The Consumption Pattern of the Rising

Middle Class in India

Nov 25, 2012

India is one of the fastest growing economies in the world. In the past decade (2000-2010),
Indias gross domestic product (GDP) has grown at an average rate of 7.27 percent.
According to the Planning Commission estimates, the economy is projected to grow at the
rate of 9-9.5 percent during the 12th Five Year Plan period (2012-2017). GDP growth has
been accompanied by a rise in per capita income.
The real household disposable income has more than doubled since 1985. With the rise in
income, consumption patterns have changed and a new middle class has emerged, which is
growing at a fast pace. Various studies have forecasted that in the next decade middle class
would be the dominant section of the Indian population.
For instance, McKinsey & Company (2007) forecasted that if the Indian economy grows at
the rate of 7.3 percent between 2005 and 2025, then by 2025, 583 million Indians will be in
the middle class, which is equivalent to the current population of countries like Australia. The
share of middle class in the total population will increase from around 5 percent in 2005 to 41
percent in 2025.
They will be a predominant force behind the increase in consumer spending and will account
for 59 percent of the countrys total consumption by 2025. This will further strengthen
Indias position, which is emerging as a leading consumer market. In 2007, India was ranked
as the twelfth largest consumer market in the world and by 2025 it is expected to be the fifth
largest consumer market after the United States (US), Japan, China and the United Kingdom
(UK).
Who are the Indian middle class?
Globally there is no definition of the middle class.Moreover, the definition varies across the
developing and developed countries. There have been a few studies that have tried to define
the middle class. For instance, Birdsall et al. (2000) defined the middle class as those with
incomes between 75 percent and 125 percent of the median in each country. Bhalla (2009)
takes an absolute approach, defining the middle class as those with annual incomes over
$3,900 in purchasing power parity terms.
Banerjee and Duflo (2008) identified the middle class in developing countries as those
earning between $2 and $10 a day. The World Bank classifies economies into different
income groups that include categories such as low income - $1,005 or less, lower middle
income - $1,006 - $3,975, upper middle income - $3,976-$12,275 and high income - $12,276
or more.
In India there is no official definition of the middle class. Survey-based studies such as those
conducted by the National Sample Survey Organisation (NSSO) classify Indian households
into different income groups but does not specifically define the middle class. The National
Council for Applied Economic Research (NCAER) define the Indian middle class as those
whose annual household income falls in the income group of Rs. 2,00,000 - Rs.10,00,000
($4,000-$21,000) (see Table 1). The majority of other studies such as the McKinsey &
Company (2007) and Saxena (2010) have used the NCAER data and definitions of the Indian
middle class.

Whatever may be the definition used and the estimate of the size of Indian middle class,
different studies show that although the size of the middle class is now small compared to the
population, it is growing at a faster pace than the overall population and will be the largest
segment in the next ten to fifteen years.
Some key characteristics of consumption pattern of the Indian middle class
The growing middle class in India and their consumption pattern has drawn global attention
not only because India is a large market but it is also different from other emerging markets.
A large proportion of Indias GDP is consumed. The share of consumption in total GDP is
higher than that of investment. According to the Central Statistical Organisation (CSO)
estimates, 60 percent of the GDP was consumed in 2010 which is much higher than that in
China.
In India, the majority of the consumption expenditure is on food compared to other countries
(see Table 2). However, this pattern is likely to change in the future as expenditure on
discretionary items is increasing and that on food is reducing with the rise in income. With
the rise in income there will be a shift in Indian population from low-income to middle-
income and middle class will spend less on food than the low-income group.
Table 2 shows that the consumption pattern in India in 2025 is likely to be different from
2005, as the middle class will drive the consumption pattern in 2025. This class will be able
to and willing to spend on healthcare, education, recreation, personal products and services.

