India’s Consumption Acceleration

To benefit from the spending boom, we need guideposts to understand which goods will see a surge in demand and when.

China;s economy is slowing down and so is its consumption.The demand for products in china is slowing down, so the world is looking for the next big demand provider or creater. So the natural choice is India , with population of 1.3 billion people and the median age is less than 30.So everyone is Interestingly studying the case for India.

For India, financial analysts and consultants are highlighting the consumption growth potential.They basically are using the model of consumption acceleration framework to track and project the growth potential of multiple countries at different stages of growth and development.

The Basic concept is that as the income rises, the rise in demand for specific goods and products are in-proportionate. The demand structure changes with rise in income. That is the spending increases, on different product with crossing of different income thresholds.

Taking a recent example for Gavelkar report, lets say the economy of a country increases from 10,000 $ to 12,500 $ with a growth of 25%, then the percentage of population earning more than 15,000 $ will not increase by 25%, but will increase by 7 folds from 2.3% to 15.9%.

This will lead to increase of demand for the products on the lines of the increase in income and not 25%.

And now the next challenge is to figure out the distribution curve to model this above mention accelerated consumption phenomenon. India’s economy does not have the ideal bell shaped distribution curve.In India’s GDP per capita of 2000$ ,more than 2/3rd of the population, earn less than 2000$.So, we have Long tail.Also we have a limited data on actual distribution.So the analysts have started looking at proxies like the consumption data from the Sample surveys.

The Next Question is about India’s growth is at what rate it will grow? It is expected that India will grow at 7-8% for the next 5 years and then taper to 7%.It is very important as growth in India’s GDP will play a very big role in India’s Consumption.

Second comes Urbanization . One needs to predict the accurate rate of urbanization as urban consumption is higher than rural consumption.Next,we need to find the income thresholds which will lead to increase in particular demand for goods and services.We can model the no.of families fitting up in the each income cohort in the coming decade and its likely impact on consumption acceleration.As each income Thresholds will drive consumption for particular Goods and services.One needs to make the income categorization.

As per Gavelkar report,cleanest categorization, has been formulated.These are broadly three categories.As per 2016 prices,1. First Category or the “Emerging Customer”. They will drive the demand for two wheeler and entry level Smartphone.2.Second Category is the aspiring customer.It has an income between 5 Lacs to 12 Lacs. They can buy entry level cars or start vacationing Overseas.3.Finally, the last category is the affluent customer with an income of over 12 Lacs. They buy designer brands and prioritize experience.

As per the current modelling of income growth rate and economic distribution on the above categorization., less than half the population economically engaged , as per Gavelkar’s reports, fall under these category.Today we have 7.1 Cr in Emerging Consumer Category,3.3 Crore in Aspiring Consumer Category and 1.8 Crore in affluent Consumer Category.All, total it is 12 crore.

Considering, the latest rate of Urbanization, and with growth rate of 8% till 2025 and tapering to 7% till 2030,the no. of customers in the Emerging cohort will double by 14 crore,the aspiring customer will triple by 10 crores and the affluent customer will quadruple by 7.2 crore.In total it will increase to 31 crore from 12 crore.Growth rate is very important here considering that in the case of a difference of 2% percentage points,(Difference between high growth rate and low growth rate), the customer in the top 2 category will reduce from 19 crore to 13 crore.So around 6 crores households will miss the chance of getting to the next higher income group.

Next we also need to analyze the trend,not only should we see how much households were added or removed in each income cohort, but how much were added from the below cohort.In 2009,0.25 crore were added to the emerging customer group.In 2019, 1.2 crore were added to the emerging customer group.The Last decade was the era of emerging customer group.and in 2025, 1.5 crore was added to the emerging customer group.But after that, it will become steady and saturate, and the affluent customer group will take the lead.In 2019, 0.4 crore will be added to it. and thereafter annually 1 crore will be added.In 2025, it is predicted that there will be 1.3 crore in this group.So India will move from emerging customer group to affluent customer group.It will cross the emerging customer group in new additions.

It will be an interesting implication to watch out for as the consumer consumption changes from emerging customer to affluent customer.In the coming decade we saw the consumption and increase in sales of goods and services favored by emerging customer for example the two wheeler tripled in sales from 7 million to 21 million.Not only that, the sales of basic consumer goods increased supported by all the income categories.

In the future , as the aspiring customer gets prominence the sale other goods will increase.One among them is car sales.In the last decade, the sale of passenger vehicle increased from 1.2 mil to 2.2 mil.It will accelerate further in the coming decade.By 2025,10 million new customer will enter the potential car purchasing income bucket per annum. The sale of Goods and services like Branded clothes, foreign travel will increase.

India will have its consumption acceleration dynamic, like in china and in other emerging markets.So, it is critical to understand that what this acceleration dynamic will look like, and what goods and services, will be impacted in what time frame.An analysis done like this by Gavekal and other will serve as an important guideposts to understand this acceleration dynamic and how to position for it.