Tracking the growth of India’s middle class

BY- Eric D. Beinhocker, Diana Farrell, and Adil S. Zainulbhai
Source: McKinsey Global Institute

Over the next two decades, the country’s middle class will grow from about 5 percent of the population to more than 40 percent and create the world’s fifth-largest consumer market.

India’s rapid economic growth has set the stage for fundamental change among the country’s consumers. The same energy that has lifted hundreds of millions of Indians out of desperate poverty is creating a massive middle class centered in the cities. A new study by the McKinsey Global Institute (MGI) suggests that if India continues its recent growth, average household incomes will triple over the next two decades and it will become the world’s 5th-largest consumer economy by 2025, up from 12th now. (The full report, The ‘Bird of Gold’: The Rise of India’s Consumer Market, is available free of charge online.) Along the way, spending patterns will shift significantly as discretionary purchases capture a majority of consumer spending. India’s potential should make it a high priority for most consumer goods businesses, but to succeed in this complex market they must overcome major challenges.

Private consumption has already played a much larger role in India’s growth than it has in that of other developing countries. In 2005 private spending reached about 17 trillion Indian rupees1 ($372 billion), accounting for more than 60 percent of India’s GDP, so in this respect the country is closer to developed economies such as Japan and the United States than are China and other fast-growing emerging markets in Asia. Our study shows that aggregate consumer spending could more than quadruple in coming years, reaching 70 trillion rupees by 2025. Higher private incomes and, to a lesser extent, population growth will encourage this rise in consumption. Changes in savings behavior will play only a minor role.

With such growth on the horizon, it is unclear which companies will win in most product categories. Opportunities will blossom as millions of first-time buyers step up to cash registers and as the bulk of consumer spending moves from scattered, hard-to-reach rural areas to more concentrated, accessible urban markets. Indian consumer spending will shift substantially from the informal economy, with its individual traders, to the more efficient formal economy of organized businesses. That transition will lower prices and further boost demand.

But neither incumbents nor attackers will have an easy time. Bureaucratic hurdles and well-recognized infrastructure shortcomings will frustrate many strategies. In addition, while aggregate spending will rise tremendously, it will be spread across hundreds of millions of households, many with very modest incomes (by the standards of developed countries) and high sensitivity to price and value. Finally, in many consumer markets both Indian and multinational companies already compete intensely for customers. While the opportunities will be enormous, the challenges will force companies to be more dynamic by adapting their products, services, and business models to the rapidly changing needs and incomes of Indian consumers.

We examined the way India’s consumer market will likely develop under a set of reasonable economic assumptions (see sidebar, “About the research”). In particular, our model assumes that real compound annual growth will be 7.3 percent over the next two decades and that economic-reform efforts will continue. If these conditions are met, the life of the average Indian will change vastly by 2025.

A market rising from poverty
India’s economic reforms, begun in 1991, have substantially improved the country’s well-being, and our analysis shows that further improvements are to come. In 1985 93 percent of the population lived on a household income of less than 90,000 rupees a year, or about a dollar per person per day; by 2005 that proportion had been cut nearly in half, to 54 percent. By our estimate, 431 million fewer Indians live in extreme poverty today than would have if poverty had remained stuck at the 1985 level. We project that if India can achieve 7.3 percent annual growth over the next 20 years, 465 million more people will be spared a life of extreme deprivation.

Contrary to popular perceptions, rural India has benefited from this growth: extreme rural poverty has declined from 94 percent in 1985 to 61 percent in 2005, and we project that it will drop to 26 percent by 2025. While the progress has been substantial—even historic—significant challenges remain. First, there are large regional disparities in growth and in the reduction of poverty: India’s southern and western states prosper, while the northern and eastern states (with the exceptions of the capital region, Haryana, Himachal Pradesh, and Punjab) lag behind. Second, while India has been slowly urbanizing over the past two decades, it remains the least urbanized of the emerging Asian economies. Today only 29 percent of Indians live in cities, compared with 40 percent of the Chinese and 48 percent of Indonesians, and we project that the level of urbanization will increase to only 37 percent by 2025.2 Finally, while more Indians are completing secondary and higher education, the educational system remains severely strained and the quality of and opportunities for schooling vary widely.

