India: A billion people have no real money to spend, says report

A recent report estimates that despite India's 1.4 billion population, approximately 1 billion of them lack the disposable income to purchase non-essential goods or services. This implies that India's vast population size has not fully translated into strong consumer spending power.

According to a report by venture capital firm Blume Ventures, India's true consuming class, which represents the potential market for startups and business owners, is only about the size of Mexico, at roughly 130 to 140 million people. Another 300 million people are considered "emerging" or "aspiring" consumers, but they have a weak propensity to spend, only just beginning to open their wallets with the proliferation of convenient digital payment methods.

The report points out that India, as the third-largest economy in Asia, is seeing its consuming class "deepen" rather than "widen." This means that the number of wealthy people in India is growing slowly, while the existing wealthy are accumulating more wealth. This trend is shaping India's consumer market in a unique way, especially accelerating the trend of "premiumization," with brands doubling down on expensive, upgraded products to cater to the needs of the rich, rather than focusing on the mass market.

This phenomenon is evident in the soaring sales of high-end gated communities and premium mobile phones, while lower-end products are struggling. Affordable housing currently accounts for only 18% of the overall market in India, compared to 40% five years ago. Branded goods have also captured a larger market share. The "experience economy" is booming, with concert tickets for international artists like Coldplay and Ed Sheeran selling out despite their high prices. Sajith Pai, the author of the report, stated that companies adapting to these changes have thrived. "Those who were too focused on the mass market or lacked premium offerings in their portfolio have lost market share."

The report's findings corroborate the long-held view that India's post-pandemic recovery has been K-shaped—the rich are getting richer, while the poor are experiencing a decline in purchasing power. In fact, this is a long-standing structural trend that began even before the pandemic. Inequality in India is increasing, with the top 10% of the population now owning 57.7% of the national income, compared to 34% in 1990. The share of national income for the bottom half of the population has fallen from 22.2% to 15%.

However, the latest consumption slowdown has been exacerbated, not only by declining purchasing power, but also by a sharp drop in mass financial savings and a surge in debt. The Reserve Bank of India has also cracked down on the easy, unsecured loans that supported demand after the COVID-19 pandemic. Pai stated that the spending of "emerging" or "aspiring" Indian consumers was largely driven by such borrowing, and "closing off that channel is definitely going to have some impact on consumption."

In the short term, two factors are expected to help boost spending: a rebound in rural demand due to a record harvest, and $12 billion in tax breaks in the recent budget. Pai said that this will not be "dramatic," but it could boost India's GDP, which is largely driven by consumption, by more than 0.5%. However, the long-term headwinds remain.

According to data compiled by Marcellus Investment Managers, the Indian middle class, a major engine of consumer demand, is being squeezed, with wages barely growing. A report released by the firm in January stated that "in the last decade, the income of the middle 50% of the tax-paying population in India has effectively stagnated. This implies that real income (adjusted for inflation) has reduced by half." The report also added that "this financial battering has decimated the savings of the middle class – the net financial savings of Indian households are nearing a 50-year low, as highlighted multiple times by the Reserve Bank of India. This shock suggests that products and services associated with middle-class household spending are likely to face tough times in the coming years."

Marcellus' report also pointed out that urban white-collar jobs are becoming increasingly difficult to find as AI automates clerical, secretarial, and other routine tasks. "The number of supervisors employed by Indian manufacturing units (as a percentage of all employees) has declined significantly." The government's recent economic survey also raised these concerns. The survey stated that job losses due to these technological advancements are particularly concerning because India is primarily a service-driven economy, with most of its IT workforce employed in low-value-added service industries that are most vulnerable to disruption.

"India is also a consumption-based economy, so the decline in consumption that may result from job losses will inevitably have macroeconomic implications. If the worst-case scenario predictions come true, this could derail the country's economic growth trajectory," the survey report stated.