Why great Indian middle class consumer is a Myth

Why great Indian middle class consumer is a Myth

For an economy to grow sustainably over the long run, its consumption spending must be broad-based. However, consumption patterns in India are highly asymmetrical: the top 25% of India’s population accounts for 52% of its annual consumption; and approximately 75% of it is unable to spend more than Rs 5,000 a month, according to a report by Kotak Securities, a Mumbai-based securities company. It is now expected that 64% of the country’s population could remain in the low-spending category even in 2020. 

 

Infrastructure

While China also faces consumption-related challenges, in recent years, the government has taken many initiatives to boost demand. The most notable among these initiatives is a massive infrastructure investment programme that will enable marketers to transport goods and services to the less-accessible parts of the country. Infrastructure project will also create new jobs, which will improve household spending capacity. 

 

Bank accounts 

Ease of banking access is critical for consumption growth in an economy. This is because easy access to bank branches lures people towards saving a part of their income and depositing it in a bank to earn interest. These savings are mobilised by banks in the form of loans offered to consumers and businesses. Consumers use these loans to purchase cars, homes etc.; whereas businesses invest them in further growth. The growth so generated allows them to hire more people, at better wages, which improves the spending ability of the country as a whole. At present, more than 50% of India’s population contributes 1.5% to its total savings deposits. This is largely because close to 70% of the country’s population still resides in rural areas where banks- particularly private sector banks – have not been able to establish a credible rural presence. The government has taken some steps, such as the direct transfer of subsidy and the Pradhanmantri Jan Dhan Yojana, to improve bank account ownership. However, the disappointing execution has led to limited success. 

 

E-commerce 

As we rapidly progress towards an era where most purchases will take place online, the penetration of e-commerce will be one of the key parameters for evaluating a country’s consumption ability. The Kotak report referred to earlier, suggests that 40 million people are expected to actively shop online in India in 2015. In comparison, Alibaba, a Chinese e-commerce company, estimates that it actively served 255 million people in 2014. The average number of transactions per buyer for Alibaba stood at close to 49.8 in 2014, whereas in Indian, assumptions for 2015 stand at 4. Talking in aggregate terms, most Indian e-commerce companies estimate that 300 million Indians will shop online in 2020. However, results of Kotak’s analysis suggest that these estimates are farfetched. Most people who e-commerce companies expect to join the online market by 2020 are already on the internet, and possibly shopping. Consequently, e-commerce companies must focus on acquiring a larger share of the online spending of the existing 100-150 million online customers (which only translates to about 1% of India’s population) than trying to acquire new ones.

Happy Investing

Source:Yahoofinance.com