In rural areas life may become less desperate thanks to continued growth and to government investment in infrastructure and development. But it will likely remain a struggle, particularly for subsistence farmers in the north and east and for others with little education. For India’s urbanites, especially educated ones, the future looks promising. Many of these households will make the jump not only out of poverty but also into the new and aspiring middle class.

The birth of a new middle class
The growth that has pulled millions of people out of poverty is also building a huge middle class that will be concentrated in India’s urban areas. While urbanization isn’t proceeding as quickly as it is in other Asian economies, rapid population growth means that in absolute terms the country’s urban population will expand significantly, from 318 million today to 523 million in 2025.

Urban growth will bring several important consequences. First, it will put tremendous pressure on the urban infrastructure, which is already heavily overburdened. (Our projections assume that infrastructure investments will at least keep pace with urban growth and that problems with transportation and utilities won’t worsen to the point of hampering growth.) Also, in India—unlike China, where urban growth is spread across a large number of cities—the economy will continue to be dominated by the megacities (Delhi and Mumbai) plus the six next-largest urban agglomerations.3 Nevertheless, a handful of smaller places, such as Chandigarh and Ludhiana, will have per capita incomes rivaling those of the major cities and emerge as attractive markets. The shift in spending power from the countryside to the cities will place the bulk of India’s private consumption within easier reach of major companies. Today 57 percent of private spending is spread across rural areas, but by 2025 cities will command 62 percent of the country’s spending power.

Along with the shift from rural to urban consumption, India will witness the rapid growth of its middle class—households with disposable incomes from 200,000 to 1,000,000 rupees a year.4 That class now comprises about 50 million people, roughly 5 percent of the population. By 2025 a continuing rise in personal incomes will spur a tenfold increase, enlarging the middle class to about 583 million people, or 41 percent of the population. In 20 years the shape of the income pyramid will have become almost unrecognizable.

The Indian middle class has already begun to evolve, and by 2025 it will dominate the cities. By then about three-quarters of India’s urbanites will be part of the middle class, compared with just more than one-tenth today. The expansion will come in two phases, with the lower middle class peaking around 2020, just as the growth of the upper middle class accelerates (Exhibit 4). About 400 million Indian city dwellers—a group nearly 100 million people larger than the current population of the United States—will belong to households with a comfortable standard of living. For many companies, the sheer scale of this new urban middle class will ensure that it receives significant attention.

What’s more, companies shouldn’t underestimate the market presented by the country’s most affluent consumers: those earning more than 1,000,000 rupees a year—$21,890 in real 2000 dollar terms, or $117,650 in terms of purchasing power parity (PPP). They will remain a small portion of society: about 2 percent of the population in 2025, up from 0.2 percent today. But in absolute numbers, by 2025 India’s wealthiest citizens will total 24 million, more than the current population of Australia. By that year too, India’s affluent class will be larger than China’s comparable segment, projected at about 19 million people.5 Affluent India’s share of national private consumption will increase from 7 percent today to 20 percent in 2025, which helps to explain the recent rush into the Indian market of luxury goods such as Louis Vuitton bags and Jimmy Choo shoes.

These “global” Indians live mostly in the eight largest cities, so they are very accessible to large domestic and multinational companies. Further, they have tastes similar to those of their counterparts in developed countries: brand name goods, vacations abroad, the latest consumer electronics, and high-end cars.


Changes in consumption
As Indians continue to climb the economic ladder, the composition of their spending will change considerably. In a pattern witnessed in many other developing countries, discretionary expenditures, such as mobile phones and personal-care products, will take up more room in the nation’s shopping basket.

This shift from necessities, defined in our analysis as food and clothing,6 is already under way—and taking place at lower income levels than we have seen in other countries. We expect that discretionary spending in India will rise from 52 percent of total private spending today to 70 percent in 2025. South Korea went through a similar transformation in the 1980s, when its per capita income levels were about twice those of India now.


Food (including beverages and tobacco) will post the sharpest decline in relative consumption, even as overall spending in the category rises. The fall in the share of food expenditures during our forecast period—to 25 percent, from 42 percent—is linked closely to the growth of the middle class. Despite this relative decline, food will remain the single largest category of expenditure, and we expect that growth in consumption will accelerate to 4.5 percent annually, from 3 percent over the past 20 years.

