INDIA IS POISED to become the third-largest consumption market by 2026, says a report by UBS. At present, it is the fifth-largest and one of the fastest-growing economies. At current prices, India’s household consumption nearly doubled between 2013 and 2023 to $2.1 trillion or ₹168 lakh crore (assuming $1 at ₹80) at compound annual growth rate (CAGR) of 7.2%. China’s 10-year CAGR is 7.1%; U.S. is at 5% and Germany at 1%.
Not surprising perhaps considering that in April 2023, India surpassed China to become the most populous country in the world; and a rising population boosts overall consumption. The twist in the tale, however, is the dichotomy in consumption patterns. India shows no sign of diverting from the K-shaped recovery that had started after the pandemic. Top 4% of its earning population is contributing heavily to consumption, while the bottom 57% seems to be barely subsisting.
The Dichotomy
Household consumption, or private final consumption, is 60% of nominal GDP. However, the recovery in consumption after the pandemic has been uneven in terms of discretionary/services spending versus consumer staples; rural versus urban; and premium versus broad-based demand.
The dichotomy is stark. While categories such as premium cars, housing and smart phones seem to be doing well, demand for entry-level and mass-market goods such as small cars, two-wheelers and affordable housing has been muted. For instance, demand for luxury/premium cars, mid-size SUVs and large UVs rose 34% in FY24, while demand for entry-level variants of small cars and sedans dipped 16%.
International Data Corporation says while smartphone sales (in volume terms) rose a modest 1% in 2023, premium segment (greater than ₹40,000) and mid-premium (₹25,000-40,000) grew 55% and 27%, respectively. Budget smartphone (less than ₹25,000) volumes fell 12%.
A UBS report says, though, rural economy has recovered from the lows of the pandemic, the urban economy continues to outperform. The bottom 20% households in urban and rural areas spend almost 80% of their budget on food, fuel, electricity and clothing. On the other hand, top 20% urban households spend about 50% on services and discretionary items like travel and leisure. Top 20% rural households spend about 30% on services and discretionary items.
A similar divide is visible in consumption of services if you look at domestic air passenger traffic, which has surpassed pre-pandemic levels despite capacity constraints and other supply issues leading to higher ticket prices. Domestic air traffic was 15.4 crore in FY24 compared with 14.1 crore in FY20. Similarly, data from MakeMyTrip, which caters to the mid/premium segment, suggests hotel bookings recovered sharply after the pandemic despite an increase in prices. MakeMyTrip says there is also a trend of customers upgrading from mid to premium segment.
Income Pyramid Shifts
As per Euromonitor UBS data of Indians older than 15 years, in 2010, there were 1.2 crore people in India with gross annual income of more than $10,000. They constituted 1% of population aged 15-plus. These are the ‘affluent’ consumers. At the same time, 61.2 crore people, or 72% of the population, had gross annual income of less than $1,500. Around 87% population earned less than $2,500 and only 4% earned more than $5,000.
In 2023, 11% Indians earned more than $5,000, of which 4%, or four crore, earned more than $10,000. The number of those at the bottom of the pyramid, earning less than $2,500, shrank to 71%. And 50% of the population, or 53.8 crore, earned less than $1,500. The affluent segment will grow at 17% CAGR in next five years, which means an estimated 8.8 crore or 8% Indians over 15 will earn more than $10,000 in 2028, says the UBS report.
The expansion of the affluent segment and growth in sale of premium products in sectors ranging from automobiles to gadgets travel and tourism, suggests premium goods and services will dominate. Essentially, businesses catering to the affluent will do well.