McKinsey Global Institute

Tapping Into the Indian Consumer Market
The India-Europe Investment Forum
28 June 2007

HOW WILL INDIA’S CONSUMER MARKET EVOLVE IN THE FUTURE?
India’s economy has been growing rapidly …

• What impact has growth had on Indian incomes
and how quickly will they grow in the future?

• How is the distribution of income changing? When
will its middle class take off?

What does this mean for business and investment opportunities? How should companies compete for the “new Indian consumer”?

• How is income growth effecting urban versus rural
areas?

• How much of rising Indian incomes will be spent
versus saved?

• What will Indian consumers spend their newfound
wealth on?

1

OUR PANEL

• Prashant Desai – Group Head, Investor Relations and
New Ventures (PE), Pantaloon Retail (India) Limited

• Richard Fairgrieve – Director of Global Emerging Markets,
WestLB Mellon Asset Management

• Dippankar S. Haldar – Chief Executive Officer, Wadhawan
Food Retail (P) Limited

• A.P. Parigi – Managing Director and Chief Executive
Officer, Entertainment Network (I) Limited

• R. Subramanian – Managing Director, Subhiksha Trading
Services

2

KEY FINDINGS FROM McKINSEY GLOBAL INSTITUTE RESEARCH

• Indian incomes will triple over the next two decades,
significantly reducing poverty

• India will emerge as the world’s fifth largest consumer
economy

• A large urban middle class will develop, but rural areas will
benefit too

• Patterns of consumption will shift rapidly towards
discretionary spending

• Income and consumption growth will create opportunities
and challenges for business and government

3

HOUSEHOLD INCOME GROWTH WILL ACCELERATE ACROSS INDIA
Compound annual growth rates 1985–2005

Average household disposable income thousand, Indian rupees, 2000 Actual Forecast Urban

2005–2025

500

400
5.8% All India

300

200
4.6%

5.3%

Rural

100
2.8%

3.6%

3.6%

0 1985

1990

1995

2000

2005

2010

2015

2020

2025

Source: McKinsey Global Institute

4

INDIA WILL SEE CONTINUED REDUCTION IN POVERTY AND GROWTH OF ITS MIDDLE CLASS
Share of population in each income bracket %, millions of people 755 1 6 Household income brackets thousand, Indian rupees, 2000 1,429 2 9

100%

0 0

928 0 2

0

1,107 4 1

0

1,278 1 1 19

18 41

Globals (>1,000) Strivers (500–1,000) Middle class

32

Seekers (200–500)

43 93 80 54 35 22
1985 1995 2005E 2015F 2025F Deprived (<90)

36

Aspirers (90–200)

Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: McKinsey Global Institute

5

INDIA'S AGGREGATE CONSUMPTION WILL QUADRUPLE OVER THE NEXT 20 YEARS
Aggregate consumption across income brackets trillion, Indian rupees, 2000 4.1x 70 14 Globals (>1,000) Household income brackets thousand, Indian rupees, 2000

16 34 4 3 17 7 0 5 1 10 12 1

Strivers (500–1,000) Middle class

25

Seekers (200–500)

1 12 3
2015F

0 0

3 5

1

0 0

2

9 4
2005E

12
2 2025F

Aspirers (90–200) Deprived (<90)

1985

1995

Note: Figures are rounded to the nearest integer and may not add up exactly to column totals. Source: McKinsey Global Institute

6

INDIA WILL BECOME THE FIFTH LARGEST CONSUMER MARKET IN THE WORLD BY 2025
Aggregate private consumption, 2005–2025 billion, $, 2000 2005 2015 2025 1,521 1,511

746

783

370

388

India Per capita $, 2000 Rank 334 12

Brazil 2,082 11

India 584 8

Italy 13,540 7

India 1,064 5

Germany 18,429 6

Source: Global Insight; UN Population Division; McKinsey Global Institute

7

INDIA'S SHARE-OF-WALLET IS SHIFTING AS INCOMES RISE
Necessities Discretionary spending

Share of average household consumption %, thousand, Indian rupees, 2000 100% 3 60 4 82 7 2 140 248