That growth, however, will appear tepid compared with the rise of other categories. In particular, spending on purchases that improve the economic prospects and quality of life of a person or family—health, education, transport, and communications—will soar and eventually command a greater share of consumption than they do elsewhere. The inadequacy of India’s public-health system, for example, means that private health care is a high priority for many Indian families when their incomes grow. This imperative will drive growth in private health care spending by almost 11 percent a year, so that it will account for 13 percent of the purchases of Indian households by 2025, a larger share than current levels in all of the countries we examined except the United States.

In another remarkable shift, spending on education will grow by 11 percent over the next 20 years, to 9 percent of household consumption, higher than today’s levels in any of our benchmark countries. In rural areas, households emerging from poverty will make educating their children a priority, while higher-income urbanites will be spending more on better-quality education, university degrees, and study-abroad programs. Meanwhile, despite India’s fondness for cricket and “Bollywood” movies, recreational products and services will take a smaller slice of household spending there than in other countries.

Transportation, already the largest category of expense after food, will take a bigger portion of household budgets in coming years, exceeding its share in all of our benchmark countries. The highest growth will come from car purchases. Categories such as clothing and household goods are expected to post slower annual growth relative to overall consumption—6.4 percent and 6.9 percent, respectively—and thus to lose share of wallet. Yet even in these categories, growth rates will remain highly attractive as compared with those in other markets around the world.

What it means for businesses
Three-quarters of India’s consumer market in 2025 doesn’t exist today—about 52.6 trillion rupees a year in future purchases will be up for grabs. Also, India’s rapid upward mobility means that many of India’s households will be new consumers, enjoying significant discretionary consumption in the organized economy for the first time in their lives. Incumbents and challengers alike face a sea change. India’s incumbents, mostly domestic companies, will start with many advantages: existing relationships with customers, an understanding of their needs, and recognized brands.

The incumbents also have established distribution channels—very important in a country of vast geography and limited infrastructure.

But growing incomes and consumption will pressure incumbents from two directions. First, such companies must adjust to the pace and magnitude of change, for as consumers rise through the income brackets, their needs, tastes, aspirations, and brand loyalties will evolve along with their lifestyles. Second, India’s growing consumption will attract a raft of challengers, and ongoing economic reform will significantly intensify competition in many markets. New competition will come from multinationals entering the Indian market, from established Indian companies looking for expansion opportunities, and from entrepreneurs. Indeed, if the country’s policy makers create the conditions for India’s entrepreneurs to succeed, major new companies could be built on the back of consumer growth.

Many incumbents haven’t prepared enough for this discontinuity. They will have to develop a deep understanding of how the consumer’s needs and aspirations will change as incomes grow and find ways of creating innovative products that meet those changing needs. In addition, they must think about how they should introduce new consumers to their products, whether their brands are appropriate for those consumers, and what prices and cost positions will help them compete most effectively for a share of this new middle-class market. Nor is that all: incumbents will have to keep a wary eye on the actions of their current competitors and on new market entrants. That’s a full agenda, and companies that begin preparing today will be in the best position to benefit from the changes.

For attackers, the challenge will be to spot the gaps and opportunities that arise as India’s income and class structure change; they might, for example, ask themselves where small markets or limited competition, or both, have served middle-class consumers poorly. Attackers could also turn to other emerging economies to seek lessons on how tastes and needs will likely evolve in India, perhaps looking in particular for categories in which spending shifted from local products and brands to international ones as aspirations rose. Attackers seeking to exploit these changes should consider what new needs will be unique to Indian tastes and the market as the middle class grows.

In India, as in many emerging markets, multinational companies will find themselves squeezed between the desire of the country’s consumers for a modern middle-class lifestyle and the realities of their limited budgets. In 2005 the average middle-class family spent just over 300,000 rupees annually—roughly $6,600—a very modest sum in real terms, but in PPP terms equal to around $35,000. As one multinational executive noted, however, “You can’t put PPP dollars in the bank, only real dollars.” Multinationals must innovate to deliver an aspirational middle-class lifestyle to families on an Indian budget. Companies that can develop new business models, design products with carefully targeted features, and create brands that appeal to India’s upwardly mobile people will attract huge numbers of eager consumers.

