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    South Asia
     Jun 1, 2007
India's middle class takes wing
By Indrajit Basu

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.)


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