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Indian Consumer

Indian Consumer

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Published by Ashok Tiwari

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Published by: Ashok Tiwari on Nov 14, 2010
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India's Consumer Market: The Surge of Indian Consumer as India Emerges
“Today, the drivers in urban and rural areas are the same – aspiration, quality and price – differingonly in order.”1 ---D. Shivakumar, VP & MD, Nokia India Private Ltd.“From pester power, kids have changed their role to becoming influencers. In the older age group,they have actually become consultants, whom parents turn to for advice during the decision-making process.”– Rajat Jain, MD & CEO, Mobile2Win“The differences are the breadth and depth of the Indian market and the fact that India hasundergone much more social and economic change in the last generation than the US has.”3
David Daniel, CEO, Spencer StuartWell said David Daniel. The Indian market had evolved and expanded its breadth and depthduring its independent life for more than 50 years, giving impetus to socioeconomic and culturalchange.It was a 200-year-long tryst with destiny, after which India attained independence in 1947. Thefirst national government, which was inclined towards socialistic philosophy aimed at economicand social transformation of the country while nurturing Indian democracy and the rule of law. Alsoaiming at ascending from tradition to modernity and from poverty to prosperity, it gave importanceto the public sector, the growth of which was expected to trickle down to the rural and poor sectionsof Indian society.On the contrary, the Cambridge Journal of Economics noted that there was “little evidence tosuggest that the trickle down effect had occurred at all... the emergence of capital-labour substitution was primarily responsible for preventing growth from reducing poverty (in India). Thedecline in poverty and a higher growth rate that took place during the late 1970s and 1980s werelargely a result of government anti-poverty measures teamed with the more equitable distribution of credit and inputs to smaller and marginal farmers.”4Accordingly, the Indian consumer market could not evolve at a rapid pace. The government’ssocialistic philosophy did not encourage the establishment of private manufacturing units and hadelaborate licenses to curb expansion of existing units. This led to supply constrained consumptionfor the Indian consumers, since firms could not produce enough to fulfil the demands. As a result,the consumer in India was always short of choices and had to buy what was supplied to him. Thescenario changed when Indian economy liberalised in 1991 and markets opened up.Since 1991, when the Indian economy liberalised, it presented opportunities on a large scale; bothas a domestic market and as a global base, on account of the desire of more than a billion5 people togrow and improve their standard of living. With the relaxation of regulatory controls on the ForeignDirect Investment (FDI) norms, the Indian consumer market geared up, attracting investments fromvarious Multinational Corporations (MNCs) from across the globe. With these developments, theIndian economic scenario changed rapidly. Growth in disposable incomes, rapid urbanisation,development of an urban way of life and increasing trend-consciousness among Indians, created theright environment for new consumer segments to be nurtured and developed – a scenario which wasnot seen in India in the past 50 years.
Evolution of Indian Consumer Market
A very difficult question to answer – why could India not take advantage of industrialisation,despite having bright prospects to improve its economic status? Till 1914, India was the largest jute producing country, the third-largest railway network and the fourth-largest cotton-textile industry.6It also had the largest canal irrigation network and a share of 2.5% in global trade.7 However, it had
meandered through several ups and downs since 1951 till the end of last decade of the 20th century,which can be broadly divided into four phases.
Phase I (1951–1965)
After achieving independence in 1947, the role of the new Indian government was to formulate policies and frameworks that would help the economy grow and it started the development programmes by launching its First Five-Year Plan (FYP) (1951–1952). Since independence, theconsumer markets in India were controlled by the socialistic philosophy of India’s first PrimeMinister, Jawaharlal Nehru (Nehru), who believed in self-reliance and local manufacturing whilefocusing on shielding the small-scale industries. He also believed that sturdy economic growthcoupled with greater emphasis on small-scale and rural sectors could significantly increase incomeand consumption among the poor.India’s GDP grew at nearly 4%8 per annum during the first two FYPs (1951–1956 and 1956– 1961, respectively). During the first 4 years of the Third FYP (1961–1966), the growth rateaveraged even higher, at 4.5%.9 The government had more restrictive policies towards industriesthan it had for trade and foreign investment.There were three key elements of the industrial policy as it evolved in phase I – dominant role of the public sector in the development of heavy industry, regulation of private sector investmentthrough licensing and distribution and price controls.
Phase II (1965–1981)