1 11 4 14
5

9 5 6 3 19

13 9 6 20

Health care Education and recreation Communication Transportation

2

17 8 3 12
6

9 3 12
5

11
3 10 5

Personal products and services Household products Housing and utilities Apparel

56 42 34

25

Food, beverages, and tobacco

1995

2005E

2015F

2025F
8

Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: McKinsey Global Institute

McKinsey Global Institute

Tapping Into the Indian Consumer Market
The India-Europe Investment Forum
28 June 2007

Back-up

10

THE MCKINSEY GLOBAL INSTITUTE (MGI) HAS SPENT THE PAST YEAR EXAMINING THE FUTURE OF THE INDIAN CONSUMER MARKET
400 300 200 100 0 1985 90 95 2000 05

Proprietary database 1985–2005

• Exclusive access to NCAER 300,000 • •
household MISH survey Government NAS, NSS, and RBI data Other sources, e.g., UN, World Bank, Oxford Economics

What makes our work unique?

• Focuses on future
60% 50% 40% 30% 20% 10% 0% 2006

consumption Econometric forecasting model 2006–2025
2009 2012 2015 2018 2021 2024

• Covers 100% of
demand

• Includes detailed
income distributions

• Integrates
macroeconomic scenarios On-the-ground insights from McKinsey experience

11

MGI’s FORECAST ASSUMES 7.3 PERCENT COMPOUND ANNUAL GDP GROWTH
Real GDP billion, Indian rupees, 2000

120.000
History Forecast

100.000 80.000 60.000 40.000 20.000 0 1985
Overall compound annual growth Per capita compound annual growth
Source: McKinsey Global Institute

1990

1995
6.0%

2000

2005

2010

2015
7.3%

2020

2025

4.0%

5.9%

12

KEY FINDINGS

• Indian incomes will triple over the next two decades,
significantly reducing poverty

• India will emerge as the world’s fifth largest consumer
economy

• A large urban middle class will develop, but rural areas will
benefit too

• Patterns of consumption will shift rapidly towards
discretionary spending

• Income and consumption growth will create opportunities
and challenges for business and government

13

GROWTH HAS LIFTED 431 MILLION FROM POVERTY AND COULD LIFT 465 MILLION MORE
Population in households with annual disposable income less than 90,000 Indian rupees, 2000 millions of people

327 702

431 598 180 465 313

Deprived in 1985

Increase in poverty due to population growth*

Net reduction in poverty

Deprived in 2005

Increase in poverty due to population growth*

Net reduction in poverty

Deprived in 2025

* Number added to deprived if poverty remained at 1985 and 2005 rates respectively Source: McKinsey Global Institute

14

THE SHAPE OF INDIA'S INCOME PYRAMID WILL CHANGE DRAMATICALLY AS INCOMES GROW
Household income brackets thousand, Indian rupees, 2000 Globals (>1,000) 2005E Strivers (500–1,000) Seekers (200–500) Aspirers (90–200) Deprived (<90) Globals (>1,000) 2015F Strivers (500–1,000) Seekers (200–500) Aspirers (90–200) Deprived (<90) Globals (>1,000) 2025F Strivers (500–1,000) Seekers (200–500) Aspirers (90–200) Deprived (<90)
Source: McKinsey Global Institute

Number of households million 1.2 2.4 10.9 91.3 101.1 3.3 5.5 55.1 106.0 74.1 9.5 33.1 94.9 93.1 49.9

Aggregate disposable income trillion, Indian rupees, 2000 2.0 1.6 3.1 11.4 5.4 6.3 3.8 15.2 14.6 3.8 21.7 20.9 30.6 13.7 2.6

Aggregate consumption trillion, Indian rupees, 2000 1.2 1.0 2.1 8.5 4.1 4.1 2.7 11.8 12.2 3.3 14.1 16.5 24.6 11.9 2.4
15

THE INCOME DISTRIBUTION IN THE COUNTRY WILL WIDEN AS POVERTY FALLS AND THE MIDDLE CLASS GROWS
Distribution of household income % of households 35

