[Kotak] GameChanger RUPEES - The India Consumption Story

`110 tn consumption market by 20252.5X the current size in real terms

Premiumization to be the key trendUpgrade from low cost to high value products

High, well-distributed growth criticalProductive job opportunities essential

Introducing KIE’s RUPEES Estimator

THE INDIA CONSUMPTION STORY

Akhilesh [email protected]+91-22-6634-1139

GAME CHANGER

ForewordBuying power by the billion

Slowly, but certainly, the story is unfolding: Indian consumption is meta-morphing. Already India is one of the largest

global markets, but by 2025, we expect it to be two-and-a-half times larger. It will also be a vastly different, richer,

more colorful market—for good reason. Incomes will increase dramatically, and most people will spend more than

just to keep body and soul together. Higher incomes will open the sluice gates of far-reaching consumption change.

KIE’s RUPEES Estimator, a predictive model that projects Indian consumption, among other things, anticipates

significant transformation by 2025: The affluent will spend more on enhanced lifestyles, less on staples. That means

more buying in sectors such as leisure, hotels, housing, household goods and healthcare. Indians will have more

money in their pocket and the poorest of the poor class will shrink. The urban market will account for 60% of India’s

consumption market, from less than 50% today, as rural areas morph into urban centers.

Indian consumers will demand improved quality and more. Our model predicts a clamor for sub-categories of

products, for differentiated products that cater to numerous consumer sub-groups. India will emerge, metamorphed,

making it fertile soil for fresh, new brands.

We are about to enter an era of buying power by the billion…

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

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A market meta-morphing 5

The RUPEES Estimator telescopes dramatic change 11

Buying power by the billion: Bucks for luxe 15

Growing gains: What people want 19

Rural India morphs into mushroom towns 23

GameChangers: How to nurture the metamorphosis 27

Appendix: The birth of a model 29

Contents

The Indian consumption market is emerging as a rich, multi-faceted

entity, that will grow two-and-a-half times by 2025E, to Rs110 tn

from Rs43 tn, right now. More Indians will have a pocketful of

money and a long shopping list, spending disproportionately

on leisure, hotels, housing, household goods, healthcare and

more, but less on bare necessities and staples, as a proportion

of consumption. How do we know? We present KIE’s RUPEES

Estimator, a predictive model that plots India’s consumption

story. It classifies households into: (1) Real-rich, (2) Upper class,

(3) Prospering, (4) Evolving, (5) Emerging and (6) Surviving.

However, inclusive growth (through productive job creation) is

crucial to the stability of the process.

Chapter 1A market meta-morphing


Buying power by the billion

By 2025E, more Indians will have a pocketful of currency and a heart full of dreams. That means a long

shopping list. Some of the big items on that list will be (1) leisure, including hotels, (2) housing, education

and healthcare and (3) communication, transport and other new categories, now small enough to be jotted

under a Miscellaneous head. The share of staples and necessities will fall as a proportion of consumption

spends. (see Exhibit 1).

Exhibit 1: The big winners in the Indian consumption story

CAGR and market size of various commodities, March fiscal year-ends (at FY2010 prices)

Growth Market size (Rs bn)

Categories CAGR (%) Rank FY2011 FY2025 Opportunity (Rs bn)

Food and beverages 5.7 12 17,190 37,130 19,940

Alcohol and tobacco 6.6 10 1,056 2,601 1,545

Clothing and footwear 6.0 11 2,348 5,331 2,983

Housing 8.0 3 5,012 14,762 9,750

Household goods 7.4 9 1,848 4,994 3,145

Healthcare 8.0 4 2,152 6,295 4,143

Transport 7.6 7 3,715 10,298 6,584

Communications 7.8 5 1,136 3,270 2,134

Leisure 8.4 1 1,550 4,797 3,247

Education 7.5 8 1,198 3,287 2,089

Hotels 8.2 2 1,319 3,980 2,661

Miscellaneous 7.6 6 4,766 13,276 8,511

Total 6.9 43,291 110,023 66,732

Source: Kotak Institutional Equities estimates

What counts for consumption can also represent payment for capital value. In the housing component,

for instance, a significant part of an Indian’s expenditure might include capital value (either as interest

on loans or as rent). Therefore, growth in a sector (and its associated sectors, like finance) can be far

more meaningful. Even if you consider other categories, such as education and car or two-wheeler

purchases, finance can play an important role. Consequently, Miscellaneous will become a larger category

of expenditure in India’s new scheme of things, and a significant proportion of the expenditure will be

financial services like banking, investment and insurance.

Segments like food and beverages, alcohol and tobacco and clothing and footwear will grow in their own

right, by 5.5-6.6% a year, but as they trail overall spending growth, their proportion in the share of wallet

will fall. Food and beverage, though, will be high on a consumer’s shopping list and account for a third of

total spends.

Big items on the

shopping list will

be (1) leisure,

including hotels,

(2) housing,

education and

healthcare, and

(3) communication

and transport

What counts for

consumption can

also represent

payment for

capital value

7KOTAK INSTITUTIONAL EQUITIES RESEARCH

GAME CHANGER

When the middle classes evolve beyond survival…

India’s per capita income in FY2011 was Rs60,388. However, there is wide, and increasing, disparity of

income: India’s Gini co-efficient (which measures the level of inequality in income distribution, in which

1 indicates complete inequality and 0 indicates equal income distribution across all people) was 0.395 in

FY2010, having risen from 0.324 in FY1995.

However, India’s large population and long tail of income distribution gives it a consumption market that

houses a significant number of households across the spectrum (see Exhibit 2). We introduce the RUPEES

Estimator (more details in the next section) to classify households into expenditure-based classes. Not

surprisingly, there are more high-end urban households due to the dominance of the services economy in

urban India as opposed to agriculture in rural areas.

Exhibit 2: India will see a huge uptick in rich households

Distribution of Indian households by consumption expenditure, March fiscal year-ends, FY2010-25E (mn)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Rural households

Real-rich — — — — — — — — — — 0.3 0.9 1.4 1.9 2.5

Upper-class — — 0.2 0.7 1.2 1.7 2.2 2.7 3.2 3.8 4.0 4.0 4.1 4.1 4.2

Prospering 5.5 6.0 6.3 6.4 6.4 6.5 6.5 6.6 6.7 6.8 6.8 6.9 7.0 7.0 7.1

Evolving 6.2 6.3 10.2 10.0 9.9 9.7 9.7 9.5 9.2 9.0 9.0 13.1 17.3 21.4 25.2

Emerging 21.2 24.8 26.9 32.8 38.4 46.0 53.3 60.9 69.2 77.4 85.9 90.2 94.0 98.3 102.5

Surviving 129.8 127.1 122.3 117.6 113.2 107.0 100.8 94.7 87.7 80.9 73.7 66.4 59.6 52.4 45.6

Total 162.6 164.3 165.9 167.6 169.3 170.9 172.7 174.4 176.1 177.9 179.7 181.5 183.3 185.1 187.0

