The covetousness that the potential of India’s middle class inspires as a base for consumption and economic growth amongst firms of the world is not dissimilar to the feeling held by English nobility in 1858, the year British Crown Rule was established in the subcontinent. Despite it’s bloody ruling, and the fact that the Raj-appointed Viceroys never presided over a territory encompassing all of modern India, England viewed India as an engine of economic gain, taking resources from the region in true mercantile fashion. Now, it is not resources that English firms seek to remove, but rather entrance and access to the new most valuable resource: that resource is the 300M Indians making 250,000 rupees annually, a figure estimated to rise to 550M by 2025, that makes up it’s domestic middle class and forms the largest untapped consumer base Western firms have seen since the rise of China over a decade ago.
A recent briefing in the Economist detailed the rise and risk associated with Western firms’ salivation over the upcoming expected consumption glut. The article issued a word or two of caution to gluttons dreaming of paisa feasts: the first, India’s GDP per head sits at $1700USD, far below the $3915USD required to qualify as middle-class, and over 80% of the population sits below the GDP per head mark. A dramatic shift and acceleration of trends would be required for almost 50% of the population to transition from subjective poverty to middle-income consumers, even with figure adjustments for lower costs of living. The second is the growing inequality seen the world over that is exacerbated in India by a caste-system allowing the top 1% of earners to capture 22% of the entire income pool, leaving more humble slices for the remaining 99%.
There are other issues the forecasts face: higher than average employment rates within the informal sector, an average firm size and productivity that limits wage growth, and low female workforce participation rates that has been falling in the past decade. But perhaps the largest contrast can be made by a striking issue: urbanization rates, primarily the fact that India’s urbanization rates are lower than that of it’s regional neighbors. Cities are breeding grounds for white collar jobs and participation within the services economy, the growth of both of which can be correlated to increased corporate investment rates and upward economic mobility.
China’s middle-class expansion was at it’s largest from 2000 onwards, with estimates placing 4% of households in 2000 within the middle class and over 68% by 2012. One key reason for this growth is attributed to it’s skyrocketing urbanization rates. From 1950 to 2005, Chinese urbanization rates exceeded 41%, and are estimated to sit at 64% of the total population by 2025. Never before has a nation urbanized at such a high rate, and the results have been exponential. Urban per capita GDP is expected to grow at a rate of 6% annually from 2005 to 2025, and it’s urban middle class is expected to explode to 280M households by 2025, or more than 3/4 of all urban households. India, by contrast, has not capitalized on this trend – while India spends $17 per capita on capital investments in urban infrastructure annually, China spend $116. China’s major cities enjoy the same status as provinces, and mayors are often powerful figures within the CCP.
India scores lower across the board, but does have a higher potential moving forward. By 2025, the year McKinsey, a consultancy, places as a milestone of urban growth across Asia, only 16% of India’s population will be older than 55. Estimates predict that if India follows similar growth rates to China and adopts a like-minded urbanization model, the economy could add an additional 170M workers compared to China’s 50M.
Within these figures, it is apparent why major Western eyes train towards the East. But barriers exist – all those outlined above as risks are very much present dangers, and a disorganized education system and protectionist policies limiting foreign firms from major investment are impediments within themselves. But the consumer pivot to India still draws the eye of Western firms like it drew the eyes of the empires before it. But India should transition to a consumer power house within it’s own right, and capacity is only built with time and wisdom earned through err – firms may dislike the exploits of President Modi, with his sudden decisions to eliminate 86% of cash in circulation in a country where 304M do not have access to electricity, somewhat limiting the capacity of digital transactions. Perhaps it is best to see if the Star of India, still a nebulous mass of potential, can transition into a sun on it’s own before proclaiming it’s rightful place alongside the Red Giant that is China.