1985 1995 2005 2015 2025

30 25 20 15 10 5 0 0 -5 100 200 300 400 500 600 700 800 900 1000

Annual household disposable income thousand, Indian rupees, 2000
16

Source: McKinsey Global Institute

FIRST ASPIRERS AND THEN SEEKERS WILL BECOME THE LARGEST INCOME BRACKETS
Number of households in each income bracket millions of people Household income brackets thousand, Indian rupees, 2000

140 120

Actual

Forecast

Aspirers (90–200)

100
Seekers (200–500)

80 60
Deprived (<90)

40
Strivers (500–1,000)

20
Globals (>1,000)

0 1985

1990

1995

2000

2005

2010

2015

2020

2025

Source: McKinsey Global Institute

17

KEY FINDINGS

• Indian incomes will triple over the next two decades,
significantly reducing poverty

• India will emerge as the world’s fifth largest consumer
economy

• A large urban middle class will develop, but rural areas will
benefit too

• Patterns of consumption will shift rapidly towards
discretionary spending

• Income and consumption growth will create opportunities
and challenges for business and government

18

RISING HOUSEHOLD INCOMES WILL BE THE KEY DRIVER OF CONSUMPTION GROWTH NOT CHANGES IN SAVINGS
Sources of growth in private consumption 2005–2025 billion, Indian rupees, 2000

69,503
1,922

8,360

42,326

16,896

Private consumption 2005 Contribution to overall consumption growth

Disposable income growth

Growth in number of households

Changes in savings

Private consumption 2025

80%

16%

4%

Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: Oxford Economics; UN; McKinsey Global Institute

19

KEY FINDINGS

• Indian incomes will triple over the next two decades,
significantly reducing poverty

• India will emerge as the world’s fifth largest consumer
economy

• A large urban middle class will develop, but rural areas
will benefit too

• Patterns of consumption will shift rapidly towards
discretionary spending

• Income and consumption growth will create opportunities
and challenges for business and government

20

URBAN INDIA WILL ACCOUNT FOR MORE THAN TWO-THIRDS OF CONSUMPTION GROWTH OVER THE NEXT 20 YEARS
Aggregate annual consumption billion, Indian rupees, 2000 69,502

35,913

62%

16,695
16,896 Urban Rural 43% 57% All India consumption, 2005 Contribution to consumption growth
Source: McKinsey Global Institute

38%

Rural consumption growth

Urban consumption growth

All India consumption, 2025

32%

68%

21

MIDDLE CLASS HOUSEHOLDS WILL DOMINATE URBAN INDIA
Share of urban households by income class %, millions of households 100% = 1 33 0 46 62 1 83 1 10 4 3 114 6 26 Global (>1,000) Strivers (500–1000) Middle class Household income brackets thousand, Indian rupees, 2000

0

4

0

2

18

50

53

66 81 32 21 9
1985 1995 2005E 2015F 51 Seekers (200–500)

46

12 5
2025F

Aspirers (90–200) Deprived (<90)

Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: McKinsey Global Institute

22

LARGE CITIES TEND TO HAVE HIGHEST INCOMES, BUT SMALL ‘NICHE’ CITIES PROSPERING TOO
Average annual household disposable income, 2001 thousand, Indian rupees, 2000

Total disposable income billion, Indian rupees Tier 1 Tier 3 Tier 2 Niche cities

400 350 300 250 200 Goa 150 100 50 0 0 2 4 6 8 10 12 14 16 18 20 Estimated population, 2001 million
23 Surat Kanpur Lucknow Jaipur Bangalore Ahmedabad Jallandhar Chandigarh Ludhiana Faridabad Amritsar Coimbatore
Pune Nagpur

Delhi

Hyderabad Chennai Mumbai

Kolkata

Source: The Great Indian Middle Class, NCAER; McKinsey Global Institute

RURAL POVERTY WILL DECLINE SIGNIFICANTLY BY 2025
Share of rural population by income class %, millions 571 1 4 Household income brackets thousand, Indian rupees, 2000

100%

0 0

682 0 1 8

0

790 1 3

0

875 1 6

0

906 1 2

Global (>1,000) Strivers (500–1,000) Seekers (200–500)

20 32 47 48
96 90 65 46 29

Middle class

Aspirers (90–200)

Deprived (<90)

