Rise of Indian Consumerism
OBJECTIVE
The objective of this seminar paper is to demonstrate how India has risen to a new class of consumerism lead on by a more knowledgable and younger generation and how it has opened doors for its poverty standards to lower down by working to build up its rural market .And how India can work this up to its advantage – leveraging its upcoming sectors such as FMCG , Luxury , and Retail .
A number of facts and figures have been supplemented to support the topic of discussion.
EXECUTIVE SUMMARY
India’s economic growth has accelerated significantly over the past two decades and so, too, has the spending power of its citizens. Though the raging fire of global economic slowdown has engulfed almost all the nations,India, a country of 28 states, with over one billion people, has somewhat escaped the scare. India is a big country that consists of various segments of consumers, based on income, class and status.Real average household disposable income has roughly doubled since 1985. With rising incomes, house- hold consumption has soared and a new Indian middle class has emerged.
Yet much remains unknown about how India’s consumer market will evolve in the future. Will Indian incomes continue to keep pace with overall economic growth? How will the distribution of incomes change? Who will benefit most from growth? How big is India’s middle class today and how large will it become? How will income be distributed geographically? What will Indians spend their new-found wealth on, and which industry sectors will be the winners and which the losers from changing spending patterns?
As Indian incomes rise, the shape of the country’s income pyramid will also change dramatically. Over 291 million people will move from desperate poverty to a more sustainable life, and India’s middle class will swell by over ten times from its current size of 50 million to 583 million people. By 2025 over 23 million Indians—more than the population of Australia today—will number among the country’s wealthiest citizens. While much of this new wealth and consumption will be created in urban areas, rural households will benefit too. Annual real rural income growth per household will accelerate from 2.8 percent over the past two decades to 3.6 percent over the next two.
Indian spending patterns will also evolve, with basic necessities such as food and apparel declin- ing in relative importance, and categories such as communications and health care growing rapidly. But in order for India to achieve these positive results, the country must continue to reform and modernize its economy, as well as address significant shortfalls in its infrastructure and education system.
REVIEW:
I reviewed a few reports and observed Five major points for the Rising Indian Consumer
A few facts to show the significant changes in the landscape :
Ø Indian incomes will almost triple over the next two decades
Forecasts for India’s real GDP growth rate over the coming two decades generally range between 6 and 9 percent per year. I believe this optimism that Indian income will triple is justified because of the substantial scope for continued productivity increases in Indian businesses, the growing openness and competitiveness of the Indian economy, and favourable demographic trends.
Average real household disposable income will grow from 113,744 Indian rupees in 2005 to 318,896 Indian rupees by 2025, a compound annual growth rate of 5.3 percent.
Ø Rising incomes will lift 291 million out of poverty and create a 583 million-strong middle class
India’s rising real incomes have already had a significant impact on poverty reduction. In 1985, 93 percent of the population had an annual household income of less than 90,000 Indian rupees, an income bracket categorized as deprived. By 2005 this had dropped by about two-fifths to 54 percent of the population, with the biggest fall occurring since 1995. Thus more than 103 million people moved out of desperate poverty in the course of one generation—not just in India’s urban centers but in its rural areas as well. This is all the more impressive given that India’s population grew by 352 million during this period. So, in effect, there are 431 million fewer poor people in India today than there would have been if poverty had remained at its 1985 rate.
In short, India’s economic reforms, and the increased growth that has resulted, have been the most successful anti-poverty program in the country’s history.
Ø India will become the world’s fifth largest consumer market by 2025
The combination of rapidly rising household incomes and a robustly growing population will lead to a striking increase in overall consumer spending. Mc Kinsey Study forecast that aggregate consumption in India will grow in real terms from 17 trillion Indian rupees today to 34 trillion by 2015 and 70 trillion by 2025—a fourfold increase This soaring consumption will vault India into the premier league among the world’s consumer markets. Today its consumer market ranks 12th. By 2015 it will be almost as large as Italy’s market. By 2025 India’s market will be the fifth largest in the world, surpassing the size of Germany’s consumer market. The size of India’s market will still be tied closely to its large population. On a per capita basis, real spending will remain modest at 48,632 Indian rupees in 2025 (or $1,065)—although this will still represent a tripling from today’s level.
The income growth will be the biggest driver of increasing consumption, far outweighing population growth or any change in savings behaviour. 80 percent of consumption growth will come from rising income, while 16 percent of the increase will be due to growth in the number of households. Only 4 percent will come from changes in India’s household savings rate.
As incomes grow, the class structure of consumption will change significantly as well. Consumption today is dominated by the deprived and aspirer income segments, which together control 75 percent of spending. By 2025, however, the global segment will wield 20 percent of total spending and the new middle class will come to dominate, controlling 59 percent of India’s consumption power.
Ø Middle-class growth will spread beyond top-tier cities
The geographic pattern of India’s income and consumption growth will shift too.
Today, despite their lower incomes, rural households, due to their majority share of the population, are collectively India’s largest consumers—57 percent of cur- rent consumption is in rural areas versus 43 percent in cities. The challenges of accessing and serving rural markets mean that much of the Indian market has not been addressable by major companies and is served by the informal economy instead.
