The growth of India’s middle class and the
emergence of a consumer economy
Based on the article by
Eric D Beinhockner, Diana Farrell,
Adil S Zainulbhai
McKinsey Quarterly, 2007, No. 3
Introduction
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According to McKinsey Global institute, average
household incomes in India will triple over the
next two decades.
India will become the sixth largest consumer
economy in the world by 2025, up from 12th now.
In 2005, private spending reached Rs. 17 trillion
or 60% of India’s GDP.
But aggregate spending may be spread across
hundreds of millions of households.
They
may have very modest incomes by
developed country standards and show high
sensitivity to price and value.
Challenges
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There are large regional disparities in growth &
reduction of poverty.
 The southern and western states are more
prosperous.
 But the northern (with the exception of Delhi,
Haryana, Himachal Pradesh and Punjab) and
eastern states are lagging behind.
 India also remains the least urbanized (29%) of
the emerging Asian economies.
 Bureaucratic hurdles remain formidable.
 Infrastructure problems are plenty – urban
infrastructure is already heavily overburdened.
Growth of the middle class
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Along with the shift
from rural to urban
consumption, India will witness a rapid growth of
the middle class – households with disposable
incomes ranging from Rs. 200,000 to Rs.
1,000,000 per year.
 This class forms currently 5% of the population.
 By 2025, it may form 41% of the population.
 By 2025, the Indian middle class will dominate
the cities.
High Net worth individuals
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Those earning more than Rs. 1,000,000 a year
will make up 24 million by 2025 or larger than
the current population of Australia.
These people live in the eight largest cities.
They have a global outlook.
They have tastes similar to those of their
counterparts in the developed countries – brand
name goods, vacations abroad, the latest
consumer electronics and high end cars.
Changes in consumption patterns
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Increase in discretionary expenditures likely.
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Spending on health, education, transport and
communications will increase.
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Recreational products and services will account
for a smaller slice of household spending than in
other countries.
Conclusion
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MNCs are likely to find themselves squeezed
between the desire of the country’s consumers for a
modern middle class lifestyle and the realities of their
limited budgets.
In 2005, the average middle class family in India
spent just Rs. 300,000 or $6,600.
MNCs must be able to deliver an aspirational middleclass lifestyle to families on an Indian budget.
Companies should be able to come up with new
business models, products with carefully targeted
features and brands that appeal to the country’s
upwardly mobile people.