1985

1995

2005E

2015F

2025F

Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: McKinsey Global Institute

24

PER-HOUSEHOLD CONSUMPTION IN RURAL INDIA WILL REACH TODAY'S URBAN LEVELS BY 2017
Average consumption per household thousand, Indian rupees, 2000

158

116 104

67 45 50

Urban India, 2005E

1985

1995

2005E Rural India

2015F

2025F

Source: McKinsey Global Institute

25

KEY FINDINGS

• Indian incomes will triple over the next two decades,
significantly reducing poverty

• India will emerge as the world’s fifth largest consumer
economy

• A large urban middle class will develop, but rural areas will
benefit too

• Patterns of consumption will shift rapidly towards
discretionary spending

• Income and consumption growth will create opportunities
and challenges for business and government

26

FALL IN SHARE OF SPENDING ON NECESSITIES IN INDIA IS COMPARABLE TO SOUTH KOREA'S DURING ITS HIGH-GROWTH PHASE
Share of average household spending % South Korea India
Necessities* Discretionary spend*

100

100
History Forecast

75

75
Discretionary

50

50

25

25

Apparel Food

0 1981
Per capita income 5,017 $, PPP, 2000

1986

1991
12,850

0 1985
1,173

1995

2005
2,500

2015

2025
7,364

* Necessities include food and apparel; discretionary spending includes all other household spend categories. Source: Euromonitor; India data from McKinsey Global Institute

27

NUMBER OF URBAN HOUSEHOLDS WITH DISCRETIONARY SPENDING POWER TO MULTIPLY TWELVE TIMES
Number of urban households with ‘true’ discretionary spending power* million 12x 94 7 Household income brackets thousand, Indian rupees, 2000

Globals (>1,000)

29

Strivers (500–1,000)

49 3 2

Middle class

58 44
8 1 2005E

Seekers (200–500)

1
2015F 2025F

6

* Consumers with sufficient budget to have significant levels of choice-driven spending (beyond categories such as food, housing, health care, education, fuel and transport services) Source: McKinsey Global Institute 28

INDIAN SPENDING PATTERNS WILL BE UNIQUE
Share of total consumption, %
U.S. Consumption category In line with benchmarks Germany Brazil South Korea China India (2005) India (2025)

• Food beverages and • •
tobacco Apparel Personal products and services

15 4 14

21 5 10

19 6 8

23 4 13

35 11 4

42 6 8

25 5 11

Less than benchmarks

• Housing and utilities • Household products • Education and recreation
More than benchmarks

19 5 12

27 7 8

22 9 13

18 4 16

9 6 15

12 3 5

10 3 9

• Transportation • Communication • Health care

11 1 19

17 1 4

13 4 6

12 2 8

6 7 7

17 2 7

20 6 13

Note: Figures are rounded to the nearest integer and may not add up to 100% Source: Euromonitor, MGI China Consumer Demand Model v2.0, McKinsey Global Institute

29

FOOD WILL REMAIN THE LARGEST CONSUMPTION CATEGORY WHILE COMMUNICATIONS WILL GROW THE FASTEST Market size in 2025
2005–2025 compound annual growth rate of aggregate consumption %
trillion, Indian rupees, 2000

16
Communications (4.3)

14 12 10 8 6 4 2 0 0.0

Education and recreation (6.1) Health care (8.9)

Personal products (7.4)

Transport (13.8) Food, beverages, and tobacco (17.3)

Household products (1.8)

Apparel (3.3) Housing and utilities (6.6)

1.0

2.0

3.0

7.0 4.0

8.0 5.0

2005 market size trillion, Indian rupees, 2000
Source: McKinsey Global Institute 30

KEY FINDINGS

• Indian incomes will triple over the next two decades,
significantly reducing poverty

• India will emerge as the world’s fifth largest consumer
economy

• A large urban middle class will develop, but rural areas will
benefit too

• Patterns of consumption will shift rapidly towards
discretionary spending

• Income and consumption growth will create
opportunities and challenges for business and government

