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India is still a growth story—a big growth story. Even assuming conservative GDP increases of 6% to 7% a year, we expect consumption expenditures to rise by a factor of three to reach $4 trillion by 2025. India’s nominal year-over-year expenditure growth of 12% is more than double the anticipated global rate of 5% and will make India the third-largest consumer market by 2025.
Rising affluence is the biggest driver of increasing consumption. (See Exhibit 1.) Of India’s five household income categories (elite, affluent, aspirers, next billion, and strugglers), the top two income classes are the fastest growing. From 2016 through 2025, the share of elite and affluent households will increase from 8% to 16% of the total while the share of strugglers will drop from 31% to 18%.
Behind the growth headlines is an even more important story: consumer behaviors and spending patterns are shifting as incomes rise and Indian society evolves. These shifts have big implications for how companies position themselves now.
In 2012, BCG’s Center for Customer Insight (CCI) conducted its first in-depth exploration of growth and consumer trends in India. (See The Tiger Roars: Capturing India’s Explosive Growth in Consumer Spending, BCG Focus, February 2012.) In 2016, we took an updated look at emerging developments, basing it on new research among 10,000 consumers in 30 locations nationwide. The evolution in consumer behaviors is playing out largely as we predicted four years ago, but, inevitably, new developments, as well as twists and turns, are affecting consumer attitudes and consumption.
This report examines the factors that are shaping India’s complex and growing market, consumers’ evolving spending patterns, the increasing and substantial impact of digital technologies on spending, and emerging trends that could alter spending. It presents an assessment of how companies need to adjust their strategies and models to meet shifting circumstances.
THE FACTORS SHAPING A GROWING MARKET
Companies today need to focus on three aspects of India’s fast-growing consumer market: rising affluence, the country’s continuing and unique pattern of urbanization, and fundamental shifts in family structures. (See Exhibit 2.)
Rising Affluence. We observed in 2012 that India’s income pyramid was transforming itself into a diamond as household incomes grew. In terms of spending, the two top consumer categories—elite and affluent—will become the largest combined segment by 2025, accounting for 40% of consumption compared with 27% in 2016. Within this segment, the urban elite and affluent are fueling most of the growth. By 2025, wealthy urbanites will be responsible for one-third of total consumption. The share of the next billion and strugglers will shrink from 49% in 2016 to 36% in 2025.
Continuing Urbanization. India’s continuing pattern of urbanization is uniquely Indian. The migration to urban centers is not concentrated in a few cities as it is in countries such as Indonesia or Thailand; nor is urbanization in India occurring as quickly as in China. In India, the population is booming in scores of small cities across the country. About 40% of India’s population will be living in urban areas by 2025, and these city dwellers will account for more than 60% of consumption. Much of this growth will take place in small towns. (See Exhibit 3.)
In terms of consumption expenditures, emerging cities (those with populations of less than 1 million) will be the fastest growing. Fueled by rising affluence, expenditures in these cities are rising by nearly 14% a year, while consumer spending in India’s biggest cities is increasing at about 12% a year. We expect emerging cities to see the highest growth in the number of elite and affluent households through 2025. By then, the number of such households will have increased by a factor of more than 2.5 in emerging cities, while it will have almost doubled in major metropolitan areas. Furthermore, some 120 cities will have matched today’s major metropolitan areas in average household income.
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