - makers of toothpaste, soap, detergent, soft drinks, etc - moved in, first just to sell their products. But what's different in the "Rural Strategy Version 2" is the new range of interests and their approach in tapping this largely unexplored market. The latest rural aspirants include a wide range of companies, ranging from retail products to drug and industrial products companies, as well as many technology companies.

Their strategy, too, is different. Few are looking at selling their products or services immediately; in fact, many are willing to wait for years. In addition, almost all are targeting the entire rural population rather than just the affluent elite.

Take Yahoo for example, the latest firm to announce that it is moving into rural India. This Internet company has finally decided to take the plunge after watching the markets for several months, primarily because competition from rival portals is getting tougher. According to Pranesh Anthapur, chief operations officer of Yahoo India, "The importance of rural India can't be underestimated any more." The company plans - for the time being - to just promote brand awareness by providing basic e-commerce support against the backdrop of growing personal computer ownership and Internet penetration in rural India.

Yahoo's obvious competition in the rural markets is Google, which announced its foray about two weeks back and does not have profits in mind either - at least not just yet. This search-engine technology innovator's "challenge" is to make the search engine less complicated, as well as to develop content for rural users - such as weather updates, crop patterns, ebb and tide schedules, etc.

Similarly, DataWind Net Access Corp, a Canada-based provider of wireless web access products and services, has tied up with the Indian IT lobbyist NASSCOM to run Internet training programs in the villages and small towns in the Indian states of Orissa, Andhra Pradesh, West Bengal and Maharashtra. The objective looks more social than commercial in the sense that the aim is to improve the reach and user base of the Internet in villages and small towns so that state and district administration services can be enhanced and made more transparent.

Rural India also drives volumes
But if the rural markets are not revenue generators yet for Yahoo!, Google or even Microsoft - which is implementing the "IT Saksham" project primarily to evangelize the benefits of using IT in rural communities - most telecom companies (and even mobile handset makers) are moving out of larger cities and plugging into the rural sector, purely to ramp up volumes.

Although urban markets are still lucrative and will continue to be the focus for the telecom sector, the untapped potential of the rural markets is now seen as the next volume driver. "India has the target of reaching 500 phone subscribers - from the present 200 million (fixed plus mobile) - by 2010, and that kind of growth can only come from the rural segment," said TV Ramachandran, director general, Cellular Operators Association of India (COAI).

In fact, a strange thing happened in India two weeks ago. To create and run networks in remote areas, the government announced the auction of 81 rural regions, the laying-out cost of which was supposed to have been subsidized by the Universal Service Obligation Fund (USOF) created by the Department of Telecom (DoT) in 2003. The resources for implementation of this objective are raised through a 5% universal service levy on gross revenue of all telecom companies (except the pure value-added service providers like the Internet, voicemail, e-mail service providers) and grants and loans from the federal government.

However, in 38 of the 81 regions, telecom companies did not bid - meaning that subsidies was not sought at all - and in about 15 regions, Bharti Airtel, Reliance Communications and Aircel (three of India's large telecom companies) submitted negative bids - which means that they preferred to pay into the USOF instead of accepting its support.

"Most of the rural pockets, which were unviable even a few years back, have now become viable and profitable. Therefore, operators preferred to pay to the USOF rather than to take its support and be bound by a few restrictive DoT conditions," said a COAI spokesperson.

Small wonder then that with the DoT stranded with unutilized USOF funds of about $2 billion as of March, many telecom experts have started questioning the utility of creating such a fund in the country.

Indeed, to some extent, thanks to an abysmally low teledensity (number of telephone connections per 100 people) of 4% (versus 15% in urban areas) in rural India, that segment of the market is scorching. According to the vision plan drawn up by the DoT, 200 million rural telephone connections are envisaged by the end of 2012, taking the rural teledensity figure to 25%.

New source for human resources
India's 700 million-plus rural population is a cheap talent pool as well. That's what the flourishing IT-enabled services or the business process outsourcing (BPO) sector has realized lately. Stymied in their growth by an acute shortage of human resources in the cities (where the attrition rate can go up to 60%) local BPO companies have now started moving into to the rural sector for launching their services. The other reason why the rural sector has emerged as attractive is cost. The industry says that the infrastructure cost is 20% cheaper compared to urban set-ups.

Pioneers that have set up such centers include Lason Inc (a US-based outsourcing firm), GramIT (a rural venture associated with local IT giant the Satyam Group), and Datamation (a Delhi-based group). These are now the key players in the Indian rural BPO scene, who say that besides reducing costs for their customers, their rural strategy has also been a key contributor toward bridging the digital divide and creating jobs.