The Hindu Business Line : `India set to become world's fifth largest consumer market by 2025'

Mumbai May 3 A study by the McKinsey Global Institute (MGI) says that if India's high economic growth rate holds steady, Indian incomes will almost triple over the next two decades and India will climb from its position as the 12th-largest consumer market today to become the world's fifth-largest consumer market by 2025.

The report, titled `The Bird of Gold: The Rise of India's Consumer Market,' by the MGI, McKinsey's economics research arm, says that more than 291 million people will move from 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. By this time, over 23 million Indians, will number among the country's wealthiest citizens, says the report.

"The emergence of a huge middle class is not a question of if, but when for India. Indian incomes will almost triple if the government forges ahead on a systematic reform programme, promotes competition, contains the fiscal deficit and inflation, and invests in infrastructure, healthcare and education. Our work with developing economies shows that such concerted actions are instrumental in boosting productivity, reducing poverty and providing people with more sustainable lifestyles," says Mr Adil Zainulbhai, Managing Director, India, McKinsey & Company.

MGI forecasts that aggregate consumption in India will grow in real terms from Rs 17 trillion today to Rs 34 trillion by 2015 and Rs 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. However, 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 Rs 48,632 in 2025 (or $1,064) — although this will still represent a tripling from today's level.

Income growth

MGI also found that income growth will be the biggest driver of increasing consumption, far outweighing population growth or any change in savings behaviour.

The report says the geographic pattern of India's income and consumption growth will shift too. Income growth will be fastest in urban areas where real average household incomes will rise from Rs 166,922 today to Rs 513,042 by 2025, an annual increase of 5.8 per cent.

It emphasises that India's rural areas will not be left on the sidelines. Average real rural income growth per household will accelerate to 3.6 per cent over the next two decades and consumption will reach today's average urban household level by 2017.

However, by 2025 the Indian consumer market will largely be an urban affair, with 62 per cent of consumption in urban areas versus 38 per cent 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 per cent of the population.

Within urban areas, India's middle tier and smaller cities will begin to emerge as increasingly attractive markets with substantial numbers of middle class customers. While Delhi and Mumbai will continue to be the country's biggest markets and the top eight cities will remain the dominant locations for upper-income global consumers, MGI estimates that almost two-thirds of India's middle class opportunity will lie outside these top-tier urban areas in cities such as Lucknow, Jaipur, Nagpur, Patna, Nasik, and Indore amongst others.

As Indian incomes rise, the report says, the "share-of-wallet" of consumer spending will change significantly too. By 2025 food, beverages and tobacco will still be the biggest category, although its share will have dropped from 42 per cent to 25 per cent, and this will be followed by transport and health care. Communications, which account for only two per cent of spending today, will be one of the fastest expanding categories with growth of over 13 per cent a year (on an aggregate basis). Apart from this, transport, personal products and services, health care, and education and recreation will all see over eight per cent annual growth and these categories will evolve into sizeable markets. India's relative share of world markets will rise in virtually every product and service category.

These findings are the results from a proprietary econometric model developed by MGI to estimate the future evolution of Indian consumption by income bracket across nine high-level and 30 more detailed product and service categories that cover 100 per cent of Indian household consumption.

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