Urban households

Real-rich 1.0 1.2 1.5 1.7 2.0 2.4 2.7 3.1 3.5 3.9 4.3 4.8 5.2 5.7 6.3

Upper-class 1.5 1.6 1.7 1.7 1.8 1.9 2.0 2.0 2.1 2.2 2.3 2.3 2.4 2.5 2.6

Prospering 2.6 2.7 4.5 4.6 4.6 4.7 4.8 4.8 4.8 4.8 6.4 8.2 10.0 11.8 13.7

Evolving 7.7 9.0 8.5 10.4 12.9 15.4 18.0 20.8 24.6 28.5 30.9 33.4 36.2 39.0 42.0

Emerging 26.1 28.7 31.4 33.5 35.4 37.3 39.3 41.3 42.5 43.9 45.2 46.2 47.0 47.7 48.5

Surviving 29.3 28.0 26.7 25.4 23.9 22.2 20.6 18.8 16.8 14.7 12.7 10.7 8.6 6.7 4.6

Total 68.2 71.2 74.2 77.4 80.6 83.9 87.3 90.8 94.3 98.0 101.7 105.5 109.5 113.5 117.6


By FY2019E, the number of households in the Surviving class—almost 70% of India’s current households

(159 mn of the 231 mn households)—will be eclipsed by the Emerging class with each class having108 mn

households. By FY2025E the Evolving and Emerging classes will comprise about 210 mn households (out

of about 300 mn households). The top three classes will have grown more than 3X, to 36 mn households

(11.9% of households) from an estimated 11 mn households today (4.6%).

India’s large

population

and long tail

of income

distribution gives

it a consumption

market with

a significant

number of

households across

the spectrum

The top three

classes will have

grown more than

three fold, to

36 mn households


…they grow with big buying power

Surviving households form the largest segment by value (28%) in a Rs43 tn Indian consumption market,

today. By 2025E as economic growth, assuming it is reasonably well distributed, increases the number of

the Emerging and Evolving middle-class households, they will command almost half the Rs110 tn market,

and the Surviving class will account for only 3%. The top three classes, which now account for about 30%

of the consumption basket, will account for about 43% by FY2025E.

As the share of wallet shifts to high-end customers, per capita expenditure in each category will expand

(see Exhibit 3). This will create sub-categories: we expect to see this, especially in categories that will lead

growth, at above-average levels.

Consider this: a Survivor spends about Rs600 a year on healthcare (a small proportion of a relatively

small wallet) while a Real-rich person spends Rs45,000 a year. As people graduate into higher classes

their approach to well being will undergo a sea change. They would focus on (1) disease prevention (also

captured in the leisure category through health boutiques), (2) chronic diseases and (3) paying more for

capital-intensive tests and procedures. In the new scheme of things, Indians are likely to spend more on

such things.

Exhibit 3: More evenly spread consumption as India gets richer

Consumption across classes, rural and urban India, March fiscal year-ends, FY2010-25E (Rs tn, at FY2010 prices)

Total 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Real-rich 2.7 3.3 3.9 4.7 5.4 6.2 7.0 7.9 8.8 9.7 11.5 13.7 15.9 18.1 20.6

Upper-class 2.5 2.6 3.1 3.9 4.6 5.4 6.3 7.1 7.8 8.6 9.0 9.0 9.1 9.3 9.3

Prospering 7.7 8.2 10.0 10.1 10.1 10.1 10.1 10.1 10.1 10.1 11.4 13.0 14.5 16.0 17.5

Evolving 6.7 7.3 8.8 9.5 10.6 11.6 12.6 13.7 15.2 16.8 17.7 20.3 23.0 25.7 28.2

Emerging 11.4 12.7 13.7 15.4 17.0 18.9 20.8 22.7 24.5 26.3 28.1 28.9 29.6 30.3 31.0

Surviving 12.4 12.0 11.4 10.8 10.3 9.6 8.9 8.2 7.5 6.8 6.1 5.4 4.7 4.0 3.4

Grand Total 43.3 46.0 50.9 54.4 58.0 61.8 65.7 69.7 74.0 78.3 83.7 90.3 96.8 103.4 110.0


In the face of such a phenomenal increase in buying power, companies will usher in innovation to premium

products and services, moving away from lower ticket sizes. With large parts of the market now catering to

high-end customers, there will be significant changes in (1) the types of products and services on offer in

each product and service category, (2) the evolution of new sub-categories and (3) the mode of appeal to

customers (marketing) and reach (distribution).

RUPEES Estimator telescopes kaleidoscopic spending patterns…

India is evolving into new dimensions. Consumer needs and preferences are shifting and the change can

only accelerate as consumer spends increase. However, this change is not uniform. Wide income disparity is

throwing up kaleidoscopic spending patterns across consumer classes.

KIE’s RUPEES Estimator, a predictive model, classifies households into six categories, based on their per

capita spending capacity (see Exhibit 4): (1) Real-rich, (2) Upper class, (3) Prospering, (4) Evolving,

(5) Emerging and (6) Surviving.

With large

parts of the

market catering

to high-end

customers, there

will be significant

changes in the

types of products

and services and

evolution of new

sub-categories

and in marketing

and distribution


GAME CHANGER

The RUPEES Estimator does not differentiate a class based on geographic location of rural or urban

India, given the increasing reach of media (including television, mobile phones and internet). We believe

aspirations will tend to be similar in rural and urban India and hence, we treat the rural Real-rich as having

a similar consumption pattern as the urban Real-rich. We note that the figures presented in this report are

in constant FY2010 terms.

Exhibit 4: The RUPEES framework

Classifying Indian households in categories of monthly per capita expenditure, (FY2010, Rs)

Monthly expenditure Annual expenditure

From To From To Average

Real-rich 30,000 360,000 — 500,000

Upper-class 20,000 30,000 240,000 360,000 300,000

Prospering 10,000 20,000 120,000 240,000 180,000

Evolving 5,000 10,000 60,000 120,000 90,000

Emerging 2,500 5,000 30,000 60,000 45,000

Surviving — 2,500 — 30,000 15,000

in PPP USD

Real-rich 3,000 — 36,000 — 50,000

Upper-class 2,000 3,000 24,000 36,000 30,000

Prospering 1,000 2,000 12,000 24,000 18,000

Evolving 500 1,000 6,000 12,000 9,000

Emerging 250 500 3,000 6,000 4,500

Surviving — 250 — 3,000 1,500

Source: Kotak Institutional Equities

…and abundant opportunity

The Indian consumption market is morphing into a bouquet of opportunities and all are invited to the party,

especially (1) companies that can produce products and services for this huge, fractured market, and

(2) investors seeking to invest in such companies.

As (1) new categories (and increasingly differentiated sub-categories) of consumption open up and (2) the

profile of consumers that companies cater to, changes, companies that develop appropriate strategies and

execute them well will win. For investors, a guide-map of segments that represent threats or opportunities

for portfolio companies is useful.

The RUPEES Estimator predicts (1) the class of customers that will dominate the mind-share of companies,

and (2) categories in which there will be enhanced activity.

The risk of lopsided prosperity… and how to mitigate it

India’s increasing Gini co-efficient depicts lopsided prosperity. Lopsided prosperity has created several

classes, each with its own needs. This can take India along the same path as some larger countries/

economies with significant income disparity: Brazil’s Gini co-efficient was 0.518 in FY2010, China’s was

0.513 and the US’ was 0.471.

