Tapping Into the Indian Consumer Market

McKinsey Global Institute Tapping Into the Indian Consumer Market The India-Europe Investment Forum 28 June 2007

HOW WILL INDIA S CONSUMER MARKET EVOLVE IN THE FUTURE? India s economy has been growing rapidly What impact has growth had on Indian incomes and how quickly will they grow in the future? How is the distribution of income changing? When will its middle class take off? How is income growth effecting urban versus rural areas? How much of rising Indian incomes will be spent versus saved? What will Indian consumers spend their newfound wealth on? What does this mean for business and investment opportunities? How should companies compete for the new Indian consumer? 1

OUR PANEL Prashant Desai Group Head, Investor Relations and New Ventures (PE), Pantaloon Retail (India) Limited Richard Fairgrieve Director of Global Emerging Markets, WestLB Mellon Asset Management Dippankar S. Haldar Chief Executive Officer, Wadhawan Food Retail (P) Limited A.P. Parigi Managing Director and Chief Executive Officer, Entertainment Network (I) Limited R. Subramanian Managing Director, Subhiksha Trading Services 2

KEY FINDINGS FROM McKINSEY GLOBAL INSTITUTE RESEARCH Indian incomes will triple over the next two decades, significantly reducing poverty India will emerge as the world s fifth largest consumer economy A large urban middle class will develop, but rural areas will benefit too Patterns of consumption will shift rapidly towards discretionary spending Income and consumption growth will create opportunities and challenges for business and government 3

HOUSEHOLD INCOME GROWTH WILL ACCELERATE ACROSS INDIA Average household disposable income thousand, Indian rupees, 2000 Compound annual growth rates 1985 2005 2005 2025 500 Actual Forecast Urban 400 300 5.8% All India 200 5.3% Rural 100 4.6% 3.6% 3.6% 2.8% 0 1985 1990 1995 2000 2005 2010 2015 2020 2025 Source: McKinsey Global Institute 4

INDIA WILL SEE CONTINUED REDUCTION IN POVERTY AND GROWTH OF ITS MIDDLE CLASS Share of population in each income bracket %, millions of people Household income brackets thousand, Indian rupees, 2000 100% 755 928 1,107 1,278 1,429 0 1 0 0 0 6 0 2 4 1 1 1 2 9 18 19 Globals (>1,000) Strivers (500 1,000) 41 32 Seekers (200 500) Middle class 43 93 80 36 Aspirers (90 200) 54 35 22 Deprived (<90) 1985 1995 2005E 2015F 2025F Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: McKinsey Global Institute 5

INDIA'S AGGREGATE CONSUMPTION WILL QUADRUPLE OVER THE NEXT 20 YEARS Aggregate consumption across income brackets trillion, Indian rupees, 2000 Household income brackets thousand, Indian rupees, 2000 4.1x 70 14 Globals (>1,000) 16 Strivers (500 1,000) 7 0 1 5 0 0 34 4 3 25 12 17 1 1 10 0 2 1 9 12 3 0 12 5 4 3 2 Seekers (200 500) Aspirers (90 200) Deprived (<90) Middle class 1985 1995 2005E 2015F 2025F Note: Figures are rounded to the nearest integer and may not add up exactly to column totals. Source: McKinsey Global Institute 6

INDIA WILL BECOME THE FIFTH LARGEST CONSUMER MARKET IN THE WORLD BY 2025 Aggregate private consumption, 2005 2025 billion, $, 2000 2005 2015 2025 1,521 1,511 746 783 370 388 India Brazil India Italy India Germany Per capita $, 2000 Rank 334 2,082 584 13,540 1,064 18,429 12 11 8 7 5 6 Source: Global Insight; UN Population Division; McKinsey Global Institute 7

INDIA'S SHARE-OF-WALLET IS SHIFTING AS INCOMES RISE 100% Share of average household consumption %, thousand, Indian rupees, 2000 3 2 60 11 14 5 56 4 4 1 82 140 7 9 2 5 6 3 17 19 8 3 9 12 3 6 12 42 5 34 248 13 9 6 20 11 3 10 5 25 Health care Education and recreation Communication Transportation Personal products and services Household products Housing and utilities Apparel Necessities Discretionary spending Food, beverages, and tobacco 1995 2005E 2015F 2025F Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: McKinsey Global Institute 8

McKinsey Global Institute Tapping Into the Indian Consumer Market The India-Europe Investment Forum 28 June 2007