A recent survey conducted by the Boao Review Magazine across nine cities in Asia including
New Delhi, India, found that the consumption pattern of middle class in large cities in India is
not widely different from their global counterparts of other Asian cities, especially with
respect to spending on food.
The growing Indian middle class and their consumption will drive the consumer goods
market in the future. For instance, commodities such as cars and air-conditioners, which were
in the past considered as luxury items, are now considered as necessities. In fact, small car
ownership in India has shown a doubledigit growth. It has grown at a compound annual
growth rate of 12.7 percent for the period 2004-05 to 2010-11.
With the growth of the middle class, a number of Indians have upgraded from owning two
wheelers and using public transport to owning small cars. Due to the high demand in this
segment a number of international and Indian manufacturers such as Nissan, Renault and
Tata motors have forayed into the small car segment. There is a shift in preferences for
products. For instance, in the case of apparels the trend of getting shirts stitched has been
replaced by a rising demand for ready-made shirts. The changes in consumer demand will be
a major opportunity as well as a challenge for businesses as they have to gear their products
and business models to cater to the demand of the middle class.
This challenge is further propelled by the fact that the Indian middle class is not a
homogenous group. In food there are distinct preferences across states and even within states.
There are regional differences in branded and non-branded products and willingness to pay
for such products. For instance, based on a survey of 300 Indian middle class and high
income consumers Mukherjee et al. (2012) found that middle class Indian consumers in cities
like Kolkata and Chennai prefer Indian brands and mid-price ranges for products like shoes
and handbags while those in cities like Mumbai and Delhi prefer high-end/luxury brands or
unbranded products. The study also shows that preferences for brands vary across product
categories. As shown in Figure 1, for some product categories, such as watches and dietary
supplements, consumers largely purchase branded products. In categories like apparel,
footwear and handbags, they buy both branded and non-branded products, while in categories
like fresh fruits and vegetables,the bulk of the purchases are non-branded products.
This is due to reasons such as availability of brands, consumers perception about the quality
and reliability of brands, among others. In the case of fresh fruits and grocery there is limited
availability of brands. However, in the case of furniture even though branded products do
exist, Indians like to customize their products to suit their personal requirements and,
therefore, they prefer local carpenters.
There are also differences in perception and preferences for Indian and foreign brands.
Various studies highlight that the Indian middle class has a distinct preference for foreign
brands (Mukherjee et al, 2012).
Kumar et al. (2007) found that Indian consumers prefer American brands over local brands
for their uniqueness and good quality. Bandyopadhyay and Banerjee, (2003) based on a
primary survey of consumers in the cities of Ahmedabad and Calcutta, highlight that country-
of-origin is an important determinant of consumersshopping behavior and products of
advanced countries enjoy a positive country-of-origin effect. Results also indicate that foreign
products are not perceived differently even if they are manufactured domestically.
Unlike their global counterparts, the Indian middle class are less conscious of branded
purchases. Their brand knowledge and loyalty is also low (Mukherjee et al. 2012). This is
partly because the concept of branded products in India is relatively new and foreign brands
have entered into the market over the past two decades.
The majority of the luxury brands such as Giorgio Armani (Italy), Louis Vuitton (France),
Rino Greggio (Argentina), Signature Kitchens (Malaysia) and Crocs Inc. (United States of
America) (Chattopadhyay et al.,2011) have only entered into the Indian market after 2006
when the government allowed 51 percent FDI in single-brand retail subject to certain
conditions. Using an aided awareness technique Mukherjee et al. (2012)
found out that brands that are globally well advertised are more likely to be well known.
Indian consumers are also highly price sensitive. Kumar and Bishnoi (2007) used an
exploratory-cumdescriptive analysis and concluded that rural Indian consumers are willing to
buy a variety of products and brands if their prices are lowered in the future. A KPMG (2005)
study also concludes that within the fast moving consumer goods (FMCG) range, low priced
products constitute the majority of sales volume.