The future we have described assumes that India will continue on its recent path of strong growth. There are many reasons to believe that this assumption is realistic, most notably the scope for improved productivity in the economy. But India’s outlook depends strongly on continued long-term economic reforms that are needed to address serious deficiencies in the country’s infrastructure, modernize the financial system, and promote investment in human capital through better education and health care.

India’s emergence as the world’s fifth-largest consumer economy will bring significant benefits to the country and the world. Growth will pull hundreds of millions of people out of poverty and into the world’s middle class. With rising incomes, Indians will have the opportunity to realize comforts and pleasures enjoyed by middle-class families around the world. In addition, rising domestic consumption will create further economic growth and employment as companies work to meet the new consumer demand. For the world’s businesses, India represents one of the largest consumer market opportunities of the next two decades. During the first millennium, merchants referred to India’s glittering and dynamic market as the “bird of gold.” That bird is preparing to take flight again.


About the Authors
Eric Beinhocker is with the McKinsey Global Institute, where Diana Farrell is director; Adil Zainulbhai is a director in the Mumbai office.

What Is So Middle About Middle Class?

It is interesting to note in general discourse, the two constitutive words of the phrase ‘middle class’ – middle and class –are both absent in the meaning of the eventual phrase. Middle class is now used more as a referent to ‘people like us’ in media, a hegemonic lens of ideas and discursive practices through which one ‘should’ look at the society, than as a referent to a class based grouping clawing to advance its own class aims.

Class may be dead as a publicly flaunted grouping (except the modest moral middle) but it doesn’t mean people are any less disposed to class wisdom that surreptiously privileges their class. The concept of ‘meritocracy’ as an ordering mechanism is so widely accepted today that it now carries with it the sharp edge of moral righteousness rooted in ‘fairness’. It is understandable that the meritocratic inclusive ideal has been constructed in a way to obfuscate middle class’s own culpability, but it is less clear why the ideal has been accepted by those it disprivileges. To be sure, the acceptance rates are dramatically lower among the disadvantaged, but it is likely that even they accept large portions of the basic premise in a whole range of circumstances.

It is a signal of the success of the system when people choose to believe in a system that disadvantages them. The fact of the matter is that the final aim of all stable power systems is not rule by force but co-option – if not in the fruits, then in its truths. Marx - meet Gramsci.

It is useful to note that the number of people who buy into the ‘dream’ depends on the extant (economic) counterfactuals as well as salience of alternate discourses led by other political entrepreneurs. (But politics provides at least as many counterfactuals as number of entrepreneurial politicians.)

Classifying the Middle

The rise of middle class is generally understood in terms of rise of Capitalism as a dominant economic system, the rise of cities, and the rise of bureaucracy. So it is no surprise that valorization of ‘middle class’ is universally barnacled to such societies.

‘Middle class’ has been described as a rentier class with ‘no social basis’ but one with a specific function. Benefits are distributed asymmetrically in a Capitalist (or for accuracy sake power) pyramid and the top .01% gain significantly more than the next .09% who in turn gain significantly more than the next 1%, and so on. This sharply tapering pyramid is held in place by the inclusive meritocratic rhetoric (some of it is true some of the time), and by the aspirants (middle class) in whose claws ‘success’ seems the nearest. More broadly, each economic system has a legitimizing (sense making) discourse for its winners and losers, and in Capitalism – it is the inclusive, achievable, democratic discourse about merit and hard work. Super rich probably don’t have illusions about how they got their money, but the moral middle is caught up in its need for ascribing their modest success to their own ingenuity and hard work. The moralism of middle class can be better understood if acknowledge its historical roots in Victorian England. One of the defining features of the ‘middle-class’ in Victorian era was its extreme moralism – railing against corrupt degenerate aristocracy, and the equally corrupt breeding-like-rats poor, and trying to define middle class ‘meritocracy’ as the only ethical framework. Hence meritocracy has become the defining ethos of the society–inclusive yet elusive - inclusive enough to keep the bottom salivating, and yet elusive enough to keep it nearly always out of reach of the lower classes.

