China’s Taobao villages show e-commerce can transform rural India

Narendra Modi’s Digital India is a scheme that includes connecting all Indian villages with broadband. He says this will empower rural Indians, without spelling out all the details. He should learn from China’s Taobao villages, which have been transformed by e-commerce.

China’s e-commerce giant, Alibaba, has pioneered rural e-commerce through its rural arm, Taobao, claiming this has created 280,000 rural jobs in 2014 alone. The Chinese government has picked 55 poor counties for grants to develop industries using e-commerce. Taobao villages have risen from 20 in 2013 to 211 in 2014, and the trend continues. These villages now cover 70,000 rural producers.

Some of the output of rural industries and farms is destined for big cities. But a lot is also consumed in other villages. E-commerce provides Chinese villagers the huge choice of goods enjoyed by urban folk. India’s rural market is booming, but e-commerce India is associated almost exclusively with urban distribution. We need rural e-commerce for Indian Taobaos.

Indian villages desperately need low-end manufacturing to create jobs for youngsters who have no interest in farming. Large industries cannot do the job. What’s needed is infrastructure plus marketing and financial linkages that enable rural entrepreneurs to start small-scale industries.

Alibaba defines a Taobao village as a cluster of rural e-tailers where at least 10% of village households engage in e-commerce or at least 100 online shops have been opened by villagers, and transaction volume is at least RMB 10 million ($1.6 million). Indian Taobao equivalents will have to start with more modest targets: they have limited purchasing power and limited production capacity. But, as in China, they have access to the cheapest rural labour, giving them the potential to compete, provided they overcome logistical disadvantages.

City manufacturers have the best infrastructure and marketing networks, and so dominate in most countries. Alibaba has shown that Taobao villages can use the e-commerce route to overcome their logistical disadvantages. Encouraging the clustering of rural units has helped create the minimum trade volume needed to attract trucking and financing services. Alibaba itself has a financing arm. None of this requires government subsidies. But government investment in rural roads, electrification and broadband is necessary.

In effect, Taobao villages transform villages into towns. The first Taobao village, Dongfeng, became a centre for low-cost furniture production by over 1,000 households. With access to cheap local timber and labour, they were able to quote competitive e-prices. They immediately got orders, which in turn stimulated supporting services. By 2014, the Dongfeng region had 40 logistics companies providing transport.

CNBC reported last year on Beishan, another Taobao village, that once specialized just in bread-making. It now has a company with annual sales of $8 million worth of camping gear, such as sleeping bags, beating big brands.

India has long tried to promote rural industries through its Khadi and Village Industries Commission, which operates through state khadi departments. KVIC runs a wide network of “Khadi Gram Udyog” shops. The results are unsatisfactory despite substantial subsidies and reservation of various products (like saris) for handlooms. The ethos of KVIC is Gandhian, not commercial. A women’s group like Lijjat Papad has been far more successful, because it is commercially oriented, and not run by bureaucracies.

The curse of every rural area is the huge gulf between what the farmer or rural artisan gets, and the much higher price paid by urban consumers. To some extent this is justified: the cost of quality control, grading, transport, wholesaling and retailing is substantial. Nevertheless, e-commerce holds the promise of slashing the logistical costs and linking the producer directly to consumers, helping the rural producer get a better price even as the consumer gets a lower price.

This indeed was the original aim of ITC’s e-choupal, which got much publicity but achieved only limited success. Eliminating the middleman was again the theme of “farm-to-fork” giant retailers like Reliance. Here too, the results have been modest, even in states that abolished compulsory sales through government mandis.

E-commerce has the potential to beat e-choupals and retail chains. It can go far beyond agriculture to rural manufacturing. But it will require supporting investment in rural roads, electrification and broadband. This cannot be done by state KVIC departments. Rather, chief ministers will have to push for good rural infrastructure, plus a climate where doing business becomes easy. Once that is done, small industries and transport companies will quickly come up on their own. E-commerce companies will rush in, just as Alibaba has in China.

Modi won the general election promising millions of jobs for villagers. Critics say this is a pipe dream. But China has shown that the Taobao route can indeed create millions of rural jobs. So can India.