The socialistic system started by Nehru continued even after his death and was perfected byIndira Gandhi. During her Prime Ministership, government’s control on enterprises and the growingtentacles of state ownership saw the average GDP growth rate of India fall from 4.1% during 1951– 1965 to 2.6% during 1965–1975. The population of the country was growing at a rate of 2.3% per annum, which meant that there was per-capita income growth of just 0.3%.11 During this era, thegovernment was entirely in charge of the business sector. Government had the power and control todecide which firm in an industry would produce what and how much. Though there was a hugedemand for products, the government curtailed the production limits and never allowed the privatefirms to increase the supply. Thus, due to the constrained supply of products, prices of most of themwere very high and only the rich could buy them. Taxes were high and it was the government whichcategorised the products or items into needs, comforts and luxuries, whether it was car, oil,shampoo or any other product. The government was also keen on applying additional restrictions onlarge enterprises through the Monopolies and Restrictive Trade Practices Act (MRTP), 1969 andimposed severe restrictions on foreign investment through the Foreign Exchange Regulations Act(FERA), 1973. The license raj12 was further tightened by introducing reservations for small-scaleindustries and nationalisation of banks, insurance companies and oil and coal industries.
Phase III (1981–1988)
During this period, the MNCs were brought under the purview of FERA, making it mandatoryfor the foreign firms to reduce their equity to 40% and to register themselves as Indian companies.(“Phase I (1951–65): Takeoff Under a Liberal Regime”, op.cit. ) The socialist approach of the Indian government ensured to control businesses and avoidmonopolisation for which they imposed stringent trade regulations. Many products were set asideto be manufactured by the small-scale industries. To enter a business and to expand firms, severalcomplex rules and regulations were to be followed. When Rajiv Gandhi became the Prime Minister of India, the economy took few steps towards liberalisation, though they were not completelysuccessful. Gurucharan Das, ex-CEO, Procter & Gamble (P&G) India, summarised his views onfailure of economic reforms by saying, “After fifty years the failure is staggering: four out of tenIndians are illiterate; half are miserably poor, earning less than a dollar a day; one-third of the people do not have access to safe drinking water; only a sixth of the villages have modern medicalfacilities. The irony is that this system, which was made in the name of the poor, in the end did
very little for them.”( Das Gurucharan, “The Train to Nowhere”, India Unbound, (ISBN 978-0-14306-301-8), Penguin Books, 2002, page28 )
Phase IV (1988–2009)
According to many researchers, academicians and industry experts, though India achieved its political freedom in 1947, it became economically independent only after 1991. Post-1991, theeconomy started opening up and India began to integrate itself with the world economy which was asignificant development. The financial and Balance of Payment15 (BoP) crisis in 1991 led to theliberalisation of Indian economy. The new government responded to the BoP crisis by undertakingmajor steps, both on domestic and international fronts. The economy of the nation successfullystabilised and a higher rate resumed within a short period of time. Succeeding governments wereable to maintain the high growth rate and it was predicted that with some key reforms it could beraised further in near future.The crisis and the conditionality did speed up the initial liberalisation, but Phase IV wascharacterised by an acceleration of growth in the GDP, foreign trade and foreign investment. At theaggregate level, as against a growth rate of 4.8% during 1981–1988, the growth rate during 1988– 2006 was 6.3%. During the period from 2003–2004 to 2005–2007, the country’s GDP at factor costgrew at an impressive rate of 8.6%.16 During 2009–2010, the GDP growth declined to around 6%due to economic downturn, but it was expected that the growth would touch 7.5% over the next 5years.(“RBI survey of analysts sees FY10 GDP at 6%”,http://m.economictimes.com/PDAET/articleshow/5238731.cms, November 17 th 2009)
India on the Move
Implementing the structural reforms to open up Indian economy to the rest of the world andsubjecting it to greater market discipline has been the reason for India’s success in the newmillennium.Since the implementation of structural reforms in Indian economy, the country has seen growth in anumber of ways.
A Market Rising from Poverty
In 1985, 93% of the population lived on a household income of less than INR 90,000 a year which included subsistence farmers and unskilled labourers that often struggle to find work.However, after the economic reforms of 1991, India’s economic growth jumped to about 7% andthat considerably improved the country’s well-being. The economic reforms also changed thefortunes of people and by 2005, that percentage was reduced to nearly 54%.( Beinhocker D. Eric,et. al., “Tracking the growth of India’s middleclass”,https://www.mckinseyquarterly.com/ghost.aspx?ID=/)The reforms also led to a reduction in number and percentage of the people living Below PovertyLine (BPL). By 2007, nearly 431 million Indians moved above the poverty line – in comparison tothe BPL levels of 1985. It is estimated that another 465 million people will move away fromextreme poverty, if India can continue to grow at 7.3% annually for the next 20 years (Exhibits IIand III). 
Exhibit IIA Comparison of Net Reduction in Poverty in 2005 and Projections for 2025

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