Since liberalization, middle class has become a significant feature of discourse on India, and within it. While the wildly improbable figure of 300 million people is seen in a variety of communiqués today, this ‘shining’ habit of overstatement has its pedigree in Mani Shankar Aiyar’s words. Aiyar in mid 1980s as a joint secretary in Rajiv Gandhi’s PMO told The Washington Post that India now had a middle class of 100 million people. Whatever the numbers, the ‘middle’ has since then gained in political and cultural significance.

Defining the middle - Middle income and middle class

Gary Burtless, economist with the Brookings Institution, chooses to define the more readily apprehensible “middle income” rather than “middle class”. He bases his definition on the median household income — which last year in US was $48,200, putting middle income range from half of that to twice that number, or $24,000 to $96,000.

MIT economist Frank Levy came up with a definition based on Census data for families in their prime earning years and pegged that range from about $30,000 to $90,000.

The World Bank defines the middle class as earners making between $10 and $20 a day — adjusted for local prices — which is roughly the range of average incomes between Brazil ($10) and Italy ($20).

In the middle of nowhere

India’s purchasing power parity adjusted GDP is $4.1 trillion (2006), giving it a per capita GDP of about $4k. Even if all of India’s GDP was assigned to 250 million, it would mean a gdp/pp of $16k. (This is opposed to $13.3 trillion for 300 million or about $44k/ capita in the US) And since it is obviously not the case, and the truth being closer to $2-3k, the group is necessarily small, and its consumption levels don’t even begin to compare to ones in OECD countries.

Middle class as is commonly understood is certainly not in the median or mean income range, and the boundaries of what it means to belong to it are perennially being pushed outwards to include more commodities that are seen as necessities to belong to this class. But there are certain minimum thresholds. For example, access to sanitation.

“One out of every two persons in the world compelled to defecate in the open is an Indian. This is one of several unsavoury facts brought out in a recent report by the World Health Organisation and UNICEF. According to the report, out of the 1.2 billion people who defecate in the open worldwide because they have no access to toilets, more than half are Indian. An astounding 667 million people in this country have no option but to defecate in the open, a country that would like people to believe that it is on the cusp of becoming a global economic giant.” (India Together)

Indian Middle class

In pseudo-socialist regimes, as was in effect in the first three decades post Indian independence, ‘Class I’ government employees emerged as the embodiments of the ‘educated’ middle class. In India, the ‘babus’ living in government quarters along with the rest of their extended families, with their focus on education for their kids, conservative social attitudes, reasonably self-congratulatory, became the embodiment of the Indian – or certainly Delhi- middle-class. But before we discuss middle class, defined thus, it is useful to acknowledge that thus defined it was but a small sliver of the Indian population, though one which had an oversize impact on its politics, especially post liberalization. (Of the 16 million public sector employees in 1983, only a miniscule fraction belonged to the ‘class 1’ strata.)

In the socialist economy of Nehru era, with its emphasis on building large-scale industrial projects (the modern ‘temples’), perhaps the determining ethos weren’t from the mid-ranking babu, who though I am sure heavily approved of industrialization, but from the West or Soviet looking educated technocrats dominant in the upper echelons of the civil service. Given the relatively weak political systems in which institutions to help wield political power were still being developed, it is likely that the administrative cadre was left to govern not only vast policy areas, but even where the politicians had control.

India’s trajectory – Politics

“Rajiv was the first middle class Prime Minister of India — and was proud of it. He was the first Prime Minister to have ever held a job, to have paid income tax, to have watched with alarm as his provident fund deduction went up and to have struggled to make ends meet.” Vir Sanghvi, Editorial Director to Hindustan Times

Rajiv Gandhi, who became a Prime Minister at the age of 40, was bullish in his ideas about introducing technology. Relatively free from pressures to tend to any particular political constituency, because of the sycophantic culture within Congress, a huge electoral lead, and a name like Gandhi, he, along with his select coterie of foreign and Indian bureaucrats and businessmen, worked to bring about a technology revolution in India.

The rise of BJP had something to do as well with the picture. The ‘only’ way a phantom ‘middle class’ can be a political constituency in an entrepreneurial ‘democracy’ like India’s is if significant people who ‘vote’ (this being key) buy into the rhetoric, or are encumbered with other dimensions like religion, etc. or both. Identity based politics meets class. So while BJP may talk swades, its liberalization policies were no different from Congress’s. So the middle gets to eat the cake and have it too.