We believe

aspirations will

tend to be similar

in rural and urban

India

The RUPEES

Estimator predicts

the class of

customers that

will dominate

companies'

mind-share, and

categories in

which there will

be enhanced

activity


The RUPEES Estimator assumes growth will be reasonably well spread, though not equally distributed. We

take into account a skew in growth distribution: a household in a high consumption category would reap

benefits of growth far better than a household in a low consumption category.

Two points are important here:

(1) Big buying power in the top 10 percentile. India starts off with reasonably high income inequality

(see Exhibit 5). D9/D1 numbers (which measure the income difference between a person in the ninetieth

percentile with one in the tenth percentile) is about 3 in rural India and 5 in urban India. But there is

significant buying power in the D9-D10 category (households in the top 10 percentile, between the

ninetieth and hundredth percentile), which accounts for the lopsided prosperity.

(2) Insignificant difference between current and future inequality. When we account for a skew in

projected household consumption, we project a society that will be more unequal by FY2025E, but not

significantly so. The D9/D1 ratio, based on a base-case skew, moves to 3.5 for rural and 5.6 for urban

India, not too far from current levels of 3 and 5 respectively.

Exhibit 5: We project a marginally more unequal society

Estimates of incomes at various levels in rural and urban India, March fiscal year-ends, FY2011-25E (at FY2010 prices)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Rural

D9 2,988 3,145 3,311 3,486 3,669 3,863 4,066 4,280 4,506 4,743 4,993 5,256 5,533 5,825 6,132

D1 963 1,006 1,050 1,097 1,145 1,196 1,249 1,304 1,362 1,422 1,485 1,551 1,620 1,692 1,767

D9/D1 3.1 3.1 3.2 3.2 3.2 3.2 3.3 3.3 3.3 3.3 3.4 3.4 3.4 3.4 3.5

Urban

D9 6,235 6,564 6,910 7,274 7,657 8,060 8,485 8,932 9,403 9,898 10,419 10,968 11,546 12,155 12,795

D1 1,237 1,292 1,349 1,409 1,471 1,537 1,605 1,676 1,750 1,827 1,908 1,993 2,081 2,173 2,270

D9/D1 5.0 5.1 5.1 5.2 5.2 5.2 5.3 5.3 5.4 5.4 5.5 5.5 5.5 5.6 5.6

Source: Kotak Institutional Equities calculations

As a reasonably well distributed growth story unfolds, the Survivor category will emerge into relative

prosperity, joining the large household base of the bulging middle classes. If, however, growth were to

be top-heavy, the consumption market may rise in value, but the number of Survivors will not decline as

dramatically as projected.

That’s a risk that could have unhappy consequences, ripping the social fabric. On the other hand, a more

inclusive development story would make it easier to enhance growth (through hard decisions and reform).

If the benefits of growth are not well shared, political discussion will gravitate towards distribution of the

pie rather than its growth.

One way to mitigate this risk is to get more households to take part in the bouquet of opportunity through

the creation of jobs. India has spent significant resources on educating its demographic dividend. As the

population bulge moves to the working age, it is imperative that an adequate number of jobs be generated.

As a reasonably

well distributed

growth story

unfolds, the

Survivor category

will join the large

household base

of the bulging

middle classes

Prosperity changes spend trends. With increased prosperity,

societies spend less on staples and increase discretionary spends

as a percentage of their expenditure. We fed data on historical

spends in India and in countries with different purchasing power

parity-adjusted per capita income, into the RUPEES Estimator, to

predict how Indian consumers will spend. The RUPEES Estimator

can be a helpful tool in understanding the market opportunity. If

you want to make your own assumptions, just ask for our model!

Chapter 2RUPEES Estimator telescopes dramatic change


Increased income, altered aspirations

The Indian economy’s rapid growth over the past couple of decades has produced a big churn and per

capita incomes now have much wider distribution. This means India has moved from having just Survivors

and Real-rich to several consumer classes in between, each with its own rising aspirations.

With barely a subsistence economy (Indians consumed more than three-fourths of their GDP until

FY1982), there was not much left for capital formation and to spur economic growth. As the proportion

of consumption began to fall with a corresponding increase in capital formation, India’s growth began to

improve, which has been easily visible over the past decade (see Exhibit 6).

Exhibit 6: India's share of consumption has fallen to more sustainable levels

Composition of the Indian economy, March fiscal year-ends, FY1951-2011

Source: CMIE

Change in spending patterns…

A more prosperous India’s spending on the bare necessities (food and clothing) has fallen dramatically, as a

percentage of its wallet. 'Durables' and 'Miscellaneous goods and services' (according to the definitions of

National Sample Survey Organisation, NSSO) have taken most of the increased spends, especially in urban

India (see Exhibit 7), a trend slowly but surely taking place in rural India.

India has moved

from having just

Survivors and Real

-rich to several

consumer classes

in between, each

with its own rising

aspirations

A more

prosperous India’s

spending on the

bare necessities

has fallen

dramatically, as a

percentage of its

wallet

0

20

40

60

80

100

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

Private consumption expenditure Government expenditure Gross capital formation


GAME CHANGER

Exhibit 7: India's consumption pattern has been evolving with reduced dependence on food purchases

Consumption expenditure by categories, June year-ends, 1999-2010 (%)

Rural Urban

1988 1994 2000 2005 2010 1988 1994 2000 2005 2010

Cereals 26.3 24.2 22.2 18.0 15.6 15.0 14.0 12.4 10.1 9.1

Gram 0.2 0.2 0.1 0.1 0.2 0.2 0.2 0.1 0.1 0.1

Cereal substitutes 0.1 0.1 0.1 0.1 0.1 0.1 0.1 — — —

Pulses and products 4.0 3.8 3.8 3.1 3.7 3.4 3.0 2.8 2.1 2.7

Milk and products 8.6 9.5 8.8 8.5 8.6 9.5 9.8 8.7 7.9 7.8

Edible oil 5.0 4.4 3.7 4.6 3.7 5.3 4.4 3.1 3.5 2.6

Egg, fish and meat 3.3 3.3 3.3 3.3 3.5 3.6 3.4 3.1 2.7 2.7

Vegetables 5.2 6.0 6.2 6.1 6.2 5.3 5.5 5.1 4.5 4.3

Fruits and nuts 1.6 1.7 1.7 1.9 1.6 2.5 2.7 2.4 2.2 2.1

Sugar 2.9 3.1 2.4 2.4 2.4 2.4 2.4 1.6 1.5 1.5

Salt and spices 2.9 2.7 3.0 2.5 2.4 2.3 2.0 2.2 1.7 1.5

Beverages, etc. 3.9 4.2 4.2 4.5 5.6 6.8 7.2 6.4 6.2 6.3

Food total 64.0 63.2 59.5 55.1 53.6 56.4 54.7 47.9 42.5 40.7

Pan, tobacco, intoxicants 3.2 3.2 2.9 2.7 2.2 2.6 2.3 1.9 1.6 1.2

Fuel and light 7.5 7.4 7.5 10.2 9.5 6.8 6.6 7.8 9.9 8.0

Clothing and bedding 6.7 5.4 6.9 4.5 4.9 5.9 4.7 6.1 4.0 4.7

Footwear 1.0 0.9 1.1 0.8 1.0 1.1 0.9 1.2 0.7 0.9

Durable goods 3.1 2.7 2.6 3.4 4.8 4.1 3.3 3.6 4.1 6.7

Misc goods and services 14.5 17.3 19.6 23.4 24.0 23.2 27.5 31.3 37.2 37.8

Non-food total 36.0 36.9 40.6 45.0 46.4 43.7 45.3 51.9 57.5 59.3

Total expenditure 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: NSSO 66th round report, earlier surveys, KIE calculations

