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Simplifying the Indian Consumer Market

Introduction

Most developed economies in the world are facing the prospects of

an ageing population and a shrinking consumer market. There is
therefore an urgent need to identify and tap larger markets abroad
and make inroads into them as soon as possible.

The growing Indian consumer market offers the prospects of

becoming one of the most attractive consumer markets of the world
in the near future. There are immense opportunities in terms of
mere scale and over time it is only natural that it will offer prospects
similar to those of a more mature market.

The large Indian consumer market, while immediately attractive,

can pose quite a conundrum as it is marked with wide diversity and
innumerable factors that subtly segregate its population. There are
about 6 major religions in India and about 15 official languages and
hundreds of dialects spoken across India. The Indian geographical
terrain is extremely diverse and at any given time of the year there
is an entire range of temperatures and weathers to contend with. In
addition, there are large differences in incomes, expenditure
patterns, education levels and cultures across people. All these
factors combine to make India a difficult market to tap.

This report attempts to simplify the Indian market by cutting it

across various factors that differentiate the Indian consumers. It
must be noted that while the Indian consumer market can be
divided into many segments, each segment is large in itself and
holds the potential of becoming an attractive market for a range of
products.

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Indian market is not much smaller than China

Currently the Indian population is estimated to be about

1,169,016,000 people. This is about ten times the current Japanese
population. In China, the population is only slightly larger at about
1,328,630,000. According to estimates from the United Nations’
World Population Prospects of 2006, India is slated to overtake China
in terms of the total size of the population by 2025.

Total Population ('000s)

1,750,000

1,400,000

1,050,000

700,000

350,000

0
1950 2007 2015 2025 2050
India China USA Japan

Source: United Nations’ World Population Prospects, 2006

About 51 percent of the Indian population is male. In the Indian

patriarchal society, the head of the household is generally the
oldest male who is also the main earning member. The women of
the household are responsible for taking care of the family and are
generally the ones who make the decisions relating to food and
other non-durable items.

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Population by Gender ('000s)

1750000

1400000

1050000

700000

350000

0
2001 2005 2010 2015 2020 2025
Males Females

Source: Population Projections for India and States, 2001-2026, Census of India
Working population in India is mainly accounted for by
males

According to the latest population census in India (2001), only about

a quarter of the female population works in India while about 52
percent of the males are workers. Women in India are generally
home makers and are involved in non-economically productive work
within the household.

Working Population in India

Millions
600

500
400
300
200
100 Total population
- Worker population
Male
Female

Source: Census of India, 2001

More males in India are literate than females

Even as India continues to touch new heights in terms of economic

growth, its performance in terms of social indicators such as
education continue to remain dismal. According to the 2001 census,

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about 63 percent of males and only 45 percent of the females in

India are literate. Literacy rates in urban India are far better than in
rural areas in case of both males and females.

Literate Population in India

Millions
600

500

400

300

200

100
Total population
- Literate population
Male
Female

Source: Census of India, 2001

India has a large rural base

A large differentiator in the Indian consumer market is also the

factor of urbanization. About 70 percent of the Indian population
currently resides in rural areas of India. However, merely the urban
population of India is about thrice the size of the total Japanese
population. Moreover, with rapid economic growth in India, rural
areas are quickly urbanizing with a strong purchasing power present
even in the rural areas of India.

Population by Area ('000s)

1750000

1400000

1050000

700000

350000

0
2001 2005 2010 2015 2020 2025
Urban Rural

Source: Population Projections for India and States, 2001-2026, Census of India

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With the completion of the golden quadrilateral (a network of

highways connecting the 4 large metros of India—Delhi, Mumbai,
Chennai and Kolkata) and progress of the east-west and the north-
south corridors across India, smaller towns are increasingly evolving
into attractive consumer markets with a large and affluent middle-
class.

India is a young country with a median age of about 24

years

In 2005, the median age in India was about 24 years, which is much
lower compared to the median age in China, USA and Japan.
Moreover, even as late at the year 2050, India will be a fairly young
population with a median age of 38 years. By that time, Japan would
have a much older population with median age of about 55 years. It
is no wonder then that the Indian workforce is being heralded as the
future workforce of the world.

Median Age (Years)

USA 36.0
41.1

India 23.8 2005

38.6

42.9 2050
Japan
54.9

China 36.5
55.5

World 28.0
38.1

0.0 10.0 20.0 30.0 40.0 50.0 60.0

Source: United Nations’ World Population Prospects, 2006

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Children account for about one-third of the current Indian

population. This figure would, by 2050, translate into India
accounting for the world’s largest working age population. This
revelation has led to the notion of India enjoying a 'demographic
dividend' that is expected to sustain a growth rate of over 3 percent
even as late as 2050.