31

OPPORTUNITIES AND CHALLENGES FOR BUSINESSES

Opportunities • Along with China the fastest growing of world’s large consumer markets over next two decades • Major discontinuity, winners have yet to be determined – $1.1 trillion of new market growth not yet owned by anyone • Most accessible market – upper income urbanities – will grow twelve times • Almost half of middle class will be ‘new consumers’ at any point in time – loyalties up for grabs Challenges • Indian companies – Retaining existing customers and market shares – Adapting rapid pace of change – Innovating to capture new growth opportunities – Educating new consumers • Multinationals – Meeting middle class aspirations at Indian price – Adapting products and services to meet Indian needs and task points – Building brands – Overcoming infrastructure, regulatory, and distribution hurdles
32

OPPORTUNITIES AND CHALLENGES FOR GOVERNMENT

Opportunities • A chance to make further significant inroads in poverty reduction • Domestic demand growth will spur further domestic production and employment – particularly in higher value-added industries • An opportunity to attract FDC to serve Indian consumers • The potential to improve the material well-being of hundreds of millions of people Challenges • Long-term growth must be maintained • Infrastructure issues need to be addressed • Regulatory constraints on business need further reform to enable businesses to meet growing demand and improve productivity • Financial system needs reform to efficiently allocate investment, rebalance savings away from households and provide consumer credit • Significant investments in human capital required (education, health care) in fiscally constrained environment

33

INCOME BRACKET CONVERSIONS
Household annual disposable income, real 2000

Bracket Globals Strivers Seekers Aspirers Deprived

Indian rupees 1,000,000 plus 500,000–1,000,000 200,000–500,000 90,000–200,000 Less than 90,000

U.S. dollars non-adjusted 21,882 plus 10,941–21,882 4,376–10,941 1,969–4,376 Less than 1,969

U.S. dollars PPP adjusted 117,647 plus 58,823–117,647 23,529–58,823 10,588–23,529 Less than 10,588 Middle class

Source: NCAER “The Great Indian Middle Class”; McKinsey Global Institute

34

BACK-UP

• Macroeconomic base case • Urbanization, rural growth and education • Additional results

35

MGI'S BASE-CASE GDP FORECAST IS MIDDLE OF THE RANGE
Source Planning Commission–High HSBC–High Goldman Sachs–Base HSBC–Base Deutsche Bank–High MGI/Oxford Economics–Base Planning Commission–Base EIU Global Insight PWC Deutsche Bank–Base Deutsche Bank–Low Real per capita GDP growth Compound Annual Growth Rate, % Timeframe

7.2 7.2 7.1 6.2 6.2 5.9 5.7 4.7 4.7 4.3 4.2 2.7

2007–2012 2005–2015 2006–2020 2005–2015 2006–2020 2006–2025 2007–2012 2005–2025 2005–2025 2005–2050 2006–2020 2006–2020

Source: Oxford Economics; India: Pitfalls and Possibilities, HSBC, July 2006; India's rising growth potential, Goldman Sachs, Jan 2007; India Rising: A Medium-Term Perspective, DB Research, May 2005; Towards Faster and More Inclusive Growth: An Approach to the 11th Five Year Plan, Planning Commission, Government of India, June 2006; The World in 2050: How Big will the Major Emerging Market Economies Get and How Can the OECD Compete?, PWC, 2006

36

SERVICES WILL CONTINUE TO BE THE MAIN DRIVER OF GDP GROWTH OVER THE NEXT TWO DECADES
Share of GDP %, trillion, Indian rupees, 2000 100% = 8.8 28.3 115.3 Growth by sector Compound annual growth rate, % 1985–2005 2005–2025

9 19
Agriculture

36 26 24

Agriculture

2.7

3.1

27

Industry

Industry

6.4

7.4

65 55 Services 40 Services 7.8 8.2

1985

2005E

2025F
37

Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: McKinsey Global Institute

INCOME GROWTH WILL ACCELERATE WITH ECONOMIC GROWTH
GDP versus household disposable income growth compound annual growth rate, %, Indian rupees, 2000 7.3 6.3 5.7 5.7 6.4 6.0 7.2 7.4