Just how much and what Indians consume, however, have been debated. NSSO surveys show rural and

urban India spend 54% and 41% respectively, of their wallets on food and beverages (an average of about 50%

of the overall Indian consumption basket), and Euromonitor estimates this to be about 30% of the Indian

consumption pie. Besides, there is significant difference in the estimation of the pie that transportation

commands. Exhibit 8 shows our estimates of where rural, urban and overall Indian consumption stand.

Exhibit 8: Our analysis has a reasonable resemblance to Indian consumption estimates

Estimates of the break-up of India's consumption basket, March fiscal year-end, FY2011

KIE analysis NSSO Euromonitor

Rural Urban All-India Rural Urban All India

Food and beverages 43.2 35.8 39.7 53.6 40.7 27.7

Alcohol and tobacco 2.5 2.4 2.4 2.2 1.2 3.2

Clothing and footwear 5.8 5.0 5.4 5.9 5.6 6.4

Housing 10.5 12.8 11.6 14.5

Household goods 4.1 4.4 4.3 4.8 6.7 3.9

Healthcare 4.5 5.5 5.0 4.8

Transport 8.1 9.1 8.6 9.5 8.0 17.7

Communications 2.4 2.9 2.6 2.2

Leisure 3.1 4.1 3.6 1.3

Education 2.6 2.9 2.8 2.4

Hotels 2.7 3.4 3.0 2.9

Miscellaneous 10.4 11.7 11.0 24.0 37.8 13.2

Grand total 100.0 100.0 100.0 100.0 100.0 100.0

Source: Euromonitor 'World Consumer Income and Expenditure Patterns', July 2011, NSSO, KIE estimates

Just how much

and what Indians

consume has

been debated.

We present our

estimates


…across geographies

We examined how other economies have evolved. We infer from the consumption patterns of countries

with purchasing power parity (PPP)-adjusted per capita income higher than India’s, the possible path

of India's spending patterns. Exhibit 9 shows India is nearer countries like Indonesia and China, and

is expected to achieve similar PPP-adjusted per capita income over 2-7 years. India will, however, take

28-40 years to reach the per capita income of OECD countries like South Korea, Japan and the US, but

comparisons with them help to identify consumption patterns of India’s Real-rich, Upper and Prospering

classes.

Exhibit 9: Global consumption patterns help to guide Indian projections

Consumer spending across categories, calendar year-end, CY2010, (%)

2010 - PPP basis India

Indonesia China Korea Japan USA 2011 2017E 2025E

Food and beverages 32.2 22.3 15.0 14.7 6.8 39.7 36.8 33.7

Alcohol and tobacco 5.8 2.3 2.6 2.8 2.1 2.4 2.4 2.4

Clothing and footwear 3.1 7.5 4.1 3.4 3.5 5.4 5.1 4.8

Housing 13.8 14.8 17.3 23.8 19.1 11.6 12.5 13.4

Household goods 5.3 4.7 3.9 3.7 4.2 4.3 4.4 4.5

Healthcare 4.3 6.9 5.4 4.8 20.3 5.0 5.3 5.7

Transport 6.5 6.4 10.8 11.6 9.7 8.6 9.0 9.4

Communications 2.1 4.9 5.7 3.0 2.3 2.6 2.8 3.0

Leisure 1.4 5.3 7.3 10.9 9.3 3.6 4.0 4.4

Education 2.1 4.8 6.3 2.2 2.4 2.8 2.9 3.0

Hotels 13.7 8.4 7.3 7.5 6.2 3.0 3.3 3.6

Miscellaneous 9.8 11.7 14.3 11.4 14.1 11.0 11.5 12.1

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Per capita income (PPP, US$) 3,179 4,432 19,068 28,637 43,539

# of years to reach this stage 2 7 28 34 40

Source: Euromonitor, KIE estimates and calculations

In more advanced countries, there is relative dominance of certain categories across consumption patterns.

The consistency of the dominant categories strengthens our assumptions that India’s growth story could

follow a similar plot. Of course, the numbers serve only to highlight a broad trend: the US, for instance,

spends a large proportion of its wallet on healthcare, compared with other countries, and South Koreans

love their data plans so much that it shows in a higher spend on communications. The Indian market could

surprise in some categories, given its peculiarities.

By 2025E the Indian consumption market will be two-and-a-half

times bigger than it is today. The top three classes will account

for about half the consumption, from less than a third currently

and the Surviving class will emerge from a base of deprivation.

Over our forecast period, we model consumption at 59-62% of

GDP and assume long-term real growth of 7% on a population

increase of 1% a year. To finance this growth, we expect India to

continue with its current high savings rate.

Chapter 3Buying power by the billion: Bucks for luxe


The spend trend

We estimate what various Indian classes will spend on several categories, proportionately and in absolute

terms, based on (1) the evolution of Indian consumption over time and (2) consumption spends of countries

with similar PPP-adjusted per capita income.

Exhibit 10: The RUPEES wallet

Proportion of annual per capita expenditure, wallet spend on categories

Proportion (%) Real-rich Upper-class Prospering Evolving Emerging Surviving

Food and beverages 15.0 20.0 30.0 40.0 45.0 50.0

Alcohol and tobacco 2.0 2.0 2.5 2.5 2.5 2.5

Clothing and footwear 4.5 4.5 4.5 5.0 5.0 7.0

Housing 17.0 17.0 15.0 12.0 11.0 7.5

Household goods 6.0 5.0 4.5 4.0 4.0 4.0

Healthcare 9.0 8.0 6.0 4.5 4.0 4.0

Transport 11.0 11.0 10.0 9.0 8.0 7.0

Communications 4.0 4.0 3.0 2.5 2.5 2.0

Leisure 6.0 6.0 5.0 4.0 3.0 2.0

Education 4.0 4.0 3.0 2.5 2.5 2.5

Hotels 5.0 4.5 4.0 3.5 2.5 2.0

Miscellaneous 16.5 14.0 12.5 10.5 10.0 9.5

Total 100.0 100.0 100.0 100.0 100.0 100.0

Average income 500,000 300,000 180,000 90,000 45,000 15,000

Rs

Food and beverages 75,000 60,000 54,000 36,000 20,250 7,500

Alcohol and tobacco 10,000 6,000 4,500 2,250 1,125 375

Clothing and footwear 22,500 13,500 8,100 4,500 2,250 1,050

Housing 85,000 51,000 27,000 10,800 4,950 1,125

Household goods 30,000 15,000 8,100 3,600 1,800 600

Healthcare 45,000 24,000 10,800 4,050 1,800 600

Transport 55,000 33,000 18,000 8,100 3,600 1,050

Communications 20,000 12,000 5,400 2,250 1,125 300

Leisure 30,000 18,000 9,000 3,600 1,350 300

Education 20,000 12,000 5,400 2,250 1,125 375

Hotels 25,000 13,500 7,200 3,150 1,125 300

Miscellaneous 82,500 42,000 22,500 9,450 4,500 1,425

Total 500,000 300,000 180,000 90,000 45,000 15,000


It is important to appreciate this table both proportionately and in absolute terms. The ‘proportion’

dimension is easily understood and appreciated: as income increases, a larger proportion of the spend will

move towards discretionary items.

