Purchasing Power in India

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PURCHASING POWER IN INDIA Sameer Mathur, Ph.D.

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Sameer Mathur smathur.com Asst. Professor (Marketing) 2009 – 2013 Ph.D. and M.S. (Marketing) 2003 – 2009

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Agenda

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GDP per capita method is misleading -- makes India appear to have a low purchasing power for mainstream consumer goods. Future: Purchasing power will increase due to +6% real GDP growth each year. India’s Purchasing Power

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India’s Middle Class

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Varying definitions: Based on income and socioeconomic class Based on ownership of durables like cars and televisions Those who participate in the consumer economy Source: Guide to Indian Markets 2006 Middle Class - Definition

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Uncertain – ranging from 100 million to 400 million Through MNC definition: Size < 100 million people Through FMCG market perspective: Size ~ 250-300 million people Through consuming classes (Cost-benefit optimizers): Size ~375 million people Through income distribution Size ~300 million people Indian Middle Class - Size

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Less affluent than the middle class in other countries. In terms of consuming power, middle class of other countries is comparable to top 10% of India’s population (~105 million people). Poorer Indian Middle Class

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Belief ‘Monolith’ mental model Many people with equal purchasing power Reality Multi-layered cake model Many layers of varying size and affluence Truth Behind Indian Purchasing Power

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Layer Division

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Income Classes Annual household income (000s rupees) % of Indian households in each income class Motorcycles Color Televisions Refrigerator Air Conditioner Car Sheer Rich 5,000-10,000 0.02 91 117 100 38 77 Clear Rich 2,000-5,000 0.11 77 113 81 40 69 Near Rich 1,000-2,000 0.29 66 89 68 32 66 Strivers 500-1,000 0.91 75 69 64 28 54 Seekers 200-500 4.8 70 74 62 13 29 Aspirers 90-200 21.9 47 40 34 2 4 Deprived <90 71.9 7 5 4 0 0 Affluent Layers Based on Income

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Urban India Source: (IRS) Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 Top 10% Next 14% Next 24% Next 33% Last 19% Estimated households (in millions) 6 8 15 20 11 Durables Owned (% of Tier ) Color Television 91.1 78.2 60.9 32.5 14.6 Refrigerator 82.6 59 35.3 11 3.3 Motorcycles 66.3 50.2 31.5 11.3 3.6 Car 22.4 5 1.2 0.2 0 Telephone 76.4 47.8 24.8 8.1 2.6 Washing Machine 47.7 21.6 8.8 1.7 0.5 PC 18.3 5 1.3 0.2 0 Affluent Layers Based on Income

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Rural India Source: (IRS) Tier 1 Tier 2 Tier 3 Tier 4 Top 4% Next 10% Next 35% Next 51% Estimated households (in millions) 6 15 51 74 Durables Owned (percentage of Tier) Color Television 43.1 24.6 8.3 2.2 Refrigerator 3.5 0.8 0.1 0 Motorcycles 40.1 27.7 12.3 4.5 Car 33.3 19.4 6.6 1.7 Telephone 24.9 14.3 3.6 0.9 Washing Machine 3.8 1.7 0.3 0 PC 1.2 0.3 0 0 Affluent Layers Based on Income

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Layer Name % of population Households Relative Consumption intensity index Profile % Urban-Rural Consumption intensity index X population** Samriddha 1 (prosperous) 0.50% 1/5 1,997 = 100 96-4 100 Samriddha 2 (prosperous) 0.50% 1/5 1,997 = 100 93-7 100 Sampanna (well off;not wealthy) 2% 4/20 484 = 24 89-11 96 Siddha (achieving; just entering upper class) 3% 6/30 235 = 11 76-24 70 Unmukha (aspiring; moving beyond the average) 9% 19/95 119 = 6 60-40 113 Saamaanya (average/ordinary) 10% 21/105 65 = 3.2 45-55 68 Sangharshi (strivers) 35% 71/355 32 = 1.6 30-70 113 Nirdhana (poor) 40% 83/415 15 = 0.75 11-89 62 **(Consumption index X population) is the basis on which total purchasing power index of the strata has been computed Affluent Layers Based on Consumption Intensity

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70-75% of consumer India cannot be counted as healthy consumers Consumer India: 50-60 million people (Top 30%) with high purchasing power 100 million people below, on the road to consumption 100-150 million people below, starting consumption Verdict on Purchasing Power

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Penetration of Consumer Goods in Rural India % of rural households owning/consuming Item 2000 2005 Color Television 3.7 11.1 Refrigerator 3.2 4.2** Packaged Biscuits 39.1 54.2 Soft Drinks 9.8 12.2 Shampoo 13.3 31.9** ** While a 1% increase does not appear to be much, on the massive base of rural India about 140 million households, this accounts for 1.4 million refrigerators, which is actually quite a lot. The color television penetration increase amounts to 10 million households, which is the size of Sweden's population or half of Australia's population *** This massive increase in shampoo consumption is the effect of package innovation, lowering price points, and unit sizes enabling regular occasional consumption Consumption growth happens quickly due to consumption confidence, which grows with an increase of penetration in a given layer -- accelerating consumption further. Verdict on Purchasing Power

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Deciles in terms of income GDP (US$ billions) Population (millions) GDP per capita (US$) 1(highest) 204.3 108.8 1,876.00 2 94.6 108.8 868.7 3 71.3 108.8 654.7 4 50.3 108.8 461.7 5 47.9 108.8 439.9 6 37.1 108.8 340.7 7 32.3 108.8 296.6 8 24.8 108.8 225.8 9 19.2 108.8 176.3 10(lowest) 12 108.8 110.2 Total 599 1,088.00 550 Affluent Layers B ased on GDP

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Percentage of Population Population (millions) GDP (US$ billions) GDP per capita (US$) GDP per capita of other BRIC countries (US$) Top 1% 10.9 51.5 4,733 Brazil 2,700 Top 5% 54.4 136 2,500 Russia 2,610 Top 10% 108.8 204.3 1,876 China 1,100 Top 20% 217.6 298.9 1,374 Top 30% 326.4 370.2 1,136 Bottom 70% 761.6 228.8 300 Summary of GDP Distribution

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GDP Distribution in Class, Mass and Bottom of Pyramid India (2003-04) Percentile of income Population (millions) % of National Income GDP per Capita (US$) GDP (US$ billions) Class India Top 10% 109 34.10% 1,878 204.6 Mass India Next 30% 326 36.10% 662 216.6 Pyramid India Last 60% 653 29.70% 265 178.2 Bottom of Pyramid : 650 million who earn less than a dollar a day; but, accounts for market opportunity of US$173.3 billion and requires innovative, low cost-benefit, value-right models for profitability. Simplified GDP Distribution

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India’s Middle Class

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Percentage of Population Population (millions) GDP (US$ billions) GDP per capita (US$) GDP per capita of other BRIC countries (US$) Top 1% 10.9 51.5 4,733 Brazil 2,700 Top 5% 54.4 136 2,500 Russia 2,610 Top 10% 108.8 204.3 1,876 China 1,100 Top 20% 217.6 298.9 1,374 Top 30% 326.4 370.2 1,136 Bottom 70% 761.6 228.8 300 Summary

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Summary

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Background Reading

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Recommended Reading

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