KOLKATA - For all those global marketers
who have missed the potential of India's
billion-plus people and their growing buying
power, here's a nudge from the McKinsey Global
Institute (MGI).
A new report released in
May by the economics research group at McKinsey
predicts that India's much-touted middle class has
finally taken wings and will soon embark on a
consumption spree that could reshape global
consumer markets.
The country is also set
to become the fifth-largest consuming
economy (behind the United
States, Japan, China and the United Kingdom) in
the next two decades, and as India's youthful
population earns more and saves less, consumer
spending could quadruple by 2025, overtaking
Germany. Moreover, if purchasing power parity (PPP
- economic jargon that measures the purchasing
power of a currency relative to the US dollar) is
used as a benchmark, India's total consumption
already stands at US$8.2 trillion, making it even
larger than the current US consumption of $7.8
trillion.
Indeed, ever since India
embarked on its liberalization drive in the early
1990s, the size of its middle class has always
been a puzzle. In the early years following
India's liberalization, the country suddenly
appeared as a hot market for global marketers who
thought they would find gold in the country's huge
middle-class population, initially estimated to be
about 300 million.
Many rushed in with
starry eyes, only to be disappointed. While there
was no doubt that the country's middle-class
population was almost the size of the population
of the whole United States, the truth was that its
spending power was nowhere near that of the middle
class of the West.
While a middle-class
family in the West was one that had a mortgage on
their residence, a car to drive and enough savings
for an annual vacation, a family that could afford
a balanced diet each day, send the children to
school and, say, buy a small refrigerator was
considered middle-class in India. For instance,
adjusted for inflation, the average per capita
annual income of a typical middle-class Indian
family then was about $800.
But in its
report "The Bird of Gold: The Rise of India's
Consumer Market", MGI says those days are gone.
"India's economic growth has accelerated
significantly over the past two decades and so too
has the spending power of its citizens," says the
report. "With rising income, household consumption
has soared and a new Indian middle class has
emerged. And as the income growth rolls across
Indian society, a huge shift is under way from
spending on necessities such as food and clothing
to choice-based spending on categories such as
household appliances and restaurants."
The
report assumes a growth rate of 7.3% - an
assumption it says is reasonable considering the
"substantial scope" for improvements in
productivity - at which rate the Indian income
level will triple over the next 20 years, which
will lift 291 million Indians over the poverty
line to create a 583-million-strong middle-class
population by 2025.
These 583 million
middle-class Indians, the report adds, will
trigger explosive growth in the consumer market,
taking it to a jaw-dropping $1.5 trillion, four
times the present $380 billion.
"This
soaring consumption will vault India into the
premier league among the world's consumer markets.
Today its consumer market ranks 12th; by 2025 it
will surpass the size of Germany's consumer
market, making it almost as large as Italy's
market," the report said.
Where lies
the opportunity? So as incomes rise,
consumption soars, and the market explodes, all
marketers will benefit, including foreign ones.
The country will become a nation of upwardly
mobile middle-class households, consuming goods
ranging from high-end cars to designer clothing,
says Diana Farrell, director of MGI, but
opportunities will start first with the relatively
rich.
Consumption now is dominated by the
deprived income segments, which account for 75% of
spending. According to MGI, consumers in these
segments are typically small shopkeepers, farmers
or semi-skilled industrial and service workers.
They do not live well, but they generally have
enough food and might own small consumer goods
such as a television, and spend about half of
their income on basic necessities. In the next two
decades, however, predicts MGI, this group will
shrink from 41% of the population to 36%, as many
of them move up into the middle and dominate
consumption to control 59% of India's consumption
power.
But a new breed of ferociously
upwardly mobile Indians is emerging as well, says
Farrell, whose tastes are indistinguishable from
those of prosperous young Westerners. By 2025,
there will be 9.5 million Indians in this class,
and their spending power will hit $343 billion -
about 20% of total Indian consumption. MGI calls
this segment "strivers" - they include senior
government officials, managers of large
businesses, professionals and rich farmers, and
successful and upwardly mobile people who are
"highly brand-conscious, buying the latest
foreign-made cars and electronic gadgets".
The other interesting finding of the
report is that growth will spread beyond top-tier
cities. "While India's two largest conurbations,
Delhi and Mumbai, will continue to be the
country's biggest markets and the top eight cities
will remain the dominant locations for
upper-income global consumers, we estimate that
almost two-thirds of India's middle-class
opportunities will lie outside those top-tier
urban areas," said the report.
Huge
opportunities will also come out of middle-class
India's discretionary spending, which will
represent 70% of all spending by 2025 compared
with just 39% now. The largest Indian spending
category at present is food, beverages and tobacco
(FB&T), followed by transportation and
housing. By 2025, although FB&T will still be
the biggest category, communications, which
accounts for only 2% of spending today, will be
one of the fastest-growing categories, rising 13%
per year. Other categories that will see
impressive growth (above 8%) will include personal
products, transportation, health care, education
and recreation.
Challenges Nevertheless, there are "ifs". According to
MGI, although the imminent changes in the Indian
consumer market will create major opportunities
for domestic and multinational businesses alike,
there are some challenges. "Companies will need to
attract and educate a large number of new
consumers," says the report.
It adds that
the prediction that MGI has made depends on India
maintaining its high rate of growth, which in turn
depends "crucially on the government continuing to
pursue a pro-reform, pro-growth economic agenda,
[because] slower reform and failure to act on
India's significant challenges could dampen growth
and put opportunities we have described
substantially at risk."
But MGI is
optimistic. During the first millennium AD,
merchants referred to India as the "bird of gold",
says the report, because of the glittering
dynamism of its market. "Over the next two decades
that [bird] may take flight once again."
Indrajit Basu is a Kolkata-based
journalist.
(Copyright 2007 Asia Times
Online Ltd. All rights reserved. Please contact us
about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