For necessities, the proportion begins to fall, driven by the fact that there is only so much (in absolute

terms) that can be spent on a category. For example, in the food and beverage category, even though the

absolute quantum increases across each consuming class, the overall annual spend of a person in the Real-

rich category is ‘only’ 10X the annual per capita spend of a Survivor, even though the average expenditure

differential is 33X.

It is important

to appreciate

this table

proportionately

and in absolute

terms


GAME CHANGER

For discretionary items, for example leisure, the logic works in reverse: the absolute amount a Real-rich

member spends on this category vis-à-vis a Survivor is 100X, as the proportion of the wallet a Real-rich

person spends is 6% while a Survivor spends 2%.

The quantity of food, for example, that will be consumed per capita does not significantly change or the

time spent on leisure does not materially increase, but the emphasis in the segments (as in almost all the

others) will be in the quality of goods or services delivered or on the delivery process. In food, for example,

there is a well-documented trend towards an increased protein-rich diet as opposed to a cereals-heavy

diet and in leisure a trend of towards say, plush multiplex cinemas as opposed to stand-alone theaters,

or foreign jaunts over local family vacations. As a larger proportion of the market moves away from basic

necessities, we expect a significant rise in "premiumization".

Beyond our daily bread

The overall tone of the Indian consumption market will move beyond requirements of daily necessities to

more materialistic products. Given India’s size (number of households) and range of buying power, there

will be a meaningful number of customers across the value chain in almost all categories. Hence, it will

not be surprising to find the same categories being serviced by price-leaders and very brand-conscious

companies.

The relative monetary importance of the top-three classes cannot be overstated. The Real-rich, Upper

class and Prospering classes put together, will, by FY2025E, command almost half the market by value

even though they will account for less than one-eighth of the number of households. These classes (with

PPP-adjusted per capita incomes equal to the current living standards of OECD countries) will be dominant

consumption trend setters. Even though they will number less than one-eighth of the total number of

Indian households, their absolute number will be 36mn, which is more than a third of all the households in

the US currently and similar to the number of households in Japan, Germany and the UK.

Meanwhile, the Evolving and Emerging classes (the middle class) will command an almost equal value of

market share as the premium end. Companies will need to choose their market or develop differentiated

brands to service the entire value chain.

Focus on savings

We expect India to remain a high savings economy. To achieve 7% a year real growth India will need to

have an investment rate of at least 28% of GDP (given India’s incremental capital-output ratio of about 4).

We have taken India’s sustainable growth at only 7% a year, and not 9%, which was commonplace, until

recently. For India to be self-reliant in funding growth (even as India liberalizes its FDI and FII norms), India

will need to channelize its high savings into productive investments.

As a larger

proportion of

the market

moves away from

basic necessities,

we expect

significant rise in

premiumization

The top three

classes will have

36 mn households,

which is more

than a third of

the households in

the US and similar

to the number

of households in

Japan, Germany

and the UK


The current structure of India’s savings leaves a lot to be desired.

(1) More than half the household savings (12.8% of 22.8% of GDP in FY2011) goes into gold and real

estate. Such savings are either dead-weight losses or illiquid and do not create adequate incremental

output. India needs to move its savings into financial assets so that it can improve productivity of

savings.

(2) The Government and its enterprises have been less than exemplary savers. With the Government’s fiscal

deficit requiring constant financing, it has potential to (a) crowd-out private investment and (b) keep

interest rates high. A fundamental shift in the profile of borrowers (with the Government being less of a

borrower) can be a significant growth driver.

With savings being the focus of the Indian citizen (prodded by the Government), we do not expect

consumption as a proportion of GDP to grow meaningfully. We expect consumption to be in a 59-62%

band and hence our estimates do not take into account that meaningful uptick is possible if Indian saving-

consumption habits were to change.

Financing consumption

There are two ways to spend on a category that can expand: (1) a large proportion of current income can

be diverted to the category or (2) through financing, if the category is amenable to it. In case of diverting

current income into the category, growth would be limited by new consumers or old consumers increasing

spends on the category.

The amenability of a category to finance can offer greater impetus to growth of a category (which shows

up in the consumption line item, even though this now becomes a play between a consumer’s P&L and

balance sheet). Categories like housing including housing goods, transport, education, and to some extent,

leisure, can see a disproportionate rise due to financing (some part of this is captured in the Miscellaneous

line, which includes banking and financial services).

However financing, especially of consumer products, can help to boost consumption spends if the

expectation of (nominal) growth in the consumer’s income is more than the (nominal) cost of debt. This

means that over time a consumer will have much better ability to pay for current consumption, making

it sustainable. However, increased financing, not backed by an ability to repay, can create significant

fluctuations in the growth pattern of these categories.

More than half of

India's household

savings goes into

gold and real

estate

The amenability

of a category to

finance can offer

greater impetus

to its growth


GAME CHANGER

Looking at the individual categories of spending, we identify trends

where there will be meaningful changes in the category of consumers.

The over-arching themes are (1) the sum of money spent per-capita

on a category will increase dramatically thereby requiring companies

to innovate on providing better, improved or more premium products,

and (2) new sub-categories of consumption will open up within each

of these categories as an amalgam of consumer classes will require

differentiated products.

Here is the story in graphic detail.

