The affluent now lead India Consumption Story

India is poised to become the third largest consumption market of the world by 2026, states a report by UBS. At present, India is one of the fastest-growing economies and the fifth largest consumer market in the world. At current prices, India’s household consumption nearly doubled between 2013 and 2023, to $2.1 trillion, or ₹168 lakh crore (with $1 considered equivalent to ₹80) at an annual compound growth rate of 7.2%. At the same time, the 10-year CAGR for household consumption in China is 7.1%, the US is 5%, and Germany is 1%.

In April 2023, India surpassed China in terms of population and became the most populous country of the world. Hence, it is quite understandable that the consumption story of India will also boost due to the rise in population. The twist in the tale is, however, the dichotomy of Indian consumers. India took a K-shaped recovery path post the pandemic and shows no sign of diverting from that path. The top 4% of India’s earning population is contributing heavily to the country’s consumption while the bottom 57% seems to be barely subsisting.

Consumption dichotomy in India:

Household consumption in India, or the private final consumption, constitutes 60% of nominal GDP, currently. The underlying recovery in consumption growth post pandemic is uneven in terms of discretionary and services spending versus consumer staples; the rural-urban divide; and affluent versus broad-based household demand.

The dichotomy is quite stark within the consumption basket. While the affluent consumer segment demand, like SUV or premium car sales, premium residential housing sales; premium Smart-phone sales etc. seem to be doing well, demand for entry-level and mass-market goods, entry- level car demand, two-wheeler sales, affordable housing sale etc. has been muted since the pandemic.

Demand for luxury and premium models, mid-size SUVs or large UV sales, was up 34% YoY in FY24, while for entry-level variants, entry level small cars or sedans was down 16% YoY in FY24.

According to data from International Data Corporation (IDC), while overall smartphone sales (in volume terms) were up a modest 1% YoY in 2023, premium segment (greater than ₹40,000) and mid-premium (₹25,000 - ₹40,000) sales have grown 55% and 27% YoY, respectively. Budget smartphones (Less than ₹25,000) sales volume fell 12% YoY in the same period.

The UBS report also states that though the rural economy has recovered from the lows of the pandemic period, the urban economy continues to outperform.

As per USB data, the bottom 20% households in both urban and rural areas end up spending almost 80% of their overall consumption on food, fuel, light (electricity), and clothing. On the other hand, the top 20% urban households spend about 50% for consumption of services and discretionary items, like travel, vacation and leisure etc. Even the top 20% of rural households spend about 30% on consumption of services and discretionary items.

The dichotomy of services consumption is also supported by various consumption data like the domestic air passenger traffic, which has surpassed pre-pandemic levels, despite capacity constraints and other supply issues leading to higher ticket prices. Notably, domestic air passenger traffic was 15.4 crore in FY24 compared with 14.1 crore in FY20. Similarly, in hotel bookings on MakeMyTrip, which caters to the mid/premium segment, suggests that hotel bookings sharply recovered post the pandemic, despite an increase in prices. Within this trend, MakeMyTrip also notes customers upgrading, such as, from mid-segment to premium.

Shifts in India’s Income Pyramid, past, present, and the future:

As per Euromonitor UBS data of Indians older than 15 years, in 2010, there were 1.2 crore people in India with a gross annual income of more than $10,000, and these constituted 1% of the country’s total population aged more than 15 years, these are called the ‘affluent consumers’. At the same time, 61.2 crore people, or 72% of the country's population was earning less than $1,500 as gross annual income. A total of 87% of the population earned less than $2,500 annual gross income, while only 4% earned more than $5,000.

In 2023, there were 11% Indians, older than 15 years, earning more than $5,000 gross income annually, of which 4% of the population, or 4 crore people, earned a gross annual income of more than $10,000. The bottom of the income pyramid shrank to 71%, who earned less than $2,500 gross annual income, and 50% of the population, or 53.8 crore, earned less than $1,500.

In 2028, the UBS report estimates that the population in the affluent segment will see a CAGR of 17% in the next 5-years, therefore an estimated 8.8 crore, or 8%, of Indians over 15 years will be earning more than $10,000 gross, per year.

What this means for the future?

The expansion of the affluent consumer segment and the growth of the premium segment within various sectors ranging from automobiles to gadgets, to travel and tourism, suggests that the future will be dominated by premium goods and services. The India consumption story, which was dominated by mass-market brands, would now be led by premium, discretionary brands. Thus, not only the companies that are already catering to the affluent consumer segments will do well but also the shift in consumer preferences will force the mass-market companies to diversify their portfolio to serve this segment.