India A Global Player or Lame Duck? Focus on its Middle Class. Prof. Dr. Amitabh Kundu

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1 India A Global Player or Lame Duck? Focus on its Middle Class Prof. Dr. Amitabh Kundu Indien Chancen für die deutsche Wirtschaft?! Montag, 9. Dezember 2013

2 Shifts in Cumulative Income Curve with no Change in Income Distribution 2

3 Size of the Middle Class and Its Share in Total Income A B C D 3

4 Defining the Middle Class in India Locating globally ($10-$100*) and not in country context or at the middle of income distribution National Sample Survey 11 million in Income Tax Data 45 million in 2011 McKinsey &Company 50 million in millionin 2025 National Council for 110 million in 2011 Applied Economic Research-II 547 million in 2025 Chen & Ravallion >$2.5* 90 million in 2005 NCAER -- I >$2.0- $ million in

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6 80.0 The present (2010) and projected (2030) size of middle class (% to total population) Income tax NSSO Mckinsey NCAER Brookings 6

7 Projection of India s Middle Class and its market Despite alternate definitions, it is evident that presently the Middle Class in India is very small, varying between 2 million and 60 million based on different sources of data; much less than that of Russia, Brazil or China It is, however, growing very fast and India will become the biggest middle class spender in World Bank and Brookings Institution predicts that the increase in number in coming two decades is 1200 million, India claiming 30 per cent of it Market consumption in India increasing faster than number of households or growth in income due to high elasticities Economist Magazine predicting that Middle Class does not grow incrementally but exponentially 7

8 Distinguishing Features of Indian Middle Class MC accounts for per cent of consumption of globally traded goods and services in the country. Has a high scope for discretionary spending due to excess of income on consumption; Techno savvy, modern, western oriented, globally aspiring Hungry for product differentiation and high quality. MC has higher rate of saving and investment which induces economic growth and renders stability to socio-political system. Wants instant and nuanced financial services and investment products All these create scope for global business and western producers 8

9 Middle Class and Institutions of Governance: Advantage India Middle Class demands withdrawal of the state and opening up of the market due to its desire for Consumerism Critical of public agencies also on grounds of inefficiency, corruption and poor service delivery. MC supports market Paradoxically, it demands state support to corner subsidies on basic items like food, cooking energy, power, petrol, health and education MC is successful in diluting targeted government schemes (Right to food, affordable housing) for gaining own access Has vested interest in maintaining informal sector at low wages and without any social security which allows both husband & wife to work in global sectors as per European or American time schedule Informal sector supplies intermediate products to formal sector at low cost that makes the latter competitive in the global market 9

10 Can the Middle Class (MC) in India maintain its political space in next two decades Despite small size, it is opinion builders in vote bank politics Linkages with print and electronic media, civil society etc. due to edge in knowledge and access to technology Even when MC looses political power, it can influence administrative decisions through networking with bureaucracy at different levels The Election Agenda of all Parties in India focus on the grievances and demands of the middle class 10

11 Middle Class in Emerging Urban Structure: Real Conflict is within the Class Middle class in villages and small towns account for 65 per cent of the total number in India. Exclusionary urbanisation is restricting their entry into mega cities Capture of urban space by elites in metro cities denying entry to others? Access to global jobs determined by entry into professional, technical and management institutions: population in rural and small towns face barriers. Rural life expectancy less Slowing down of the growth in urban population (next graph) Democratic state may be forced to pursue agenda for rural and small town development; generating demand in local market. This would adversely affect the growth of the middle class in the short but not in long run 11

12 Growth Rates of Urban Population in India as Projected in World Urbanisation Prospects (WUP) Revision in Rates of Urban Growth predicted by WUP for and WUP 1995 WUP 2004 WUP 2008 WUP 2010 WUP

13 Top Heaviness in Urban Structure in India Percentage of Population in Cities with Population over 5 million to Total Urban Population Europ e Africa Less Dev. Countries World Average Dev. Countrie s Asia South Central Asia India Growth in existing mega cities would not give a massive boost to global business since demand for consumer durables is less in the cities compared to villages and small towns New Cities being planned along Golden Quadrilateral and Delhi Mumbai corridor. If a large number of medium and small towns are planned along these, demand for global products will go up 13

14 60 50 Middle class consumption of different items as percent to total consumption Metro cities consuming higher percentage than towns and villages Rural consuming higher percentages Rural Otrher Other Urban Metro Cities Fuel and Light Rent Beverages Transport Other Services Medical Institutional Durable goods 14

15 Brookings projection of share of India and China s Middle Class market 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Shares of Global Middle Class Consumption, China India Other Asia Japan United States EU Others 15

16 Impact of Declining Urban Growth on India s Middle Class Consumption 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Shares of Global Middle Class Consumption, China India Other Asia Japan United States EU Others 16

17 Impact of Increasing Metro Concentration & other factors on Middle Class Consumption 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Shares of Global Middle Class Consumption, China India Other Asia Japan United States EU Others 17

18 Sensitivity Analysis with changed parameters The Brookings projection depends on rate of urban growth which is declining. Low rate of urban growth reduces MC demand as nonagricultural consumption is less in rural areas. Impact is reduction in demand in Graph shown by dark line.. Low urban growth may bring down growth rate of the economy Democratic state may be forced to pursue employment generation, rural development and poverty alleviation program, generating demand primarily in local market and reducing middle class demand MC in villages and small towns spends more on consumer durables than in metro cities; Hence, a high concentration in these cities may dampen growth. Low investment in developing small and medium towns and low investment for skill development may be inadequate affecting growth. Overall reduction in demand due to all the three factors is shown by dotted line in the Graph 18

19 Indian Middle Class holding an Opportunity and Promise: Scope for Optimism Latest Census data suggests metro growth is declining and small town growth is picking up. Government may support this by investing in infrastructure in small towns pushing up the middle class demand Strategy to promote inclusive growth may slow down economic growth in short run but may put India in fast track by shifting emphasis to small town towns that have high demand for consumer durables and assets. The size of the middle class demand will depend on whether the global entrepreneurs succeed in exploiting the potential in rural areas and small towns. 19