Executive summary of The McKinsey Quarterly article "Tacking the growth of India's middle class" (Ed. 2007 Number 3).
The Indian middle class is poised for exponential growth following population increase and rise in disposable incomes across the subcontinent.
Demographic Facts:
Whereas in 2005 the percentage of India's middle class earning Rs. 2,00,000 - Rs. 10,00,000 in disposable incomes was around 5 percent at 50 million people, this will increase to about 41 percent, or 583 million people by 2025. This will be coupled with a change in concentration of spending power from the predominantly rural today at 57 percent to the urban at 62 percent by 2025. Level of urbanization will not change much. Today only 29 percent of Indian live in urban centers, and this will increase to only about 37 percent by 2025. 40 percent of Chinese and 48 percent of Indonesians, by contrast, are urbanites today itself. However, increase in population will cause an absolute increase in the middle class population from 318 million today to 523 million in 2025. Most of this growth will be concentrated in the megacities of Delhi and Mumbai, followed by Kolkata, Chennai, Hyderabad, Bangalore, Ahmedabad and Pune.
The trend will follow a wave-like transition of masses from one class into the higher one. Until 2010 the Deprived class (< Rs. 90,000 annual income) will migrate into the Aspirers class (Rs. 90,000 - Rs. 2,00,000 annual income), which will peak around 2010. Period from 2010 to 2020 will witness an efflux of the Aspirers into the Seekers class (Rs. 2,00,000 - Rs. 5,00,000) and from 2020 onwards Seekers will start migrating into the Strivers class (Rs. 5,00,000 - Rs. 10,00,000 annual income) as incomes continue to increase. The Globals (> Rs. 10,00,000 annual income) will continue to be a small part of the population but will increase from 0.20 percent of the population in 2005 to 2 percent in 2025. In absolute terms, they will be grow to more than the current population of Australia at 24 million. As a result of these demographic changes, India, the 12th-largest consumer economy as on 2005, will become the 5th-largest by 2025.
Implications for Businesses:
As observed in other emerging economies, necessities like food and clothing will decrease as a percentage of consumption in a middle class family's budget. Due to the population increase, however, their consumption will continue to rise year-on-year, though at a much lower rate than that of discretionary spending. Growth in consumption of food, for example, will accelerate to 4.5 percent as compared to 3 percent today and will continue to remain the single largest category of expenditure.
Discretionary spending will rise from 52 percent of total spending today to 70 percent by 2025 and will comprise predominantly of services and products that contribute to improvement in the economic prospects and the quality of life for the individual and the family - health care, education, communications and transport.
Driven in part by the sorry state of public health care infrastructure, private health care spending will increase to 13% of purchases by Indian households, more than all the benchmark countries (Brazil, China, Germany, South Korea and United States), with the exception of the United States. Education expenses will grow 11 percent to 9 percent of household consumption, more than any of the benchmark countries due to demand for better-quality education, university degrees and study-abroad programs. Transportation expenses, already the largest category in spending after food, will exceed its share compared to any of the benchmark countries. The highest growth will come from purchases of cars.
The switch from spending on necessities to discretionary products and services is taking place in India at lower levels of income as compared to other countries. South Korea underwent similar transformation in the 1980s, when its per capita income was twice that of India. This means businesses catering to the Indian middle class will be squeezed between their rising aspirations, expectations and desire for a modern middle-class lifestyle and the reality of their limited budgets.
Incumbents, primarily domestic companies, have the advantage of being closer to the consumers longer, understanding them and possessing a well-developed distribution infrastructure, critical in this country. However, they will have to unlearn many of their traditional approaches to business to be able to address the impending discontinuity in consumption trends. Such gaps present opportunities for the challengers to differentiate their offerings and gain competitive advantage. Their experience in other emerging economies, especially in areas where rising aspirations caused populations to switch from local brands to the international ones, will come in particularly useful while chalking out the India strategy.
Businesses will have to come up with new business models that will customize products and services to the Indian's requirements, and will have to be able to do it rapidly on a mass scale. Those that embark on this challenging mission today will put themselves in a better position to leverage the opportunities that will manifest themselves over the next two decades.
