Tracking the growth of India’s middle class
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.

Eric D. Beinhocker, Diana Farrell, and Adil S. Zainulbhai
2007 Number 3
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.

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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 (Exhibit 1). 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.

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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