Age-wise Classification, 2005 Age-wise Classification, 2050

100% 100%

80% 80+
80%

60% 60+ 60%

40% 15-59 40%

20% 0-14 20%

0% 0%
World India China USA Japan World India China USA Japan

Source: United Nations’ World Population Prospects, 2006and IBMI calculations

India is soon to have the largest middle class market in the

entire world

According to a recent study conducted by MGI, the Indian consumer

market is set to undergo a major transformation. By 2025, India is
estimated to climb from its current position as the world’s 12th
largest consumer market to become the world’s 5th largest
consumer market. More than 291 million people are expected to
move out of abject poverty to a more sustainable lifestyle and the
size of the middle class is expected to swell by over ten times from
its current size of 50 million to 583 million people. Moreover, more
than 23 million Indians will get added to the group of the country’s
wealthiest citizens by 2025. This well-being is expected to spread
across the rural areas as well, with annual real rural income growth
per household expected to accelerate from 2.8 percent (since the
past 2 decades) to 3.6 percent over the next 2 decades.

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As the incomes in India continue to grow on the back of strong

overall economic growth, income dynamics in India are expected to
set in. According to MGI, in 2005, the Indian middle class was still
relatively small comprising 5 percent of the population or 13 million
households (50 million people). By 2025, the Indian middle class is
expected to reach 41 percent of the population or 128 million
households (583 million people). This would come along with
households with real earnings of more than 1,000,000 Indian rupees
a year (that is about more than global $21,890 or $117,650 at PPP)
comprising approximately 2 percent of the population but earning
almost a quarter of its income.

Aggregate Disposable Aggregate

No. of households (Millions)
Income (USD Billion) Consumption (USD
Billion)
100% 3.6
10.9 78.8 48.1
42.6

80% 67.8 46 669.6

>$10940 932.2
94.9
60%
$4380
313 - $10940
48.1
46
670
276
538
192.4
2

40% 367.6 669.6 275.7 538.3

<$4380 143
20%
356.7 312.9

0%
2005 2025 2005 2025 2005 2025

Source: The 'Bird of Gold', The Rise of India's Consumer Market, MGI, 2007 and IBMI
calculations

Indian spending patterns will also change as a result of the

increased affluence. From spending on basic necessities such as
food and apparel, the expenditure will shift to more sophisticated
expenses such as communications and health care.

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Clear rural-urban distinction in spending pattern

Rural and urban India are distinct in terms of the extent of average
expenditure, with the urban areas exhibiting a higher cost of living.
According to the 2004-05 data from the National Sample Survey
Organisation of India, rural India spends Rs. 560 on an average in
terms of monthly per capita expenditure (MPCE). However, urban
India spent almost double the amount at about Rs. 1052 per month
per person.

The current pattern of consumer expenditure is depicted in the

following chart:

Monthly Per Capita Expenditure (Rs.)

1000 81 Misc. consumer goods &

43 taxes
49 Durable goods
108
800 Clothing & footwear
59
69 Medical & education

600 74
Rent
34
19 105
30
Conveyance
52
3 21
400 21
57 Other consumer services

Fuel & light

464
200
323 Food, pan and intoxicants

0
Rural (Rs. 560) Urban (Rs. 1052)

Source: National Sample Survey Organisation, India

Food products account for a large share of the consumption basket

in both urban and rural areas of India. Fuel and light and rent

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account for a larger share of urban expenditure than in rural areas.

Rural and urban India are not very different in terms of the extent of
expenditure on clothing and footwear. Urban India, with its higher
incomes, spends more on miscellaneous consumer goods and other
consumer services than its rural counterpart.

However, with increasing income across India, spending pattern is

expected to change across the board. Increasingly the average
Indian consumer will be spending more on discretionary items than
on basic necessities. The share of food products is expected to
reduce from about 42% in 2005 to about 25% by 2025. The share of
expenditure on health care, education and recreation and personal
products and services is in turn expected to increase. The retail
market in India which was estimated to be worth USD 230 billion in
2005 is projected to reach USD 310 billion in another 3 years.

The Indian government appears to be consistent towards opening

up its doors to foreign investment in almost all sectors of the Indian
economy. The Indian government has allowed 51% FDI in single
brand retailing in India. The benefits of such a policy can be best
enjoyed by the nascent retail sector.

The time is right for international retail companies to enter the

Indian market and gain first mover advantage. Wal-mart has already
entered into a joint venture with Bharati Group of India. Itochu of
Japan has already set up cash and carry wholesaling operations in
India which entails the building of distribution infrastructure to
assist local manufacturers. Almost 95 percent of Indian retail market
is still unorganised and offers great potential for increased
investment, especially given the increasing prosperity of the
average Indian consumer. Large global retail brands such as
McDonalds, Adidas, Dominos, among many others have already
established a strong presence in the Indian market.

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With India topping the list of emerging markets for global retailers
and expectations of becoming the third largest economy after China
and USA by 2032 it is only natural that brands and retailers across
the world are seeking to make their presence felt in the large and
diverse Indian consumer market.

----- Next Publication Plan -----

1. Regional Consumer Report1: Northern India—August
31, 2007
2. Regional Consumer Report2: Western India—
September 3, 2007
3. Regional Consumer Report3: Southern India—
September 4, 2007
4. Regional Consumer Report4: Eastern India—
September 5, 2007

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