Back-up 10

THE MCKINSEY GLOBAL INSTITUTE (MGI) HAS SPENT THE PAST YEAR EXAMINING THE FUTURE OF THE INDIAN CONSUMER MARKET 400 300 200 100 0 1985 90 95 2000 05 60% 50% 40% 30% 20% 10% 0% 2006 2009 2012 2015 2018 2021 2024 Proprietary database 1985 2005 Exclusive access to NCAER 300,000 household MISH survey Government NAS, NSS, and RBI data Other sources, e.g., UN, World Bank, Oxford Economics Econometric forecasting model 2006 2025 On-the-ground insights from McKinsey experience What makes our work unique? Focuses on future consumption Covers 100% of demand Includes detailed income distributions Integrates macroeconomic scenarios 11

MGI s FORECAST ASSUMES 7.3 PERCENT COMPOUND ANNUAL GDP GROWTH Real GDP billion, Indian rupees, 2000 120.000 100.000 History Forecast 80.000 60.000 40.000 20.000 0 1985 1990 1995 2000 2005 2010 2015 2020 2025 Overall compound annual growth Per capita compound annual growth 6.0% 4.0% 7.3% 5.9% Source: McKinsey Global Institute 12

KEY FINDINGS Indian incomes will triple over the next two decades, significantly reducing poverty India will emerge as the world s fifth largest consumer economy A large urban middle class will develop, but rural areas will benefit too Patterns of consumption will shift rapidly towards discretionary spending Income and consumption growth will create opportunities and challenges for business and government 13

GROWTH HAS LIFTED 431 MILLION FROM POVERTY AND COULD LIFT 465 MILLION MORE Population in households with annual disposable income less than 90,000 Indian rupees, 2000 millions of people 702 327 431 598 180 465 313 Deprived in 1985 Increase in poverty due to population growth* Net reduction in poverty Deprived in 2005 Increase in poverty due to population growth* Net reduction in poverty Deprived in 2025 * Number added to deprived if poverty remained at 1985 and 2005 rates respectively Source: McKinsey Global Institute 14

THE SHAPE OF INDIA'S INCOME PYRAMID WILL CHANGE DRAMATICALLY AS INCOMES GROW Household income brackets thousand, Indian rupees, 2000 Number of households million Aggregate disposable income trillion, Indian rupees, 2000 Aggregate consumption trillion, Indian rupees, 2000 Globals (>1,000) 1.2 2.0 1.2 Strivers (500 1,000) 2.4 1.6 1.0 2005E Seekers (200 500) Aspirers (90 200) 10.9 91.3 3.1 11.4 2.1 8.5 Deprived (<90) 101.1 5.4 4.1 Globals (>1,000) 3.3 6.3 4.1 2015F Strivers (500 1,000) Seekers (200 500) Aspirers (90 200) 5.5 55.1 106.0 3.8 15.2 14.6 2.7 11.8 12.2 Deprived (<90) 74.1 3.8 3.3 Globals (>1,000) 9.5 21.7 14.1 2025F Strivers (500 1,000) Seekers (200 500) Aspirers (90 200) 33.1 94.9 93.1 20.9 30.6 13.7 16.5 24.6 11.9 Deprived (<90) 49.9 2.6 2.4 Source: McKinsey Global Institute 15

THE INCOME DISTRIBUTION IN THE COUNTRY WILL WIDEN AS POVERTY FALLS AND THE MIDDLE CLASS GROWS Distribution of household income % of households 35 1985 1995 2005 2015 2025 30 25 20 15 10 5 0-5 0 100 200 300 400 500 600 700 800 900 1000 Annual household disposable income thousand, Indian rupees, 2000 Source: McKinsey Global Institute 16

FIRST ASPIRERS AND THEN SEEKERS WILL BECOME THE LARGEST INCOME BRACKETS Number of households in each income bracket millions of people Household income brackets thousand, Indian rupees, 2000 140 120 Actual Forecast 100 80 Aspirers (90 200) Seekers (200 500) 60 40 Deprived (<90) Strivers (500 1,000) 20 Globals (>1,000) 0 1985 1990 1995 2000 2005 2010 2015 2020 2025 Source: McKinsey Global Institute 17

KEY FINDINGS Indian incomes will triple over the next two decades, significantly reducing poverty India will emerge as the world s fifth largest consumer economy A large urban middle class will develop, but rural areas will benefit too Patterns of consumption will shift rapidly towards discretionary spending Income and consumption growth will create opportunities and challenges for business and government 18

