The confusing part about the Indian market is that the issues affecting its health and wealth shift suddenly, and we are often caught unawares. From the beginning of liberalization, consumer demand has been the number 1 problem issue for us. Not enough of it, not for the price – product configurations that the rest of the world buys, truant monsoon dependant rural demand, flighty urban demand because new categories emerged faster than income growths and a premature hype about the middle class leading to exaggerated expectations and over creation of capacity.

India Inc. went from era 1 of euphoria in the first half of the 90s with the unleashing of pent up demand to era 2 of despair in the mid to late 90s with demand growth way below expectations and new capacities built with high cost borrowings. Then came era 3 in the late 90s and early 2000s, with a focus on cost cutting, debt swapping, and all kinds of re engineering. Now is the era of global forays and cautious domestic supply expansion.

Through all this, quite unnoticed, Consumer India grew richer, and gradually got more confidence in its buyer power and more used to spending. Liberalization children started driving more consumption in richer urban and rural households (6 out of 10 Indian homes have a liberalization child). The urban, educated, upper class 40 and 50 year olds earned lots more and finally started spending more to make up for their deprived growing up years Rural India morphed with about half of its economy became non agricultural, with only about a third of the population participating in it, thus creating a vibrant, richer than the average urban like pocket of consumers. In many places, the line between rich rural and urban is getting blurred. Rich rural earns far less than rich urban, but it is equivalent to the Social class C and D of Urban India (the 30 to 50 percentile in terms of income, approximately), creating a nice, large “belly” of the market, mass market. Better still, was the shift in mindset in urban and in richer rural Indians from ‘aspiration / dreaming’ as in “I wish I could / one day God willing”, to one of “expectation / planning” as in “Here is how I can now / I know I will in the foreseeable future”.

As for income shifts, ten years of NCAER data has shown that first the number of rich households grew hugely in urban India, then in urban and rural India, and now it is vending its way down to a sharp increase in middle income households in urban India and a two horned increase projected for 2009 in lower middle income households and in rich households in rural India. We now have a good sized number of 100 million people who have an annual per capita income of a little under 2000 USD; and another 325 million people or so with an annual per capita income of around 700 USD. When converted to PPP and seen at the level of a family of 5, that’s not bad at all. And the very tip of India’s income distribution tail, comprising the seriously rich has grown several fold.

That brings me to the point of this story. I think we are surprised by our own consumption. All the things we said to potential investors about the onward march to consumption of a billion people – or even the 350 mn. middle class – are now actually coming true. And my hypothesis is that (1) bitten by the disappointments of the earlier eras of consumer demand, (2) preoccupied by watching average numbers and not noticing certain segments reaching critical mass (3) being continuously chastened by the very legitimate and very loud warnings of “India is not shining for many” and in the “inclusive growth, lets not forget the poor”, what did not register as strongly as it should have is that Consumer India inched its way past the tipping point and tipped over into the domain of serious consumption and consumption growth.

Now we are in a situation that is sometimes used to describe the Indian cricket team – that it can snatch defeat from the jaws of victory. If earlier we had a demand supply gap because of excess supply, we now have a demand supply gap because of excess demand. We stand long in queues not for product but for parking or for service; air traffic delays are back because of traffic outstripping airport capacity; calls are dropped or fail as in the 70s because of network congestion. From the supply side it appears that a lot of modern retail is coming up. From the demand side, even with eight mega hyper markets dotting a city like Mumbai, it will still take lots of people an hour to get there in traffic, and if the parking lots are full and shops are packed, then there has to be an opportunity loss in consumption. If changing rooms in stores are doubled, women would experiment and hence buy more clothes. Ditto with ready made food take away. Hotel rooms are hard to get, and the less said about college seats the better. Computer and swimming classes can explosively grow, as can taxis, cosmetologists and housekeepers. A lot of the real estate price increases we are seeing is because of higher quality supply did not anticipate the upward shift in incomes and preferences. The tail piece is that thanks to the very rich growing sharply though miniscule overall, with even more miniscule supply for them, private yachts parked at the Gateway of India have no jetties, private planes have doubled with not enough hangar facilities, and in every big city, for those that want a super luxury apartment the hunt is long and there is too much money chasing not enough goods. The supply of trained manpower to fuel several knowledge sectors is almost drying up, and the relentless demand for them will cause an inflation in salaries.

So now its time to stop obsessing about demand and start obsessing about building and managing a supply spurt. Firms which are poised to do this – especially in the services sector – will be the winners of the new era.