Chapter 4Growing Gains

KOTAK INSTITUTIONAL EQUITIES RESEARCH


HOUSINGPossible uptick in quality,

improvements in neighborhood facilities

FOOD and BEVERAGESWatch for protein-rich, packaged and

ready-to-eat, “healthy” food

TRANSPORTSignificant potential for private vehicles and

public transport

mISCEllANEOUSBanking and financial services and personal

care to dominate

KOTAK INSTITUTIONAL EQUITIES RESEARCH20

0

4,000

8,000

12,000

16,000

20,000

24,000

28,000

32,000

36,000

40,000

494 1,0503,091

5171,255

1,864

2,459

3,044

5,252

2,907

5,058

11,292

5,728

9,350

13,945

5,986

4,451

1,688

2012 2017 2025

0

1,500

3,000

4,500

6,000

7,500

9,000

10,500

12,000

13,500

15,000

5601,190

3,503

439

1,067

1,584

1,229

1,522

2,626

872

1,517

3,388

1,400

2,286

3,409

898

668

253

2012 2017 2025

0

1,500

3,000

4,500

6,000

7,500

9,000

10,500

12,000

13,500

15,000

362770

2,266

284

690

1,025

820

1,015

1,751

654

1,138

2,541

1,018

1,662

2,479

838

623

236

2012 2017 2025

0

1,500

3,000

4,500

6,000

7,500

9,000

10,500

12,000

13,500

15,000

5431,155

3,400

362

879

1,305

1,025

1,268

2,188

763

1,328

2,964

1,273

2,078

3,099

1,137

846

321

2012 2017 2025

All data in Rs bn (in FY2010 terms)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

198420

1,236

129

314

466

369

457

788

291

506

1,129

509

831

1,240

479

356

135

2012 2017 2025

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

132 280

824103

251

373

246

304

525

182

316

706

318

519

775

239

178

68

2012 2017 2025


AlCOHOl and TOBACCOMore refined products

ClOTHING and FOOTWEARBranded products to flourish;

fashion trends to be defined by Indians

HOUSEHOlD GOODSExpect significant investments in household

amenities, mechanization of domestic services

COmmUNICATIONSAs more services move to mobile, data could

be the big winner


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

66 140412

52126

186

205254

438

182

316

706

318

519

775

299

223

84

2012 2017 2025

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

148 315

927

116282

419

369

457

788

363

632

1,411

636

1,039

1,549

838

623

236

2012 2017 2025


21


HEAlTHCAREAs the capital of chronic diseases,

India will spend more on preventive medicine and healthcare

HOTElSCreation of mid-end properties (2-3 stars) to

dominate; catering to increase in value

lE ISURELocal and foreign tourism, recreational items

(games, pets) to be in demand

EDUCATIONDemographic dividend to continue to spend

on education



0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

296630

1,854

207

502

746

492

609

1,050

327

569

1,270

509

831

1,240

479

356

135

2012 2017 2025

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

198420

1,236

155

377

559

410

507

875

291

506

1,129

382

623

930

239

178

68

2012 2017 2025

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

165 350

1,030

116

282

419

328

406

700

254

443

988

318

519

775

239

178

68

2012 2017 2025

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

132 280

824103

251

373

246

304

525

182

316

706

318

519

775

299

223

84

2012 2017 2025

22

Evolving India will also mean the emergence of mushroom

towns. The urban market will account for more than 55% of

the consumption market by FY2025E from less than half today

and urban households will account for about 40% of the total

number of households, up from 30% currently. The push towards

urbanization will not come from an overspill into metros, but

development of tier-II and tier-III cities. The emergence of growth

hubs can offer stability to the growth story.

Chapter 5Rural India morphs into mushroom towns


Serving up cities, with a capital C

The per capita income growth in India will come from (1) more families turning nuclear in urban India,

(2) households moving to urban from rural areas and (3) more rural areas qualifying to be classified as

urban as population growth makes towns/villages larger agglomeration units.

The per capita income growth in India will come from (1) increased movement of labor from agriculture to

the manufacturing and services sectors, which will tend to be in urban areas, or an urban sprawl around

a zone of economic activity or (2) a big increase in agricultural productivity (not just in terms of fertility of

land but in per capita terms). Agricultural per-capita income can grow significantly as people move away

from farming.

A new creature that emerges from societal reorganization will have a wing-span that will straddle a

considerable geographic area. Rural hubs will bulge at the seams and burst on to the urban city space.

Tier-II and tier-III towns will morph into larger metropolitan cities. For companies that means a larger

number of differentiated markets with their own needs and preferences.

Town-led urban spread

India’s urbanization will be incremental in nature. Over the past 40 years, India has urbanized slowly (See

Exhibit 11). But that is about to change.

Exhibit 11: Urbanization has been slow in India

Urbanization and the rate of change, decades ending FY1971-2011

Urbanization rate (%) Annual rate of change (%)

1971 19.9

1981 23.3 0.34

1991 25.7 0.24

2001 27.8 0.21

2011 31.2 0.33

Source: India Census, Indiastat

The 2011 census highlighted that India was urbanizing at the margins, and not by putting more pressure

on mega-cities (see Exhibit 12). The only large city that has seen an uptick in its population growth, over

the past decade, is Bangalore.

Exhibit 12: Growth of mega cities has slowed

Population of various urban agglomerations, March fiscal year-ends, 1991-2011

Population (mn) Increase (%)

2011 2001 1991 2011 2001

Greater Mumbai UA 18.4 16.4 12.6 12.1 30.5

Delhi UA 16.3 12.9 8.5 26.7 52.2

Kolkata UA 14.1 13.2 11.0 6.9 19.6

Notes: (a) UA denoted urban agglomeration (b) Other UA's have populations of less than 10 million

Source: Census of India

Urban

consumption

growth will

be marginally

higher than rural

consumption

growth as more

households

emerge in urban

India

India’s

urbanization will

be incremental in

nature. The 2011

census highlighted

that India was

urbanizing at the

margins


GAME CHANGER

Census 2011 defines a town (regarded as an urban area) as a demarcated area whose population exceeds

5,000, among other criteria (as noted in the Appendix). About four-fifths of India’s rural population lives

in towns smaller than this, according to the 2001 census, (data from the 2011 census are unavailable). We

note that a statutory town is, in effect, a census town whose status has been recognized by a local state

government and a municipality, corporation, cantonment board or whose town area committee has been

notified. There has hardly been an increase in the number of villages in India.

Exhibit 13: Census towns are the new growth engines

Number of towns and villages in India, census year-ends, 2001 and 2011

Increase

2001 2011 Absolute Percentage

Towns, of which 5,161 7,935 2,774 54

- Statutory towns 3,799 4,041 242 6

- Census towns 1,362 3,894 2,532 186

Villages 638,588 640,687 2,099 0

Source: Census of India

The increase in census towns indicates a more spread-out growth of India’s tardy rate of urbanization. The

process is being driven by the nature of growth of the economy, which will become increasingly dependent

on services as its engine of growth, and on agriculture as its largest employer. Unless there is a definite

thrust towards a manufacturing-led economy, we do not expect the rate of India’s urbanization to change.

The evolution of urban China

Four decades ago, China and India had a roughly similar proportion of urban populations. Today, more

than half of China’s population lives in cities. Some commentators claim China’s rate of urbanization is

understated as it does not include many migrant workers who go to urban areas as laborers.

China’s urbanization was driven by the creation of employment opportunities in manufacturing and

industry, which created an incentive to set up urban agglomerations in and around an economic activity

of manufacturing. As the labor force moved out of agriculture and into industry, it made natural and

economic sense to have clusters of growth. Given their size, the agglomerations quickly get classified as

urban.

The increase in

census towns

indicates a more

spread-out

growth of India’s

tardy rate of

urbanization


The markets... by size and segment

Exhibits 14 and 15 lay out how we expect the urban and rural markets to evolve. We expect rural households to

increase their spending on housing, healthcare and leisure significantly and urban consumption will go up 3X in

real terms in 15 years. From being a smaller market than the rural market currently, we expect the urban market

to grow bigger than the rural market — trends in the 'richer' urban market will shape the aspirations of the rural

market. We are not saying that the rural growth rate will slow: rural areas are morphing into urban areas, which is

adding to urban consumption. More 'urban' consumption will mean easier distribution logistics for companies.