RISING HOUSEHOLD INCOMES WILL BE THE KEY DRIVER OF CONSUMPTION GROWTH NOT CHANGES IN SAVINGS Sources of growth in private consumption 2005 2025 billion, Indian rupees, 2000 8,360 1,922 69,503 42,326 16,896 Private consumption 2005 Disposable income growth Growth in number of households Changes in savings Private consumption 2025 Contribution to overall consumption growth 80% 16% 4% Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: Oxford Economics; UN; McKinsey Global Institute 19

KEY FINDINGS Indian incomes will triple over the next two decades, significantly reducing poverty India will emerge as the world s fifth largest consumer economy A large urban middle class will develop, but rural areas will benefit too Patterns of consumption will shift rapidly towards discretionary spending Income and consumption growth will create opportunities and challenges for business and government 20

URBAN INDIA WILL ACCOUNT FOR MORE THAN TWO-THIRDS OF CONSUMPTION GROWTH OVER THE NEXT 20 YEARS Aggregate annual consumption billion, Indian rupees, 2000 69,502 35,913 62% 16,896 16,695 Urban 43% 38% Rural 57% All India consumption, 2005 Rural consumption growth Urban consumption growth All India consumption, 2025 Contribution to consumption growth 32% 68% Source: McKinsey Global Institute 21

MIDDLE CLASS HOUSEHOLDS WILL DOMINATE URBAN INDIA Share of urban households by income class %, millions of households Household income brackets thousand, Indian rupees, 2000 100% = 33 1 0 18 0 46 4 1 0 62 2 1 10 83 3 4 114 6 Global (>1,000) 26 Strivers (500 1000) 50 66 53 Middle class 81 51 Seekers (200 500) 46 32 21 9 12 5 Aspirers (90 200) Deprived (<90) 1985 1995 2005E 2015F 2025F Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: McKinsey Global Institute 22

LARGE CITIES TEND TO HAVE HIGHEST INCOMES, BUT SMALL NICHE CITIES PROSPERING TOO Average annual household disposable income, 2001 thousand, Indian rupees, 2000 Total disposable income billion, Indian rupees Tier 1 Tier 2 Tier 3 Niche cities 400 350 300 Jallandhar Chandigarh Ludhiana Delhi 250 200 Goa Faridabad Amritsar Pune Coimbatore Nagpur Hyderabad Chennai Mumbai 150 100 50 Surat Kanpur Lucknow Jaipur Bangalore Ahmedabad Kolkata 0 0 2 4 6 8 10 12 14 16 18 20 Estimated population, 2001 million Source: The Great Indian Middle Class, NCAER; McKinsey Global Institute 23

RURAL POVERTY WILL DECLINE SIGNIFICANTLY BY 2025 Share of rural population by income class %, millions Household income brackets thousand, Indian rupees, 2000 100% 571 682 790 0 0 0 1 0 4 1 3 1 8 32 0 875 1 6 0 906 2 1 20 Global (>1,000) Strivers (500 1,000) Seekers (200 500) Middle class 47 96 90 48 Aspirers (90 200) 65 46 29 Deprived (<90) 1985 1995 2005E 2015F 2025F Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: McKinsey Global Institute 24

PER-HOUSEHOLD CONSUMPTION IN RURAL INDIA WILL REACH TODAY'S URBAN LEVELS BY 2017 Average consumption per household thousand, Indian rupees, 2000 158 116 104 67 45 50 Urban India, 2005E 1985 1995 2005E 2015F 2025F Rural India Source: McKinsey Global Institute 25

KEY FINDINGS Indian incomes will triple over the next two decades, significantly reducing poverty India will emerge as the world s fifth largest consumer economy A large urban middle class will develop, but rural areas will benefit too Patterns of consumption will shift rapidly towards discretionary spending Income and consumption growth will create opportunities and challenges for business and government 26

FALL IN SHARE OF SPENDING ON NECESSITIES IN INDIA IS COMPARABLE TO SOUTH KOREA'S DURING ITS HIGH-GROWTH PHASE Share of average household spending % South Korea India Necessities* Discretionary spend* 100 100 History Forecast 75 75 Discretionary 50 50 25 25 Apparel Food Per capita income $, PPP, 2000 0 0 1981 1986 1991 1985 1995 2005 2015 2025 5,017 12,850 1,173 2,500 7,364 * Necessities include food and apparel; discretionary spending includes all other household spend categories. Source: Euromonitor; India data from McKinsey Global Institute 27