GDP Household disposable income

1985–1995

1995–2005E

2005E–2015F

2015F–2025F

Source: McKinsey Global Institute

38

INDIA'S CONSUMPTION SHARE OF GDP IS CLOSER TO JAPAN AND THE UNITED STATES THAN IT IS TO CHINA
%, billion, nominal $, 2005 12,456

100% =

2,216

4,553

801

Private consumption

39 57 62 70

Government consumption

14

18
Investment

12 16

44 23 28
-2 India

20 -6
United States
39

Net trade China

3 Japan

1

Source: Global Insight; McKinsey Global Institute

INDIA HAS A RELATIVELY HIGH NATIONAL SAVINGS RATE COMPARED WITH OTHER COUNTRIES
Gross national savings rates % of nominal GDP, 2005

50.4

Corporations

21,1

32.8
16,2
Households

32.4
8,1

26.4 21.2 18.0
21,3 10,4

22.0 6.4 22.3

7,8

12.9
11,3

Government

7,3
China*

10,2

7.9 2.0 6.4 -1.3
Japan

9.9 0.3
France

2.9
Mexico

2.1 -0,5
United States

South Korea

India

* MGI estimate based on 2005 GDP and estimates of flow-of-funds information. Source: Country National Accounts; IMF; McKinsey Global Institute 40

INDIAN HOUSEHOLD SAVINGS ACCOUNT FOR A DISPROPORTIONATE SHARE OF NATIONAL SAVINGS
Household savings as a share of gross national savings rates, 2005 %

69 55 44 37 24 20 16

India Gross national savings rates % of nominal GDP, 2005

France

China*

Mexico

Japan

South Korea 32.8

United States 12.9

32.4

18.0

50.4

21.2

26.4

* MGI estimate based on 2005 GDP and estimates of flow-of-funds information. Source: Country National Accounts; IMF; McKinsey Global Institute 41

INVESTMENT WILL GROW APPROXIMATELY IN LINE WITH GDP
Private consumption Investment Government consumption Net trade

Expenditure share of real GDP %

80
History Forecast

70 60 50 40 30 20 10 0 1985 -10

1990

1995

2000

2005

2010

2015

2020

2025

Source: National Accounts; McKinsey Global Institute

42

GOVERNMENT SPENDING AND DEFICIT WILL GRADUALLY DECLINE AS Expenditures (left scale) A PROPORTION OF GDP
% of GDP
Government expenditures and revenues*
Revenues (left scale) Deficit (right scale)

Government budget deficit
Forecast

40 35 30 25 20 15 10 5 0 1985

History

3,0 2,0 1,0 0,0 -1,0 -2,0 -3,0 -4,0 -5,0 -6,0 -7,0 -8,0 -9,0 -10,0 -11,0 2025

1990

1995

2000

2005

2010

2015

2020

* Government expenditure figures are available through 2005. Source: McKinsey Global Institute 43

BACK-UP

• Macroeconomic base case • Urbanization, rural growth and education • Additional results

44

INDIA REMAINS LESS URBAN THAN ITS COUNTERPARTS IN ASIA, BUT DEFINITIONS VARY
Urban share of total population, 2005 %

81 65 66 69

48 40 27 29

Vietnam India Urban population, 2005 million

China

Indonesia

Malaysia Japan

United States

Korea, Rep.

23

318

530

108

17

84

210

39

Source: United Nations World Urbanization Prospects 2005; McKinsey Global Institute

45

BIRTHS AND MIGRATION WILL DRIVE URBAN POPULATION GROWTH
Urban population, 2005–2025* million

523 100
1.6 x

318

105

Urban population, 2005E Share of total population or urbanization rate 29%

Net births

Net migration

Urban population, 2025F 37%

* Estimate of birth versus migration split assumes urban birth rate = 19 per 1,000 and death rate = 6 per 1,000 Source: McKinsey Global Institute

46

CLASSIFICATION OF CITIES AND TOWNS

Mumbai Kolkata, Delhi, Chennai Bangalore Hyderabad Ahemdabad, Pune Surat, Kanpur, Nagpur, Lucknow, Jaipur, Kochi, Vadodara, Indore, Ludhiana, Madurai, Bhopal, Patna, Nasik, Agra, Varanasi, Rajkot, Meerut, Jabalpur, Dhanbad, Kozhikode . . . . Tiruchirapalli, Amritsar, Faridabad, Aurangabad, Allahabad Gwalior, Jodhpur, Raipur, Bhubaneshwar, Goa, Pondicherry Aligarh, Moradabad, Mangalore, Gorakhpur, Bhavnagar…

