The size of consumption: a tale of two countries

Consumption by the Indian consumer has increased threefold and there are few parallels in history of this kind of increase in income and consumption

 

Govind Singh’s weather-beaten face tells two stories. The broad toothy smile tells the story of a man who is now happy with life; the lines around his forehead hint to the fact that life has not always been easy. Singh, who has spent all his life in Jaipur, is a 40-something who has moved from abject poverty to middle-class prosperity in the last 20 years.

“My family was really poor and I started working as a daily labourer when I was about 16 doing odd jobs at construction sites on days when the contractor needed an extra hand,” he recalls. “The hours were long and punishing; the work itself was physically exhausting, the working conditions were harsh and unsafe, and the daily wages a pittance. But I had no other opportunities, and so I did this for a few ye

ars.”

Today, he earns more than Rs.6 lakh per annum, more than a 10-fold increase in 20 years. And middle-class symbols of early consumption success are all around him: a TV by LG, a refrigerator by Godrej, a Hero motorcycle. Singh is a recent addition to the Indian consumptive middle class.

Throughout history, India has had a small elite class at the very top, the overwhelming majority at the bottom and nothing much in the middle. Most people, whether in the cities or the villages, were really living at subsistence levels. According to estimates by the National Council for Applied Economic Research, in 1995 nearly 80% of Indian households were “deprived” (or having income below Rs.90,000 per annum) and the middle class was still a small fraction of India’s households.

This picture has changed dramatically in the last two decades and is expected to continue in the same direction. According to Boston Consulting Group estimates, the number of aspirer and affluent households increased from less than 15 million in 2000 to 48 million by 2010. It is this middle class with its new-found earning power that is underpinning the dramatic growth in consumer spending. The aggregate consumption by the Indian consumer has increased threefold from Rs.15 trillion during 2000-2010. There are few parallels in history of this kind of increase in income and consumption.

In this context, it is instructive to examine the one country that has witnessed a similar increase in its economy—China. Comparisons with China tend to focus on infrastructure—roads, ports and the high-speed trains, and how India lags China by 20-30 years. The picture on the consumption side is somewhat different. At an aggregate level, China appears to lead India by seven-eight years. India’s gross domestic product per capita (by purchasing power parity) was about $4,100 per annum in 2013—nearly the same as China’s $4,180 per annum in 2005. The same trend holds true for personal disposable income and private consumption as well. We then plotted the per capita consumption of fast-moving consumer goods (FMCG) and durables in the two countries, and here the gap is closer to 10 years.

Our work shows that the increase in consumption in China has been driven by similar stories like India’s Singh. Ma Guojun is typical of the middle class in China. Born near Xining, the capital city of Qinghai province, he grew up in a poor family, the eldest of three boys. His father worked for the local electricity company. As it turned out, Ma performed only modestly in his gaokao, the national college entrance examination, secured a place at a university in Shenyang and completed his postgraduate studies from Beijing. Ma then got a job as a researcher with a manufacturer of metallic products in Beijing. His annual salary was 60,000 renminbi, or about $9,400. Four years later, he moved to his hometown of Xining at a salary of 80,000 renminbi. He now owns a small apartment—thanks, in part, to a gift from his parents—and he has many of the things that he wanted: a TV, a computer, a mobile phone. He has a strong appetite for more: more goods, more savings, more comforts. He has achieved “the first half of his dreams” and is eager for more.

As the stories of Singh and Ma illustrate, the rise of the middle class and consumption has many parallels (and some differences) across the two countries. We estimate that the number of aspirer and affluent households is likely to nearly double from 48 million to 103 million from 2010 to 2020. Our cross-country/category analysis suggests that the aggregate consumption is likely to increase from Rs.45 trillion to more than Rs.150 trillion in the same time period—a nearly 3.5-fold increase.

The next step is to examine what really are the drivers behind this consumption increase, how it varies across categories and what role digital technology plays in this entire scenario.