The Indian middle class is poised for exponential growth following population increase and rise in disposable incomes across the subcontinent.
Demographic Facts:
Whereas in 2005 the percentage of India's middle class earning Rs. 2,00,000 - Rs. 10,00,000 in disposable incomes was around 5 percent at 50 million people, this will increase to about 41 percent, or 583 million people by 2025. This will be coupled with a change in concentration of spending power from the predominantly rural today at 57 percent to the urban at 62 percent by 2025. Level of urbanization will not change much. Today only 29 percent of Indian live in urban centers, and this will increase to only about 37 percent by 2025. 40 percent of Chinese and 48 percent of Indonesians, by contrast, are urbanites today itself. However, increase in population will cause an absolute increase in the middle class population from 318 million today to 523 million in 2025. Most of this growth will be concentrated in the megacities of Delhi and Mumbai, followed by Kolkata, Chennai, Hyderabad, Bangalore, Ahmedabad and Pune.
The trend will follow a wave-like transition of masses from one class into the higher one. Until 2010 the Deprived class (< Rs. 90,000 annual income) will migrate into the Aspirers class (Rs. 90,000 - Rs. 2,00,000 annual income), which will peak around 2010. Period from 2010 to 2020 will witness an efflux of the Aspirers into the Seekers class (Rs. 2,00,000 - Rs. 5,00,000) and from 2020 onwards Seekers will start migrating into the Strivers class (Rs. 5,00,000 - Rs. 10,00,000 annual income) as incomes continue to increase. The Globals (> Rs. 10,00,000 annual income) will continue to be a small part of the population but will increase from 0.20 percent of the population in 2005 to 2 percent in 2025. In absolute terms, they will be grow to more than the current population of Australia at 24 million. As a result of these demographic changes, India, the 12th-largest consumer economy as on 2005, will become the 5th-largest by 2025.
Implications for Businesses:
As observed in other emerging economies, necessities like food and clothing will decrease as a percentage of consumption in a middle class family's budget. Due to the population increase, however, their consumption will continue to rise year-on-year, though at a much lower rate than that of discretionary spending. Growth in consumption of food, for example, will accelerate to 4.5 percent as compared to 3 percent today and will continue to remain the single largest category of expenditure.
Discretionary spending will rise from 52 percent of total spending today to 70 percent by 2025 and will comprise predominantly of services and products that contribute to improvement in the economic prospects and the quality of life for the individual and the family - health care, education, communications and transport.
Driven in part by the sorry state of public health care infrastructure, private health care spending will increase to 13% of purchases by Indian households, more than all the benchmark countries (Brazil, China, Germany, South Korea and United States), with the exception of the United States. Education expenses will grow 11 percent to 9 percent of household consumption, more than any of the benchmark countries due to demand for better-quality education, university degrees and study-abroad programs. Transportation expenses, already the largest category in spending after food, will exceed its share compared to any of the benchmark countries. The highest growth will come from purchases of cars.
The switch from spending on necessities to discretionary products and services is taking place in India at lower levels of income as compared to other countries. South Korea underwent similar transformation in the 1980s, when its per capita income was twice that of India. This means businesses catering to the Indian middle class will be squeezed between their rising aspirations, expectations and desire for a modern middle-class lifestyle and the reality of their limited budgets.
Incumbents, primarily domestic companies, have the advantage of being closer to the consumers longer, understanding them and possessing a well-developed distribution infrastructure, critical in this country. However, they will have to unlearn many of their traditional approaches to business to be able to address the impending discontinuity in consumption trends. Such gaps present opportunities for the challengers to differentiate their offerings and gain competitive advantage. Their experience in other emerging economies, especially in areas where rising aspirations caused populations to switch from local brands to the international ones, will come in particularly useful while chalking out the India strategy.
Businesses will have to come up with new business models that will customize products and services to the Indian's requirements, and will have to be able to do it rapidly on a mass scale. Those that embark on this challenging mission today will put themselves in a better position to leverage the opportunities that will manifest themselves over the next two decades.
