Understanding Consumer India Better

27 July 2009

While consultants and companies advise investing in India based on the current and projected size of the middle class, the bogey of the definition and sizing of the middle class hasn't gone away, says Rama Bijapurkar

B2C business in India continue to struggle with defining target markets based on the most logical measure – household income. Every meeting we go to, the target market definition, based on which market potential is calculated and business plans are drawn up, is either hotly debated or accepted with a sceptical shrug of the shoulders by some people in the audience. The definition is based on some income band per households per month or year, and this income band neither makes blindingly obvious sense nor is it standardised across data bases.

People have their own definition and they qualify this with labels like high / rich / middle / lower middle or labels like “strivers / consuming class / aspirers” or “top end of the market / mid market” and so on. These labels, instead of reassuring us, often leave us feeling even more anxious. Yes, we see the income numbers, and yes, we accept the number of people in each income band as per survey estimates. We also know that survey data on income is a reliable measure (it throws up the same numbers when the question is asked the same way) but it is not a “valid” truth number, statistically speaking. That means that surveys do a good job measuring a certain kind of definition of income that is relatively accurate across people, but when income reported from surveys is grossed up and projected to the all India level, it falls far below the number that it should add up to as per the national income statistics that the government puts out.

While consultants and companies advise investing in India based on the current and projected size of the “middle class”, the bogey of the definition and sizing of the middle class hasn't gone away yet and adds to the unease. The World Bank defines middle class as having between $10 and $20 purchasing power parity (PPP) per capita per day, which is a lot narrower than the NCAER definition of households income between Rs. 2-10 lakh ($4,000 to $21,000 at 2001-02 prices) annually; which is what McKinsey Global Institute uses in its Bird of Gold book. Chris Butel of IIMS-Dataworks suggests sensibly that the middle class are those that have their own personal transport (car or 2-wheeler), own entertainment as in a TV set, sound system and their own communication (phone). Some of us suggest that the middle class are those who are literally in the middle i.e., have approximately between the 33rd and 66th percentile of income. Expectedly the numbers swing wildly from 50 million to 200 / 230 / 300 million. What's more, the nagging worry persists that the middle class being defined by most of these income bands is actually India's upper class.

So, we thought it's better to work with a more intuitive way to understand income strata in the Indian market. The one which needs the least amount of assumptions or leaps of faith, and advances our collective understanding of Consumer India's income distribution, is simply to work with percentiles of income. This article presents a very simple set of tables that analyses Consumer India in terms of quintiles of population stratified in terms of household income. The data is from NCAER's household surveys, 2005-06.

Analysing INCOME STRATA

TABLE 1

Population quintile arranged by income

Households

Household income

Household expenditure

Household income surplus

Q1 (lowest)

18

6

9

(2)

Q2

19

9

12

2

Q3

20

14

17

7

Q4

21

21

22

17

Q5 (highest)

22

51

40

76

% in each quintile of all India…

TABLE 1 shows the percentage of consumer India's income, expenditure and surplus (income – routine expenses) that resides with households in each quintile. Table 2 shows the rural-urban split of households in each quintile, the percentage of income that is surplus (i.e., remaining after meeting routine and non-routine expenditure) and some patterns of expenditure.

The richest 205 million people in India (Q5), the top earning 45 million households, are discontinuously well off – if the average income of a household in Q1 (the lowest income) is 100, then the income in Q5 is 840; which is more than double that of even Q4, which is 350. They have half of Consumer India's income, and three quarters of its discretionary income, and don't need to spend more than half of what they earn.

The interesting thing is that Q5 households’ average income level fits several of the more popular definitions of “the middle class”. Social class A and B households, which are most marketers' “catch all' target group for premium ranges, comprising about 20 million urban households are what the urban component of Q5 is all about. Q4 hovers around 20% on all counts. It has about 20% of Consumer India's income and expenditure, and 20% of income is surplus.

The data also tells us not to be so surprised by the rural market robust growth, and also says that we shouldn't give the NREGS all the credit for it! About half of Q5 (richest quintile) households are actually in rural India. Q4, which is a sort of poorer but fairly well of cousin to Q5, is approximately equally divided between rural and urban India. NCAER analysis shows that improvement in rural infrastructure will impact consumption more than improvement in income. Q1, Q2, Q3 households are predominantly in rural areas.

TABLE 2

Quintile

Rural-Urban Split (%)

Surplus as % of income

% of non-routine expenditure spent on education

% of routine expenditure spent on transport

Q1 (lowest)

91-9

(12)

3.1

7.0

Q2

83-17

11

3.5

7.7

Q3

77-23

20

4.1

9.0

Q4

56-44

31

6.7

10.9

Q5 (highest)

48-52

55

12.6

12.9

Table 2 provides a vignette of expenditure information by quintile. The interesting question is, as Indians get richer what do they spend on? NCAER data looks at items of 'routine' expenditure as well as 'non-routine' expenditure. Education is the net gainer as incomes increase, both in terms of routine and non-routine expenditure; as is transportation. Ceremonies form the single largest expenditure item in non-routine expenditure, both for the rich and the poor. Health expenditure also shows interesting patterns when analysed this way.

How many quintiles have various consumer durables conquered? As of two years ago, the 2-wheeler has done better than even the mobile phone. The 2-wheeler penetration is 71%, 48%, 28% 16% in the top 4 quintiles; the corresponding numbers of mobile phone (2006) is 45%, 18%, 7% and 3%. The car is 21% in the top quintile and then it's a below 5% penetration the rest of the way.