The growth of India’s middle class and the emergence of a consumer economy

Based on the article by

Eric D Beinhockner, Diana Farrell,

Adil S Zainulbhai

McKinsey Quarterly, 2007, No. 3

Introduction

According to McKinsey Global institute, average household incomes in India will triple over the next two decades.

India will become the sixth largest consumer economy in the world by 2025, up from 12th now.

In 2005, private spending reached Rs. 17 trillion or 60% of India’s GDP.

But aggregate spending may be spread across hundreds of millions of households.

They may have very modest incomes by developed country standards and show high sensitivity to price and value.

Challenges

There are large regional disparities in growth & reduction of poverty.

The southern and western states are more prosperous.

But the northern (with the exception of Delhi, Haryana, Himachal Pradesh and Punjab) and eastern states are lagging behind.

India also remains the least urbanized (29%) of the emerging Asian economies.

Bureaucratic hurdles remain formidable. Infrastructure problems are plenty – urban

infrastructure is already heavily overburdened.

Growth of the middle class

Along with the shift from rural to urban consumption, India will witness a rapid growth of the middle class – households with disposable incomes ranging from Rs. 200,000 to Rs. 1,000,000 per year.

This class forms currently 5% of the population. By 2025, it may form 41% of the population. By 2025, the Indian middle class will dominate

the cities.

High Net worth individuals

Those earning more than Rs. 1,000,000 a year will make up 24 million by 2025 or larger than the current population of Australia.

These people live in the eight largest cities. They have a global outlook. They have tastes similar to those of their

counterparts in the developed countries – brand name goods, vacations abroad, the latest consumer electronics and high end cars.

Changes in consumption patterns

Increase in discretionary expenditures likely.

Spending on health, education, transport and communications will increase.

Recreational products and services will account for a smaller slice of household spending than in other countries.

Conclusion

MNCs are likely to find themselves squeezed between the desire of the country’s consumers for a modern middle class lifestyle and the realities of their limited budgets.

In 2005, the average middle class family in India spent just Rs. 300,000 or $6,600.

MNCs must be able to deliver an aspirational middle-class lifestyle to families on an Indian budget.

Companies should be able to come up with new business models, products with carefully targeted features and brands that appeal to the country’s upwardly mobile people.