Tier 1: Major cities
8 cities Population > 4 million Total income >100 billion Indian rupees

Tier 2: Mainstream cities
26 cities Population >1 million

Tier 3: Climbers
33 cities Population >500,000

Rohtak, Rourkela, Udaipur, Anand, Faizabad, Hassan, Shimla, Roorkee, Gurgaon, Shillong…

Tier 4: Small towns
5,094 towns

* Population for each city estimated using the average urban household size (from MGI model) and the estimated number of households in each city from NCAER (in the year 2001). Source: The Great Indian Middle Class, NCAER; McKinsey Global Institute

47

HIGHER INCOME HOUSEHOLDS CONCENTRATED IN LARGE CITIES, POOR IN SMALL TOWNS
Proportion of households in each income class across city tiers, 2001 %, thousand, households 100% = 16,809 Tier 1: Major cities Tier 2: Mainstream cities Tier 3: Climbers 15 33 13 50 16 55 34,139 3,750 806 470

9

60

9
Tier 4: Small towns

13

12

63 43

9

10

8 25

8 22

27

Deprived

Aspirers

Seekers

Strivers

Globals

Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: The Great Indian Middle Class, NCAER; McKinsey Global Institute

48

RURAL EMPLOYMENT HAS BEEN GRADUALLY SHIFTING AWAY FROM AGRICULTURE
Distribution of rural male workers by economic activity % Manufacturing Construction Trade, hotels and restaurants Transport, storage and communication Others* 7 5 7 4 2 8 7 8 4 7

Agriculture

75

67

1987

2004

* Sectors with minimal shift in this period (6% in other services, 1% in mining, quarrying, electricity and water).
Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: Employment and unemployment situation in India (2004–05), NSSO; McKinsey Global Institute 49

AGRICULTURAL GROWTH IS FORECAST TO ACCELERATE FROM ITS Compound annual RECENT HISTORICAL RATE
growth rate

Agricultural value added in GDP billion, Indian rupees, 2000

9,974
3.1%

7,529
2.4%

5,462

4,299

1995

2005E

2015F

2025F

Source: McKinsey Global Institute

50

ACHIEVEMENT IN HIGHER AND SECONDARY EDUCATION WILL CONTINUE TO BECOME MORE WIDESPREAD
% of relevant population groups*
Rate of secondary-school and higher-education enrollment 40 35 30 25 20 15 10 5 0 1985
History Forecast

Secondary Higher

Rate of secondary-school and higher-education attainment

40 35 30 25 20 15 10 5 0 1985

History Forecast

1995

2005

2015

2025

1995

2005

2015

2025

* Enrollment is measured as a percentage of 15 to 24 year old population; attainment is measured relative to 15 and above population. Source: McKinsey Global Institute

51

BACK-UP

• Macroeconomic base case • Urbanization, rural growth and education • Additional results

52

INDIAN CONSUMPTION WILL BE DOMINATED BY THE MIDDLE CLASS
Share of total consumption by income bracket %, billion, Indian rupees, 2000 6,679 2 6 10,098 1 5 8 16,896 34,089 69,503 Globals (>1,000) 20 8 Household income brackets thousand, Indian rupees, 2000

100%

0

7 6
12

12

15 32

24 35

Strivers (500–1,000) Middle class

51 77 54 24 10
1985 1995 2005E 2015F 35 Seekers (200–500)

36 17
3 2025F Aspirers (90–200) Deprived (<90)

Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: McKinsey Global Institute

53

HALF OF URBAN CONSUMPTION WILL COME FROM UPPER INCOME STRIVERS AND GLOBALS
Share of urban consumption by income class %, trillion, Indian rupees, 2000 2.2 100% 6 2 4.0 7.2 2 12 10 8 10 17 33 53 Strivers (500–1000) Middle class 18 26 Global (>1,000) 17.4 43.1 Household income brackets thousand, Indian rupees, 2000

