McKinsey Study on the Growth of India’s Middle Class

Republishing this piece to remind readers why urban congestion is a danger that the Tata Nano aggravates:

Great article from McKinsey Quarterly, that offers the following projections:

* Over the next 20 years, India will likely grow to become the world’s fifth-largest consumer economy, up from 12th now.

* A study by the McKinsey Global Institute suggests that if India can achieve 7.3 percent annual growth – a reasonable assumption if economic reforms continue – consumer spending will quadruple, from about 17 trillion Indian rupees ($372 billion) in 2005 to 70 trillion rupees in 2025. The dramatic growth in India’s middle class, from 50 million to 583 million people, will power this surge.

* In 1985, 93% of the population lived on a household income of less than 90,000 rupees a year, or about a dollar per person per day; by 2005 that proportion had been cut nearly in half, to 54%. By their estimate, 431 million fewer Indians live in extreme poverty today than would have if poverty had remained stuck at the 1985 level. They project that if India can achieve 7.3% annual growth over the next 20 years, 465 million more people will be spared a life of extreme deprivation.

* Contrary to popular perceptions, rural India has benefited from this growth: extreme rural poverty has declined from 94% in 1985 to 61% in 2005, and they project that it will drop to 26% by 2025.

* The growth that has pulled millions of people out of poverty is also building a huge middle class that will be concentrated in India’s urban areas. While urbanization isn’t proceeding as quickly as it is in other Asian economies, rapid population growth means that in absolute terms the country’s urban population will expand significantly, from 318 million today to 523 million in 2025.

* Urban growth will bring several important consequences. First, it will put tremendous pressure on the urban infrastructure, which is already heavily overburdened. (Our projections assume that infrastructure investments will at least keep pace with urban growth and that problems with transportation and utilities won’t worsen to the point of hampering growth.)

* Also, in India—unlike China, where urban growth is spread across a large number of cities—the economy will continue to be dominated by the megacities (Delhi and Mumbai) plus the six next-largest urban agglomerations (Bangalore, Hyderabad, Chennai, Kolkata, Pune and Ahmedabad). Nevertheless, a handful of smaller places, such as Chandigarh and Ludhiana, will have per capita incomes rivaling those of the major cities and emerge as attractive markets.

* The shift in spending power from the countryside to the cities will place the bulk of India’s private consumption within easier reach of major companies. Today 57 percent of private spending is spread across rural areas, but by 2025 cities will command 62 percent of the country’s spending power.

* About 400 million Indian city dwellers—a group nearly 100 million people larger than the current population of the United States—will belong to households with a comfortable standard of living. For many companies, the sheer scale of this new urban middle class will ensure that it receives significant attention.

These are some nuggets. You can read more here.