Impact of the rising middle class on economic growth
In future, the rise of the middle class and their consumption pattern is expected to bring
noticeable changes in the Indian economy. Rise in per capita income of the growing middle
class will further propel urbanization.
According to McKinsey & Company (2007), in 2005, around 53 percent of the consumption
was in the rural area but by 2025, 62 percent of the consumption will be in the urban area.
This will lead to development of smaller cities, which are now growing at a very fast pace.
These cities will host a large number of middle class and by 2025 around two-thirds of the
Indian middle class will be outside metro cities like Delhi and Mumbai.
The use of financial services by the middle class is likely to give a push to the growing trends
of retail banking and credit card usage. The middle class will also demand better healthcare
and education services. Since they will be willing to pay for these services, private companies
will have a role in Delhivery of these services.
Their discretionary expenditure on recreation activities, leisure travel, and entertainment and
luxury items will increase. As income increases, the middle class will not only diversify their
consumption baskets, but will demand better quality of and innovation in the products they
purchase.
Issues and Way Forward
The Indian middle class is growing at a fast pace and their consumption patterns are
diversifying towards discretionary expenditure. Their brand consciousness and demand for
luxury products is low but is likely to increase with rise in disposable incomes. In future, the
growing middle class will not only have a higher standard of living but will also invest more
on housing, health care, transportation and education, among others.
This will lead to economic development. While rise in demand for new services and
innovative products will fuel consumerism, higher expenditure on education will expand the
Indian human capital pool. However, there are certain issues which need to be addressed to
sustain the growth of the middle class.
In the past two years, on the one hand, annual household income of the Indian middle class
has been rising. On the other hand, there has been high inflation, especially food inflation,
which has impacted the real disposable income. To curb inflation, the government increased
interest rates which had a recessionary impact on consumer goods sectors like the car
industry and even slowed down the GDP growth rate. The GDP growth rate declined from
7.8 percent in 2010- 11 to 6.9 percent in 2011-12. This can have an adverse impact on the per
capita income and consumption of the middle class.
The middle class in India is increasingly demanding good quality and innovative products.
The poor quality infrastructure and poor Delhivery of services can create dissatisfaction
among the middle class. To fill this gap between demand and supply, the service providers in
the public and private sectors need to understand the growing and changing tastes and
preferences of the Indian middle class. To give an example, quality of education and
employability of the Indian labor force is a growing challenge. Since the rising demand for
education has not been matched by the limited supply of government-run institutes and
universities, there has been an upsurge of private educational institutes and universities.
However, there is no system of proper accreditation and the quality of education varies across
different institutions. There is also a gap between the level of formal education and on-the-
job skill requirements.
As the middle class are increasingly becoming willing to pay more for education they are
increasingly becoming dissatisfied with the quality of education and its employability.
In India the incidence of corruption and bribery is high. The middle class who is educated
and aware has started to express their discontent towards lack of transparency and poor
governance. This class is more receptive towards reforms. Mukherjee et al. (2012) pointed
out that the educated and middle-income class is more receptive towards allowing foreign
direct investment (FDI) in multi-brand retail. Reforms in India in the past few years have
slowed down creating further dissatisfaction amongst the middle class.
Today, the low-income groups form the majority of households and they are the majority of
the voters. The high-income group are the influential class but the middle class is virtually
ignored. However, with the rise in middle class, in future their demands cannot be ignored in
a democracy like India. Policy makers should now start to focus on the needs of the middle
class.
In order to ensure sustainable development of the Indian consumer market and maintain
Indias position of an attractive investment destination, it is important that corrective actions
are taken to address the issues mentioned above. The Indian government needs to encourage
investment in research and product development. Brand India is missing on the global front.
That is because the Indian government has always focused on developing India as a
manufacturing hub and little attention has been paid on developing and promoting Indian
brands. Indian manufacturers need to be encouraged to produce superior quality products
matching up with global standards. This will fuel demand both in the global market and
domestic market. To bring down the inflationary spirals the government needs to invest in
supply chain management. Robust infrastructure development is also needed to ensure
sustainable development of sectors such as retail and to reduce the rural-urban divide. The
quality of education should improve. For this the government needs to lay down basic
standards for both public and private institutes and universities. Also, there is need for setting
up vocational training centers for imparting specialized skills required in sectors such as IT,
healthcare, etc. Strengthening the governance mechanism is a prerequisite for equitable
growth and development. The Indian government also needs to pay attention towards
formulating regulations especially for sectors that have recently undergone major
developments such as the retail sector.
Although the Indian middle class has an important role to play in Indias economic
development and in the future will be the largest section of the population, there is hardly any
research in India which analyses their needs, consumption pattern, etc. and makes policy
recommendations. It is important for the Indian government to have regular survey- based
studies to analyze the consumption pattern of this class. Since India is not a homogenous
market, the study should have pan-India coverage to capture more variations in
consumersshopping behaviors and perceptions across different regions of India.