0
6

28

56

64

55
37 Seekers (200–500) Aspirers (90–200) Deprived (<90)

26 7
1985 1995 2005E

17
2 2015F 4 1 2025F

Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: McKinsey Global Institute

54

ASPIRERS WILL DRIVE RURAL SPENDING OVER THE NEXT TWO DECADES
Share of rural consumption by income class %, trillion, Indian rupees, 2000 4.5 100% 0 6 9 2 4 6.1 0 9.7 4 3 16.7 26.4 Household income brackets thousand, Indian rupees, 2000

7
17

9

6 6 15

12 8

Global (>1,000) Strivers (500–1,000)

47 55

33

Seekers (200–500)

84 72

39

Aspirers (90–200)

37 18 8
1985 1995 2005E 2015F 2025F Deprived (<90)

Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: McKinsey Global Institute

55

CONSUMPTION BY ‘NEW-TO-BRACKET’ CONSUMERS WILL BE SIGNIFICANT, ESPECIALLY IN THE MIDDLE CLASS
‘New-to-bracket’ share of cumulative consumption 2005–2025* %, trillion, Indian rupees, 2000 100% = Globals 22

‘New-to-bracket’ consumers Existing consumers

78

111.5

Strivers

43

57

93.4 Middle class

Seekers

41

59

262.6

Aspirers

11

89

245.8

Deprived

70.9

* Calculated by determining the number of households that have shifted income class, assume they consume at new bracket levels in the first year, and then consider them ‘new’ to that bracket for three years. Source: McKinsey Global Institute 56

FROM ASPIRER TO STRIVER – THE EVOLUTION OF SPENDING FOR A TYPICAL HOUSEHOLD
Average household consumption thousand, Indian rupees, 2000 497

69 46 47

Health care Education and recreation Communication

119
214

Transportation

22 7 48
94 16 11 40 Aspirer 2005E
Source: McKinsey Global Institute

13 18 24

7 7 5

3 1 2

6 12

49 13 42 23 90
Striver 2025F

Personal products and services Household products Housing and utilities Apparel Food, beverages, and tobacco

63
Seeker 2015F

57

SHARE-OF-WALLET ON FOOD IS ALREADY LOW IN MIDDLE- AND UPPER-INCOME BRACKETS
%
Share-of-wallet of urban households in 2005E 100% Food, beverages and tobacco Other spending categories All India average share-of-wallet evolution 100% 39 28 21 25
61 72 79

Food, beverages and tobacco

34 42

Aspirers

Seekers

Strivers

Share-of-wallet of rural households in 2005E 100% Food, beverages and tobacco 58 47 35
75

Other spending categories

66 58

Other spending categories

42

53

65

Deprived
Source: McKinsey Global Institute

Aspirers

Seekers

2005E

2015F

2025F
58

FOOD CONSUMPTION WILL ACCELERATE SIGNIFICANTLY EVEN AS ITS RELATIVE SHARE DECLINES
Total consumption of food, beverages, and tobacco* billion, Indian rupees, 2000 17,296 4.5% 11,547 1.1% 3.0% 7,147 5,622 3,931 3.2% Per-capita consumption of food, beverages, and tobacco* Indian rupees, 2000

Compound annual growth rate

12.102

9.035

6.058 5.207

6.454

1985 Share of total consumption % 59

1995 56

2005E 2015F 2025F 42 34 25

1985 59

1995 56

2005E 2015F 2025F 42 34 25

* Approximately 90% of spend on the broad category “food, beverages, and tobacco” is on food. Source: McKinsey Global Institute

59

FIVE CATEGORIES WILL ACCOUNT FOR MORE THAN 80 PERCENT OF CUMULATIVE CONSUMPTION OVER THE NEXT 20 YEARS
Breakdown of total cumulative consumption across categories (2005–2025) trillion, Indian rupees, 2000
784

248

148 87 79 74 148
54 41 32 22

Education and recreation Apparel Communication Household products

Total growth

Food, Transport beverages, and tobacco

Housing and utilities

Health care

Personal products and services

Other

Source: McKinsey Global Institute

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