NUMBER OF URBAN HOUSEHOLDS WITH DISCRETIONARY SPENDING POWER TO MULTIPLY TWELVE TIMES Number of urban households with true discretionary spending power* million 12x 94 7 Household income brackets thousand, Indian rupees, 2000 Globals (>1,000) 29 Strivers (500 1,000) 3 49 2 Middle class 44 58 Seekers (200 500) 6 8 1 1 2005E 2015F 2025F * Consumers with sufficient budget to have significant levels of choice-driven spending (beyond categories such as food, housing, health care, education, fuel and transport services) Source: McKinsey Global Institute 28

INDIAN SPENDING PATTERNS WILL BE UNIQUE Share of total consumption, % U.S. Germany Brazil South Korea China India (2005) India (2025) Consumption category In line with benchmarks Food beverages and tobacco Apparel Personal products and services 15 4 14 21 5 10 19 6 8 23 4 13 35 11 4 42 6 8 25 5 11 Less than benchmarks Housing and utilities Household products Education and recreation 19 5 12 27 7 8 22 9 13 18 4 16 9 6 15 12 3 5 10 3 9 More than benchmarks Transportation Communication Health care 11 1 19 17 1 4 13 4 6 12 2 8 6 7 7 17 2 7 20 6 13 Note: Figures are rounded to the nearest integer and may not add up to 100% Source: Euromonitor, MGI China Consumer Demand Model v2.0, McKinsey Global Institute 29

FOOD WILL REMAIN THE LARGEST CONSUMPTION CATEGORY WHILE COMMUNICATIONS WILL GROW THE FASTEST 2005 2025 compound annual growth rate of aggregate consumption % 16 14 12 10 8 6 4 2 Communications (4.3) Household products (1.8) Education and recreation (6.1) Health care (8.9) Apparel (3.3) Personal products (7.4) Housing and utilities (6.6) Transport (13.8) Food, beverages, and tobacco (17.3) Market size in 2025 trillion, Indian rupees, 2000 0 0.0 1.0 2.0 3.0 4.0 7.0 8.0 5.0 2005 market size trillion, Indian rupees, 2000 Source: McKinsey Global Institute 30

KEY FINDINGS Indian incomes will triple over the next two decades, significantly reducing poverty India will emerge as the world s fifth largest consumer economy A large urban middle class will develop, but rural areas will benefit too Patterns of consumption will shift rapidly towards discretionary spending Income and consumption growth will create opportunities and challenges for business and government 31

OPPORTUNITIES AND CHALLENGES FOR BUSINESSES Opportunities Along with China the fastest growing of world s large consumer markets over next two decades Major discontinuity, winners have yet to be determined $1.1 trillion of new market growth not yet owned by anyone Most accessible market upper income urbanities will grow twelve times Almost half of middle class will be new consumers at any point in time loyalties up for grabs Challenges Indian companies Retaining existing customers and market shares Adapting rapid pace of change Innovating to capture new growth opportunities Educating new consumers Multinationals Meeting middle class aspirations at Indian price Adapting products and services to meet Indian needs and task points Building brands Overcoming infrastructure, regulatory, and distribution hurdles 32

OPPORTUNITIES AND CHALLENGES FOR GOVERNMENT Opportunities A chance to make further significant inroads in poverty reduction Domestic demand growth will spur further domestic production and employment particularly in higher value-added industries An opportunity to attract FDC to serve Indian consumers The potential to improve the material well-being of hundreds of millions of people Challenges Long-term growth must be maintained Infrastructure issues need to be addressed Regulatory constraints on business need further reform to enable businesses to meet growing demand and improve productivity Financial system needs reform to efficiently allocate investment, rebalance savings away from households and provide consumer credit Significant investments in human capital required (education, health care) in fiscally constrained environment 33

INCOME BRACKET CONVERSIONS Household annual disposable income, real 2000 Bracket Indian rupees U.S. dollars non-adjusted U.S. dollars PPP adjusted Globals 1,000,000 plus 21,882 plus 117,647 plus Strivers Seekers 500,000 1,000,000 200,000 500,000 10,941 21,882 4,376 10,941 58,823 117,647 23,529 58,823 Middle class Aspirers 90,000 200,000 1,969 4,376 10,588 23,529 Deprived Less than 90,000 Less than 1,969 Less than 10,588 Source: NCAER The Great Indian Middle Class ; McKinsey Global Institute 34

BACK-UP Macroeconomic base case Urbanization, rural growth and education Additional results 35