Exhibit 14: Expect rural households to up their spending on housing, healthcare and leisure significantly

Consumption in rural India across categories, March fiscal year-ends, (Rs tn, 2010 prices)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Food and beverages 9.8 10.2 11.0 11.4 11.8 12.4 12.9 13.4 13.9 14.5 15.0 15.9 16.8 17.6 18.4

Alcohol and tobacco 0.6 0.6 0.6 0.7 0.7 0.7 0.8 0.8 0.9 0.9 0.9 1.0 1.1 1.1 1.2

Clothing and footwear 1.3 1.4 1.5 1.5 1.6 1.6 1.7 1.8 1.8 1.9 2.0 2.1 2.2 2.4 2.5

Housing 2.4 2.5 2.8 3.0 3.3 3.5 3.7 4.0 4.2 4.4 4.7 5.2 5.6 6.0 6.4

Household goods 0.9 1.0 1.1 1.1 1.2 1.3 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.1 2.2

Healthcare 1.0 1.1 1.2 1.3 1.4 1.4 1.5 1.6 1.7 1.8 1.9 2.1 2.3 2.5 2.7

Transport 1.9 1.9 2.2 2.3 2.4 2.6 2.7 2.9 3.0 3.2 3.4 3.7 4.0 4.3 4.5

Communications 0.5 0.6 0.6 0.7 0.7 0.8 0.8 0.9 0.9 1.0 1.1 1.2 1.3 1.3 1.4

Leisure 0.7 0.8 0.9 0.9 1.0 1.1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.9 2.0

Education 0.6 0.6 0.7 0.7 0.8 0.8 0.9 0.9 1.0 1.0 1.1 1.2 1.3 1.4 1.5

Hotels 0.6 0.7 0.7 0.8 0.8 0.9 1.0 1.0 1.1 1.1 1.2 1.3 1.4 1.6 1.7

Miscellaneous 2.4 2.5 2.7 2.9 3.1 3.3 3.5 3.6 3.8 4.0 4.3 4.7 5.0 5.4 5.8

Grand total 22.8 23.7 26.0 27.4 28.8 30.4 32.0 33.5 35.2 36.8 38.8 41.8 44.7 47.6 50.4


Exhibit 15: Urban consumption will go up 3X in real terms in 15 years

Consumption in urban India across categories, March fiscal year-ends, (Rs tn, 2010 prices)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Food and beverages 7.3 7.9 8.6 9.3 9.9 10.6 11.3 12.0 12.9 13.7 14.6 15.6 16.6 17.7 18.7

Alcohol and tobacco 0.5 0.5 0.6 0.6 0.7 0.7 0.8 0.8 0.9 1.0 1.1 1.1 1.2 1.3 1.4

Clothing and footwear 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.8 1.9 2.0 2.2 2.3 2.5 2.7 2.8

Housing 2.6 2.9 3.3 3.6 3.9 4.2 4.5 4.9 5.2 5.6 6.1 6.7 7.2 7.8 8.3

Household goods 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.7 1.8 1.9 2.1 2.2 2.4 2.6 2.8

Healthcare 1.1 1.2 1.4 1.5 1.7 1.8 2.0 2.1 2.3 2.4 2.7 2.9 3.1 3.4 3.6

Transport 1.9 2.0 2.3 2.5 2.7 2.9 3.2 3.4 3.7 3.9 4.3 4.6 5.0 5.4 5.8

Communications 0.6 0.6 0.7 0.8 0.9 0.9 1.0 1.1 1.2 1.2 1.4 1.5 1.6 1.7 1.8

Leisure 0.8 0.9 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 2.0 2.2 2.4 2.6 2.8

Education 0.6 0.7 0.7 0.8 0.9 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8

Hotels 0.7 0.8 0.9 1.0 1.0 1.1 1.2 1.3 1.4 1.5 1.7 1.8 2.0 2.1 2.3

Miscellaneous 2.4 2.6 3.0 3.2 3.5 3.8 4.1 4.4 4.7 5.1 5.5 6.0 6.5 7.0 7.5

Grand total 20.5 22.3 25.0 27.0 29.2 31.5 33.8 36.2 38.8 41.5 44.9 48.5 52.2 55.9 59.7


A richer, more prosperous India will throw up scores of opportunities

for companies and entrepreneurs, according to RUPEES Estimator.

However, two assumptions are crucial: (1) economic growth

must continue (on a long-term basis) at 7% a year and (2) the

growth must be reasonably inclusive in nature. That means every

class must benefit from growth. Therefore, it is crucial that the

economy offers productive job opportunities. If it does not, the

growth process may be neither stable nor inclusive.

Chapter 6GameChangers: How to nurture the metamorphosis


GameChanger: A growing pie… it’s easier to share

Throughout the metamorphosis there are two big assumptions: (1) sustainable long-term growth of the

Indian economy and (2) reasonable distribution of the fruits of that growth.

The projections should be achievable as we have assumed (1) savings rate of only about 28%, which is

significantly lower than the recent performance of Indian savers and (2) no improvement in capital-output

ratio. Internal consumption, Government spending and increased exports should also help the economy to

grow.

But if the economy does not grow for some reason, it will amount to a stagnant pie of which more people

will want a share. It is easier to share a growing pie and hence the focus must remain on economic growth.

Over several reports we have highlighted the need for significant reforms in crucial markets like land, labor

and capital.

GameChanger: A well divided pie

The perceived and actual equality of the division of the pie is important to (1) continue fostering aspirations

and (2) keep in check social unrest. The significant disconnect in the average per capita income (and

consumption) in rural and urban India highlights the need for inclusive growth. There are two ways to

narrow this gap: (1) by transferring resources from the section of society that is doing well (tax the rich

and give the poor) or (2) by creating sustainable income streams for those who have not benefited, or

integrated, with market-oriented reforms over the past two decades.

India has followed the former strategy over the past few years and will require significant effort at

the grass-roots level to push for the latter. This will require that the Indian economy creates enough

employment opportunities in the manufacturing and services sectors so that people pull out of the less

productive agriculture sector. Creating these opportunities will require an efficient (1) land acquisition

framework, (2) ease-of-business policies, (3) skill development and employment-matching mechanisms.

GameChanger: Addressing raw material and energy challenges

One of the concerns India will have to address is increased consumption of (1) raw material and (2) energy.

India will need to work towards an environmentally sustainable way to satisfy its consumption upswing

from the perspectives of (1) an improved global environment and (2) to avoid the price rise that raw

material and energy could see due to increased demand.

AppendixThe birth of a model


How we put together the RUPEES Estimator

Expenditure over income. Statistical agencies find it easier to collect and disseminate data based on

consumption patterns (and not income). This is simply because consumption is more easily visible and

people and households are more willing to discuss it, rather than their income. It is typically assumed that

the distribution of the consumption pattern reflects the economy’s income pattern. This may or may not be

true, simply because different households may have different attitudes and priorities with respect to savings

(the biggest reason for incomes and consumption to differ). For our purposes however, having an idea

about consumption works well as we are only interested in the consumption market.

