Connecting the Pieces in India’s Business Puzzle
Two of these reports delivered sober wake-up calls for government policymakers and business executives alike. The Indian government released data providing the first detailed look at the country’s socio-economic makeup in decades. The findings show that the rural population, which constitutes much of the overall Indian population, is poorer than expected. Specifically, half of the rural population lacks regular sources of income, does not own any farm land, and survives mainly from casual manual labor. In aggregate, 70 percent of rural households survive on less than US $4 a day. And according to a media report, data that has not yet been unleashed shows a third of urban households live beneath the poverty line.
The second wake-up call came via a Pew Research Center analysis about the global middle class. It concludes that while India was successful in slashing the poverty rate in the 2001-2011 period, there was little resulting growth in the ranks of the middle class. The share of the low-income population (defined as living on US $2-10 per day) increased significantly – from 63 percent of the overall population in 2001 to 77 percent in 2011, but the share of the middle class (defined as living on US $10-$20 per day) rose much more slowly – from 1 to just 3 percent in the same period. In contrast, the share of Chinese who are middle class jumped from 3 percent to 18 percent in that time frame.
The report notes that there is no burgeoning middle class in India as is commonly made out and that a vast number of Indians are “still a ways from the transition to middle-income status.” It chalks up these findings to the lack of deep and far-reaching economic reforms in the country.
But the research gurus also delivered good, if contradictory, news. A report by the India unit of Fitch Ratings offers a dynamic and optimistic portrait of the rural economy. As it sees things, the decline in the share of farm-generated income in the rural economy has been driven by the growth of the industrial and service sectors in non-urban areas over the last decade, resulting in a number of beneficial outcomes:
- The rural economy is now less dependent upon the vicissitudes of the annual monsoon season
- The rural economy’s share in overall GDP has rebounded from its decades-long decline and now constitutes well over half of national GDP.
- Rural consumer spending on discretionary items has risen markedly.
Tata Motors, part of the iconic Tata conglomerate, is convinced that the rural economy holds the keys to the future. It plans to open more than 1,000 new car outlets over the next four years in smaller cities and towns, and expects the rural market will grow faster than the urban one in the future. Its latest annual report states:
Growing wealth in the rural markets of India also provides an added opportunity to expand sales reach and volumes. Sales from areas that were earlier considered rural are growing year-on-year and the overall gap of automobile purchase between rural and urban areas is narrowing.
Snapdeal, one of India’s largest online marketplaces, is also thinking along similar lines. It has plans to install e-commerce kiosks in thousands of rural areas by the end of the year and is assessing other opportunities for tapping into the rural market.
An Economist Intelligence Unit study estimates that overall consumer spending in India will increase from US $1 trillion in 2013-14 to US $2.4 trillion in 2018-19. It reports that “the rapid growth in personal incomes combined with a more open domestic market will make India an increasingly attractive market for foreign companies.” It adds, however, that even middle-class households will continue to have sharp limits in disposable income. “Higher-quality products certainly appeal to the country’s consumers, but price remains the main determinant of the level of demand.”
On a related note, a recent piece about how Amazon missed out on China but now sees India as its next big opportunity, quotes a Morningstar analyst as saying:
India represents a potentially lucrative consumer-spending market. India’s population could surpass China within the next 10 years, and urbanization and wage rate trends suggest a long consumer spending tailwind.
A new report projects India’s consumer electronics and appliances market to total $20.6 billion by 2020, in part due to rising disposable incomes. It expects per capita income “to expand at a CAGR [compound annual growth rate] of approximately 6.6 percent during 2013-2019, from $1,500 in 2013 to $2,200 in 2019.”
The report foresees future growth in the sector will be “driven by the rural market, as the government increases its focus on rural electrification.” It also adds that India will rank as the world’s fifth-largest market for consumer durables by 2025.
Wealth-X, a consultancy focused on the ultra rich, reports that the rise in Indian wealth creation has been particularly impressive over the past year, with the number of millionaires jumping 27 percent. Accompanying this was an equally substantial increase in luxury consumption. It forecasts that India will continue to generate new millionaires at a rapid pace, a development it attributes to rising levels of education and entrepreneurship. The report concludes:
[India] has a young, well-educated population with high levels of entrepreneurship and business ownership, underpinned by a well-developed legal system. As such, wealth creation opportunities will be great, with a comparatively benign macro environment.
A study commissioned by Visa spotlights the growing affluence among India’s youthful population. It pegs the average annual household income of the country’s affluent consumers at 1.5 million rupees, or approximately US $24,000, with an average age of 34 years, younger than their peers in most Asia Pacific markets. It states that a strong majority of these are optimistic about the country’s economic prospects.
Underscoring the point is this media report on how young entrepreneurs are flocking to India’s first luxury goods mall located in South Delhi. It quotes the mall’s vice president as saying:
There is a lot more new money because a lot more people are self employed, even the women are employed and you find that the pay packages are so much better, there is a lot more disposable income.
Confused by the conflicting data? The World Bank offers some perspective, noting that while per-capita income in India rose nearly 10 percent in 2014, the country nonetheless ranks a dismal 169th in terms of per-capita income levels in the world.