Manas Chakravarty: The great Indian consuming class

The figure of 200 million consumers is not far off the mark

There have been many attempts to measure the size of the Indian consuming classes. One early, and well-known, estimate was that of a 200 million-strong middle class avid for consumer goods and raring to take advantage of the opportunity provided by liberalisation to shop till they dropped.

How the 200 million estimate was arrived at is a mystery, and it seems to have been plucked out of thin air. But in the initial euphoria of liberalisation, that 200-250 million figure was eagerly lapped up by foreign investors, anxious to gain a foothold in the rapidly growing Indian market.

By the time the downturn of the late 1990s set in, however, it was soon realised that the Indian shopper lacked stamina, and it didn't take long for him to drop after he shopped.

The 200 million figure was then greeted with derision, and efforts were made to measure the Indian market on a more scientific basis, the National Council of Applied Economic Research's (NCAER's) MISH (the Market Information Survey of Households) survey being one such detailed and painstaking exercise.

It's possible, however, taking purely macro data, to arrive at a guesstimate of the consumption power of Indian households, based on the government of India's estimates of national income and the United Nations Development Programme's (UNDP) data on inequality of income or consumption culled from the Human Development Reports (HDRs).

The government's advance estimates of national income for 2004-05 put India's per capita NNP at factor cost at Rs 23,308 at current prices. Assuming a family of five, that would work out to an annual family income of Rs 1,16,540 or a monthly income of Rs 9,711. That's not so good "" supporting a family of five on that kind of income won't leave much room for splurging on consumer durables, after paying the rent and the bills.

The consuming classes
Wait a bit, however. That estimate doesn't take into account the inequality in the distribution of income. According to the UNDP's Human Development report for 2004, the richest 20 per cent of Indians got 41.6 per cent of the total income. With the government's advance estimates putting the 2004-05 population at 109.1 crore and per capita income at Rs 23,308 crore, the net national product at current prices works out to Rs 25,42,902 crore. 41.6 per cent of that, which is what the richest 20 per cent of Indians earn, is Rs 10,57,847.23 crore.

Now assume each Indian family has five members. The number of families would, therefore, be 109.1 crore "" the total population "" divided by 5 or 21.82 crore households. Twenty per cent of that is 4.36 crore households. In other words, the Rs 10,57,847.23 crore is divided among the top 20 per cent of the population, or 4.36 crore households. Each household in the top 20 per cent, therefore, earns Rs 2,42,625 per annum, or Rs 20,218 per month.

After paying the monthly bills, that will leave something over for buying consumer durables and other goodies on the instalment plan, especially now that interest rates have come down so much.

In other words, 20 per cent of the Indian population, or 218 million people, have the wherewithal to spend not only on soaps and shampoos and cosmetics, but also on white goods and vehicles. That 200 million estimate of the Indian consuming classes wasn't too far off the mark.

The UNDP data also says that the richest 10 per cent of the population had 27.4 per cent of the income. That's 2.18 crore households who earn 27.4 per cent of total income. That works out to Rs 26,634 a month at current prices for a family of five, enough to pay the EMI for a house as well as all the other consumer goods. The richest 10 per cent of the population, or 109 million people, is a market for selling almost every type of mass consumer good, including housing.

In short, the data proves what has been observed for years now "" that the top 20 per cent of Indians have enormous spending power. Note that the numbers do not take black money into account, which would add considerably to the purchasing power of the top ten per cent.

The real middle class
Next we have India's real middle class, the 60 per cent of the population in the middle. According to the HDR 2004, this 60 per cent had 49.5 per cent of the total income. That's 13.09 crore households who share among themselves 49.5 per cent of Rs 25,42,902 crore or Rs 12,58,736.49 crore, or Rs 96,160 per household per annum.

That works out to Rs 8,013 per household per month. It's tough feeding a family of five on that income, pay the bills and have some money left over for spending, but that's the kind of purchasing power the real Indian middle class has.

It's when this middle 60 per cent of the population graduates into the consuming top 20 per cent's current consumption levels that the Indian market will see a quantum jump. If the compounded real growth rate of around 4.8 per cent per year in per capita income in the past 10 years is maintained, these Rs 8,000 per month households will grow into Rs 12,000 per month households in the next 10 years.

The bottom of the heap
Go down the ladder into the nether reaches of the Indian population, and the poorest 20 per cent consume a mere 8.9 per cent of the total income, according to the UNDP numbers. That means the poorest 4.36 crore households share between themselves Rs 2,26,318.27 crore. Each household gets a mere Rs 4,325 per month. For a family of five, that's hardly enough to keep body and soul together. At this level , we're below the poverty line.

And finally, the very poorest 10 per cent of the population gets just 3.9 per cent of the total income, according to the UNDP data. That means these 2.18 crore households get a monthly income of Rs 3,791 for a family of five, which is utter destitution.

More socialist than China
HDR 2004 points out that the income inequality data for India "" how much goes to the top and bottom 10 and 20 per cent of the population "" pertain to 1999/2000. Interestingly, the HDR for 2003 gives income inequality data for 1997, which are significantly worse than the 1999-2000 data. For instance, while the bottom 10 per cent of the population got 3.9 per cent of the total income in 1999/00, they got only 3.5 per cent in 1997.

Similarly, the bottom 20 per cent got 8.9 per cent, compared to 8.1 per cent in 1997. In contrast, the share of the top 20 per cent dropped from 46.1 per cent to 41.6 per cent, and that of the top 10 per cent went down from 33.5 per cent in 1997 to 27.4 per cent in 1999/00.

Contrast the numbers for China. In 1998, the richest 10 per cent of the Chinese population got 30.4 per cent of the total income. In 2001, that percentage went up to 33.1. The share of the top 20 per cent went up from 46.6 per cent to 50 per cent. The share of the poorest 10 per cent dropped from 2.4 per cent to 1.8 per cent and that of the poorest 20 per cent from 5.9 per cent to 4.7 per cent.

Note how much more unequal the distribution of income is in nominally Communist China compared to India. The top 10 per cent gets 18.4 times the income of the poorest 10 per cent "" in India, that multiple is a much more egalitarian 7 times. Of course, that inequality, coupled with China's GDP, which is more than twice that of India, makes the Chinese "middle class" market that much more attractive.