Based on Monthly Per Capita Expenditure (MPCE) data compiled and distributed by the National Sample

Survey Organization (NSSO) on the deciles-wise distribution of households by income, we construct and

project (based on our growth and skew estimates) the distribution (number) of households across deciles

over the forecast period. We define the cut-off of each decile in our calculation.

We define the boundaries of the classes in the RUPEES Estimator, according to the quantum of

consumption. We essentially work backward from the purchasing-power-parity adjusted annual per capita

expenditure converting it into annual Rupee consumption and work back, to get the MPCE boundaries.

Starting at the lowest consumption class, the Survivors, we typically double consumption limits to obtain

the boundary for the next class. For the Upper class, we do not double the limits, as then the absolute

magnitude of the incomes covered would be very large.

We take economies that have similar PPP-adjusted per capita expenditure to get a sense of the

consumption basket in each class. We estimate the PPP-adjusted per capita consumption of the Real-rich to

be near the per capita consumption in the US currently.

Reconciling different figures. We note that we face a very common issue: if one adds together the

consumption across the various household deciles, one does not reach the consumption figure as tabulated

by national accounts, with the NSSO data under-estimating overall consumption. We correct this, using two

techniques:

(1) NSSO data are available only until about the ninetieth percentile and do not look at the wide observable

disparity in the top-10 percentile. We take into account the disparity in this group to arrive at a more

granular picture of household distribution.

(2) Even taking this into account does not restore the balance and hence we apply a ‘scaling-up’ factor to

reconcile the NSSO data with national accounts. We expect this scale-up number to gradually fall.

Making sense of different patterns. We return to NSSO to check how the consumption pattern has been

evolving in urban and rural India: we use trend-line data for the past three decades to identify the changes

in share of wallet of consumption categories. It is interesting to note that the focus of NSSO on staples has

been so high that the food category has been divided into 12 sub-categories even as the share of wallet is

now moving to Miscellaneous.

We juxtapose this with trends in other countries, with different per capita consumptions currently (sourced

from Euromonitor). We treat the Indian consumption market as an amalgam of consuming categories and

hence it is instructive to see how consumers across the globe (with different purchasing powers) spend their

money. This provides a framework when we assign wallet-share to consumption categories in the Indian

market.


GAME CHANGER

Tying this up with the population numbers. This exercise is done separately for rural and urban India.

From the recent Census of India, we have the number of people in urban and rural India in FY2011, and

based on technical estimates made by the census team, we have an estimate of India’s population of 1.4 bn

people by FY2025. Using these and an estimate of the number of households, we project the number of

households in rural and urban India and the number of their constituents.

We expect (see Exhibit 16) the number of households to increase to 305 mn by FY2025 (187 mn rural and

118 mn urban) from 231 mn currently (163 mn rural and 68 mn urban). We expect the average household

size to shrink to 4.4 and 4.8 for rural and urban respectively by FY2025 from the current 5.1 and 5.5.

These calculations provide a reasonable break-up of India’s 1.4 bn population in FY2025E, implying 40%

urbanization in FY2025E from the present 31%.

Exhibit 16: Urbanization will increase by 10 percentage points by 2025E

Estimatied number of households and their sizes in India, March fiscal year-ends, FY2011-25E

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Number of households (mn)

Rural 163 164 166 168 169 171 173 174 176 178 180 181 183 185 187

Urban 68 71 74 77 81 84 87 91 94 98 102 106 109 113 118

Grand total 231 235 240 245 250 255 260 265 270 276 281 287 293 299 305

% urban 30 30 31 32 32 33 34 34 35 36 36 37 37 38 39

People per household

Rural 5.1 5.1 5.0 5.0 4.9 4.9 4.8 4.8 4.7 4.7 4.6 4.6 4.5 4.5 4.4

Urban 5.5 5.5 5.4 5.4 5.3 5.3 5.2 5.2 5.1 5.1 5.0 5.0 4.9 4.9 4.8

Number of people (mn)

Rural 833 833 833 833 833 833 833 832 832 832 832 832 832 832 832

Urban 377 390 402 415 428 441 454 468 481 495 509 523 537 551 565

Grand total 1,210 1,223 1,235 1,248 1,261 1,274 1,287 1,300 1,314 1,327 1,341 1,355 1,369 1,383 1,397

% urban 31 32 33 33 34 35 35 36 37 37 38 39 39 40 40

Source: NSSO - 66th round, Census 2010, KIE estimates and calculations

Rural and urban. The definition of rural and urban India, that we use, is the same that the Census uses.

A ‘census town’ is defined as having (1) a population of more than 5,000, (2) with 75% or more male

working population engaged in non-agricultural activities and (3) density of population of at least 400 per

sq km. This is an urban area and places that do not meet these criteria are classified as ‘rural’.

With agriculture employing about 57% of the Indian labor force, it typically becomes difficult to have

places where three-fourths or more of the male working population have non-agricultural work. This not

only creates issues with a more appropriate rural-urban classification but also identifies the point of stress:

if more people are not weaned from farming, the ability to connect more people to the growth story may

become difficult.

Household numbers. Over the forecast period, we expect the overall number of households to increase

(as it has done historically) by 2% a year. We expect rural household numbers to grow 1% a year and

hence, urban household numbers to grow at twice the overall rate. With (1) declining fertility and (2) an

increasing number of nuclear families, the number of people per household is expected to fall significantly.


A tight band. Once the consumption wallet of a consumer in a given household is defined, aggregating

such wallets over the distribution of different households in urban and rural India is easily achieved, which

gives us the distribution of the consumption market in a matrix of consumption across different classes of

consumers and categories of consumption. We ensure that overall consumption-to-GDP ratio does not stray

from the 59-62% of the GDP band.

Real numbers. The growth we assume in our model is ‘real’ and hence we do not take into account

inflation. This also means that the projected numbers are in terms of the Rupee’s purchasing power in

FY2010. The nominal market size may end up being significantly larger, due to the impact of inflation.

“I, Akhilesh Tilotia, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject

company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly,

related to the specific recommendations or views expressed in this report.”

Have you read our recent GamecHanGers?

April 2010‘365 million’ analyses India’s readiness for its forthcoming demographic dividend

May 2010‘Deluge of Opportunity’ examines developments that could make water a viable business proposition

May 2010‘Indian Household Savings’ highlights that US$10 tn is up for grabs in the next 15 years

Sept 2010‘The Time is Ripe’ highlights opportunities in agriculturethanks to technology and processing

Jan 2011X Factor’ looks at India’s need to increase manufactured goods in its export base

Nov 2010‘M2’ examines how mobile money is going to catalyze the race to trade with the Indian consumer

April 2011‘The Great Unskilled: Can we fix it?’ examines India’s challenge in making its ‘productive’ population employable

September 2011“The Next Big Things” identifies 14 companies helping shape India’s growth story and who could be the next darlings of the Street!

GAMECHANGER VOL III.I - APRIL 2012

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Documents

[Kotak] GameChanger RUPEES - The India Consumption Story