Posted On 2018/06/11 By In Shopping, Luxury, Middle Class, Family, News, Research With 63 Views

India’s “Invisible” Middle Class

Consumer goods firms worldwide are optimistic about their current and future investments in India, and with good reason. India’s potentially massive consumer base seems like a prime investment opportunity for many global firms. Apple CEO Tim Cook even compared the nation to China before its economic boom, praising the government and making encouraging promises of increased future investment. Although this optimism may be well placed, for now, India’s consumer goods market has a very defined ceiling. Because massive income inequality has limited the size of a consumer middle class, the market is less profitable than one may expect. This inequality and lack of consumer spending have been driven by systemic issues, bad policy, and cultural differences between India and other countries.

A prime example of this plateau can be seen in the e-commerce industry. In the early 2010s, e-commerce grew at a steady rate of nearly 50 percent a year, before suddenly booming in 2014 and 2015, experiencing revenue growth rates of around 150 percent both periods.  Such figures led analysts to predict explosive growth in the e-commerce industry, only to be disappointed by near-zero growth in 2016 and growth of a meagre 25 percent in 2017. Stagnating revenue growth among multinational companies such as McDonald’s, Starbucks, Unilever, and Zara, brands which are indicative of the global consumer class, show reasonably similar trends. Although advertisements for iPhones loom over metropolises like Delhi and Mumbai, for 90 percent of Indians, an iPhone still cost 5 months of salary or more. These trends suggest that those who can afford these luxury goods are already buying them, and the rest of India likely doesn’t earn enough to purchase them regularly, leading many, to conclude that India lacks a true consumer middle class.

A variety of structural issues have stifled Indian development. Of these, a fragmented and inadequate educational system is perhaps most notable. Most Indian children get 6 years or less of schooling, and nearly one-third of adults are illiterate. The size of a potential workforce is inhibited by poor nutrition, which affects 38 percent of children under the age of 5 and can permanently stunt physical and mental development. Additionally, nearly 90 percent of the workforce is employed in the informal sector of primarily small or micro-firms, which often lack the motivation, resources, or organization to expand beyond their current size; should a business owner choose to expand, he or she will likely be stifled by the inefficiency of India’s vast bureaucracy. The number of women participating in the workforce is falling, having dropped from 37 to 28 percent in the last 10 years.  A large urban-rural wage gap has left those living in the rural parts of the country, nearly two-thirds of the population, in fairly dire economic conditions. The richest 1 percent of the Indian population holds over 58 percent of the wealth. Overall, a variety of indicators show that India still must develop before it reaches its full economic potential.

Although many policies and schemes have been introduced to improve India’s economic health, well-intentioned government interventions such as demonetization have been unsuccessful due to poor execution. Recent records indicate that demonetization has more visibly hurt the working class than the parallel economy they targeted. While some speculate that demonetization may, in the long term, decrease income inequality by targeting wealth funneling through corrupt, cash-based economies, the veracity of this claim can only be confirmed with time.

The economic state of affairs, however, in India is not altogether abysmal. Many indicators suggest that the nation is shrugging off some of the entrenched societal issues hampering its growth.  The youth literacy rate is 86.14 percent, significantly higher than that of adults. Although women’s employment has been decreasing, it has increased in urban areas, where wages are much higher than in rural areas. Women are closing the higher education gap, making up 46.8 percent of undergraduate students, which makes them better prepared for high-paying jobs that would allow them to purchase consumer goods. India’s youth population (the world’s largest) is significantly healthier, better educated, and according to recent research, more aspirational than the earlier generations before them. This aspiration, coupled with the tools provided to achieve greater prosperity, suggests that today’s youth will grow into a more strongly-established middle class.

Business leaders are also excited about steps taken by the government to encourage investment and commerce. Prime Minister Narendra Modi campaigned on a vision of economic prosperity, and though he has not instituted the sweeping reforms promised during the campaign, he has pledged to boost India’s economy and possesses the desire to boost it further.  One major development has been the implementation of the GST, a standard Goods and Services Tax (which is weighted based on the “luxury status” of the item).  The GST replaces a convoluted and poorly-understood tax system with a more expansive tax tent that would cut tax evasion and bureaucratic waste while formalizing India’s mostly informal economy. Like demonetization, the implementation of the GST has been marred by poor execution; its insufficient online portal and taxes on the transport of goods have hobbled its development. However, lower taxes on less “luxurious” items are likely to increase the purchasing power of the aspiring middle class, opening up the possibility of increased consumption in the long run.

One fallacy in many of the arguments which seek to superimpose the consumer cultures of China, the United States, or any other nation upon India, is that the cultures and economic contexts are simply different. The Indian market economy cannot rely on state projects (as China has) to create a massive manufacturing boom to propel itself into economic prosperity.  Even if it could, manufacturing no longer has the same job-creating potential due to the general global trend of automation.  Furthermore, Indians who earn enough to purchase consumer goods are often restricted due to a general cultural ambivalence towards heavy spending, with many prudently investing first in necessities such as education and healthcare. These cultural patterns are beneficial for maintaining future economic prosperity but certainly have slowed market growth in the present. After this, most Indians are interested in purchasing more basic material goods, such as refrigerators, cars or scooters, televisions, air conditioning, and computers.  Right now, only 3 percent of Indians own all five of these items, and it is likely that we will see a growth in these markets before other consumer goods. Consumption metrics that rely primarily on western-centered multinational corporations also fail in India, since Indian consumer tastes don’t necessarily align with those in western markets. In fact, many markets for expensive western goods are being swallowed by those for cheaper Indian or Chinese ones: iPhones are replaced by cheaper Chinese analogs and McDonald’s is far less popular than other local chains tiered more to consumer tastes and purchasing ability.

Although the middle class’s growth is limited for now, it is important to remember, in a country as populous as India, that its volume is vast. This, coupled with a political openness towards foreign investment over the last 30 years, still makes India a lucrative financial opportunity. However, for India to be the investment many claim it to be, the systemic issues that drive its inequality must first be addressed. As equality improves, the middle class will grow, improving purchasing power and growing the market for consumer goods. Investment in India is being driven by the expectation that India will be able to make these changes in the future, and though it will be a long and tedious process, indicators suggest that it is certainly possible.


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Sources:

Article: Brown Political Review / Image: Mohd Fazlin Mohd Effendy Ooi

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About

Stefan

Stefan (from Austria, Europe) has been living, studying and working in China since 2010. Stefan has worked on several research, publication and consulting projects focusing on the China Travel Market. He holds two Masters degrees and is an expert on China Outbound Tourism, Marketing and Social Media in China. Stefan works with BMG on the Global Ready China Seminars as well as the Global Ready China News and related projects. He also has teaching engagements in the areas of eMarketing and Tourism Strategy.

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