Policies and politics can be orthogonal, and they often are – in India like in the US - but they are not charted by prevalent discourse but in fact discourse is created to sustain policies that benefit a few. It is unclear whether the construction of discourse around ‘middle class’ was done by ‘strategic political actors’ (in thrall of massive profits coming from corruption if nothing else), and the supporters from the upper crust (with massive incomes to flaunt of their own), or just a mundane control of discourse effected by new capitalism, or perhaps more likely the prior facilitated by the latter.

India’s trajectory – Economic Liberalization

While Rajiv Gandhi was an important precursor to the ‘middle class’, it wasn’t until the launch of economic liberalization in 1991, that the class gained in currency. It is important to note however that the 1991 economic reforms were launched under the gun of defaulting on debt, which would certainly have had catastrophic implications for the already battered Indian economy. Additionally, Soviet Union, the not-insignificant benefactor of India, collapsed in 1991 (and was on the death bed for some time before that) so there was nowhere else to turn to for help.

India’s trajectory - Media and Globalization

The timing of India’s liberalization was fortuitous in a way - especially as we trace the story of the ascent of the middle class in the past decade - as it coincided with the advent of transnational satellite broadcasting in Asia. In 1991, Hong Kong based (Murdoch owned) Star TV started broadcasting to several Asian countries from a clutch of transponders aboard Asiasat 1. Its mainstay was recycled American programming. Star TV found instant reception due to Gulf War which had revolutionized cable. The satellite dishes/and cable/ operators showed images from gulf war and then showed Hindi movies at the end of the war. Overnight, video parlor owners changed to cable operators offering Star TV’s five channels – including BBC and MTV. BBC was later dropped.

The government took a lax view of the mushrooming illegal cable industry, and didn’t take steps to regularize it until 1995, and even then enforcement was lax, if not non-existent. The rise of cable was significant in shaping the middle class, and how it chose to see itself - at once liberal, and aware of global trends in fashion and entertainment. And still aware of how to yell an order chai to the housemaid.

Not media, but the people in media

But if it were not for further liberalization of media, and new generation that took reigns of that media - the story may still have been different.

The narrative around media’s role in the construction of the new middle class is more completely understood if we move beyond analyzing the product or the stated strategic intensions of the actors, and instead look at the people running media today.

Till early nineties, the only game town used to be the state media. Even the newspapers treaded lightly, if progressively, under threat of government boycott of ads. The dominant ethos in reporting and programming on the state media were the liberalist bureaucratic ethos and on radio dominated by people likely to be friends with university professors. Doordarshan ran public service ads, and social cohesion promoting dramas.

This all changed, first with the introduction of cable, which initially featured ‘foreign channels’ carrying a sprinkling of preppy foreign bred hyphenated Indians, and then with the rise of ‘native’ media led by clawing young brigade. The new recruits to the media industry - young, turgid with ambition, aiming to please, and imbibed in business ethos- were key in hastening the spread of ‘middle class’ discourse. A similar process is underway in American journalism with shift in technology necessitating a significant generational shift. It is patently clear reading ‘Times of India’ with its ‘Leisure’ sections (something which was started by Washington Post – ‘Style Section’ in the 1980s) that newspaper today looks like a vastly different animal than a decade and a half ago. One can argue that some of the change in media was a result of the change in economy, and not a ‘cause’ of some of the changes but the alacrity with which media changed, the speed with which it contorted, and the multiple places in which it behaved as the vanguard speaks of fundamental change in ethos that could only have happened with the active participation of the eager to be indoctrinated/ or already indoctrinated.

Caste and class and class as caste

In India, class and caste have long intersected. Brahmins have long been over-represented in government jobs, especially in the officer cadre, and intelligentsia. Since economic liberalization benefits the well-prepared the most, on average, the disproportionate beneficiaries of the new regime have also been the upper castes. As upper caste elite of the new economic regime shed their caste pretension, and take on class pretensions - not that they are particularly distinguishable - the intolerance of one has been painted over with rectitude of another.

Acknowledgment/Citation

This article is in response to (and at times directly rests upon) the book, India’s New Middle Class: Democratic Politics in an Era of Economic Reform, by Dr. Leela Fernandes.