`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
For Private Circulation Only. In the US, this document may only be distributed to QIBs (qualified institutional buyers) as defined under rule 144A of the Securities Act of 1933. This document is not for public distribution and has been furnished to you solely for your information and may not be reproduced or redistributed to any other person. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions.
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
6 KOTAK INSTITUTIONAL EQUITIES RESEARCH
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
Source: Kotak Institutional Equities estimates
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
8 KOTAK INSTITUTIONAL EQUITIES RESEARCH
…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
Source: Kotak Institutional Equities estimates
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
9KOTAK INSTITUTIONAL EQUITIES RESEARCH
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
10 KOTAK INSTITUTIONAL EQUITIES RESEARCH
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
12 KOTAK INSTITUTIONAL EQUITIES RESEARCH
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
13KOTAK INSTITUTIONAL EQUITIES RESEARCH
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
14 KOTAK INSTITUTIONAL EQUITIES RESEARCH
…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
16 KOTAK INSTITUTIONAL EQUITIES RESEARCH
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
Source: Kotak Institutional Equities estimates
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
17KOTAK INSTITUTIONAL EQUITIES RESEARCH
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
18 KOTAK INSTITUTIONAL EQUITIES RESEARCH
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
19KOTAK INSTITUTIONAL EQUITIES RESEARCH
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
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
KOTAK INSTITUTIONAL EQUITIES RESEARCH
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
KOTAK INSTITUTIONAL EQUITIES RESEARCH
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
All data in Rs bn (in FY2010 terms)
21
KOTAK INSTITUTIONAL EQUITIES RESEARCH
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
KOTAK INSTITUTIONAL EQUITIES RESEARCH
All data in Rs bn (in FY2010 terms)
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
24 KOTAK INSTITUTIONAL EQUITIES RESEARCH
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
25KOTAK INSTITUTIONAL EQUITIES RESEARCH
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
26 KOTAK INSTITUTIONAL EQUITIES RESEARCH
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
Source: Kotak Institutional Equities estimates
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
Source: Kotak Institutional Equities estimates
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
28 KOTAK INSTITUTIONAL EQUITIES RESEARCH
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
30 KOTAK INSTITUTIONAL EQUITIES RESEARCH
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.
31KOTAK INSTITUTIONAL EQUITIES RESEARCH
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.
32 KOTAK INSTITUTIONAL EQUITIES RESEARCH
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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