However, by 2025 the Indian consumer market will largely be an urban affair, with 62 percent of consumption in urban areas versus 38 percent in rural areas. Urban areas will account for over two-thirds of the future growth in the Indian market despite the fact that even in 2025, urban areas will have only 37 percent of the population. This represents an important opportunity for many companies because urban areas are often easier for the formal sector of the economy to address. Indian and multinational businesses will thus see their addressable market grow substantially.
Ø Discretionary spending will account for 70 percent of all spending by 2025
Today the largest categories of Indian spending are food, beverages, and tobacco (FB&T); transportation and housing. By 2025 FB&T will still be the biggest category, although its share will have dropped from 42 percent to 25 percent. Transport and health care will be the second and third biggest markets respec tively. Communications, which accounts for only 2 percent of spending today, will be one of the fastest expanding categories with growth of over 13 percent a year (on an aggregate basis). Other categories that will see annual growth of over 8 percent include transportation, personal products and services, health care, and education and recreation as these categories evolve into sizable markets
SUMMARY OF FACTS:
These facts show the continuous increase in the rise of Indian middle class, not only urban but also rural middle class. Indian middle class is forecast to be the next set of target customers for the MNCs all over the world and expected to be the world’s fifth largest consumer market. Spending patterns of Indians and their sensibilities is a major study of most investors right now.
And as mentioned before this does not exist only in Tier-1 cities. According to a study this year by the Future Group, an Indian retailer, and the National Council of Applied Economic Research (NCAER), the ratio of spending to earning is higher in Tier II towns such as Nagpur, Jaipur, Surat and Coimbatore than it is in the metros. An earlier NCAER study, in 2004, had shown a higher percentage of the rich in Middle India than in some metros. For instance, the North Indian state of Haryana had a small-town crorepati density of 280.
And major shifts have been found in the following segments :
FMCG
The FMCG sector has been registering double-digit growth in sales since the last couple of years. Currently estimated at US$ 17.42 billion, it is the one of the most promising sectors in India.
The food and beverages (F&B) market in India holds great potential. AT Kearney estimates the market sales of F&B retailing in India at US$ 135 billion and growing at 10-15 per cent annually. The Ministry of Food Processing Industries is also planning to double the market size of the food processing industry to US$ 165.1 billion by 2009-10 and trebling it to US$ 271.8 billion by 2014-15.
Luxury Products
With the rapidly increasing number of millionaires in India, the market for luxury brands is growing annually at a compound average growth rate (CAGR) of about 35 per cent.
According to a FICCI-Yes Bank report, India is set to become a manufacturing hub for global luxury brands over the next four to five years and the manufacture of luxury items in India can grow to US$ 500 million. The luxury products market in India likely to grow at a CAGR of 28 per cent to reach US$ 1.2 billion by 2010. The market is expected to double by 2015, touching US$ 2.5 billion.
E-commerce
The increase in the personal computer and Internet penetration along with the growing preference of Indian consumers to shop online has given a tremendous boost to e-tailing-the online version of retail shopping. Several online retailers are reporting good business in categories like travel, art, books and music.
According to TRAI there were 5.45 million broadband subscribers in India on December 31, 2008, up from 5.28 million in November 2008.
Consumer Confidence
The Indian consumer remains one of the most upbeat globally. The Nielsen Global Consumer Confidence study, conducted by Nielsen, a market research company revealed that Indians are "the most optimistic lot globally who think that their country will be out of the economic recession in the next twelve months."
CHANGES & CHALLENGES
The upcoming changes in the Indian consumer market will create major opport nities and challenges for Indian and multinational businesses alike. For example, companies will need to attract and educate large numbers of new consumers, establish and retain brand loyalties as tastes change with rising incomes, and in- troduce high-value products and services at sufficiently low prices to be accessible to the emerging middle class. The quadrupling of the Indian market will present companies competing in India with a critical discontinuity to navigate—who the leaders of this changed market will be has yet to be decided.
Growth in Indian incomes and consumption will also deliver extensive societal benefits, with further declines in poverty and the growth of a large middle class.
CONCLUSION
Indians have come a long way from being known as the shrewdest customers in the world , ‘value factor’ very much intertwined with their lives, so much so that even luxury brands have to devise unique pricing strategies to inspire the great Indian consumers. They are family people , giving more importance to nurture and care than ambition .
But the dramatic population growth with a large portion in the age band of 25-35 yearswith dual incomeis the catalyst behind the spectacular rise in consumer market in India. Liberalisation and globalisation- the twin drivers of employment and business opportunities.
The Indian consumer trend is moving towards bulk buying (buying from hypermarkets ) and living a stylish lifestyle , effect of the heavy western influence. Increasing number of beauty parlours in the city, eateries, designer wear, watches, hi-tech products are a few examples which mirror these changes.
The seller market is slowing giving way to the buyer’s market. With economic liberalization initiated in 1991, new products have made way into the Indian markets, thereby increasing the product varieties. Import licensing restrictions have been abolished, and as a result an assortment of consumer goods has been flooding Indian markets. Indian consumers have always longed for foreign goods and with open-market policies being practiced by the government, their longings has apparently reached a fruitful end. It is widely believed that the Indian market will fuel the growth of multinational companies in the coming years. While most leading companies are cutting costs in the US and Europe, they see India as a strategic market, which can fuel their growth.