MGI'S BASE-CASE GDP FORECAST IS MIDDLE OF THE RANGE Source Planning Commission High HSBC High Goldman Sachs Base HSBC Base Deutsche Bank High MGI/Oxford Economics Base Planning Commission Base EIU Global Insight PWC Deutsche Bank Base Deutsche Bank Low Real per capita GDP growth Compound Annual Growth Rate, % 2.7 4.3 4.2 4.7 4.7 6.2 6.2 5.9 5.7 7.2 7.2 7.1 Timeframe 2007 2012 2005 2015 2006 2020 2005 2015 2006 2020 2006 2025 2007 2012 2005 2025 2005 2025 2005 2050 2006 2020 2006 2020 Source: Oxford Economics; India: Pitfalls and Possibilities, HSBC, July 2006; India's rising growth potential, Goldman Sachs, Jan 2007; India Rising: A Medium-Term Perspective, DB Research, May 2005; Towards Faster and More Inclusive Growth: An Approach to the 11th Five Year Plan, Planning Commission, Government of India, June 2006; The World in 2050: How Big will the Major Emerging Market Economies Get and How Can the OECD Compete?, PWC, 2006 36

SERVICES WILL CONTINUE TO BE THE MAIN DRIVER OF GDP GROWTH OVER THE NEXT TWO DECADES Share of GDP %, trillion, Indian rupees, 2000 Growth by sector Compound annual growth rate, % 100% = 8.8 28.3 115.3 1985 2005 2005 2025 Agriculture 36 19 9 27 Agriculture 2.7 3.1 26 Industry 24 Industry 6.4 7.4 55 65 Services 40 Services 7.8 8.2 1985 2005E 2025F Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: McKinsey Global Institute 37

INCOME GROWTH WILL ACCELERATE WITH ECONOMIC GROWTH GDP Household disposable income GDP versus household disposable income growth compound annual growth rate, %, Indian rupees, 2000 7.3 7.2 7.4 5.7 5.7 6.3 6.0 6.4 1985 1995 1995 2005E 2005E 2015F 2015F 2025F Source: McKinsey Global Institute 38

INDIA'S CONSUMPTION SHARE OF GDP IS CLOSER TO JAPAN AND THE UNITED STATES THAN IT IS TO CHINA %, billion, nominal $, 2005 100% = 2,216 4,553 801 12,456 Private consumption 39 57 62 70 Government consumption 14 Investment 44 18 12 16 Net trade 3 23 28 1-2 20-6 China Japan India United States Source: Global Insight; McKinsey Global Institute 39

INDIA HAS A RELATIVELY HIGH NATIONAL SAVINGS RATE COMPARED WITH OTHER COUNTRIES Gross national savings rates % of nominal GDP, 2005 50.4 Corporations 21,1 Households 22.0 32.8 16,2 6.4 32.4 8,1 22.3 26.4 21,3 21.2 10,4 18.0 7,8 12.9 Government 7,3 China* 10,2 South Korea 2.0 India 6.4-1.3 Japan 7.9 2.9 Mexico 9.9 0.3 France 11,3 2.1-0,5 United States * MGI estimate based on 2005 GDP and estimates of flow-of-funds information. Source: Country National Accounts; IMF; McKinsey Global Institute 40

INDIAN HOUSEHOLD SAVINGS ACCOUNT FOR A DISPROPORTIONATE SHARE OF NATIONAL SAVINGS Household savings as a share of gross national savings rates, 2005 % 69 55 44 37 24 20 16 Gross national savings rates % of nominal GDP, 2005 India France China* Mexico Japan South Korea United States 32.4 18.0 50.4 21.2 26.4 32.8 12.9 * MGI estimate based on 2005 GDP and estimates of flow-of-funds information. Source: Country National Accounts; IMF; McKinsey Global Institute 41

INVESTMENT WILL GROW APPROXIMATELY IN LINE WITH GDP Expenditure share of real GDP % 80 70 60 50 40 30 20 10 History Forecast 0 1985-10 1990 1995 2000 2005 2010 2015 2020 2025 Private consumption Investment Government consumption Net trade Source: National Accounts; McKinsey Global Institute 42

GOVERNMENT SPENDING AND DEFICIT WILL GRADUALLY DECLINE AS A PROPORTION OF GDP % of GDP Expenditures (left scale) Revenues (left scale) Deficit (right scale) Government expenditures and revenues* Government budget deficit 40 35 30 25 20 15 10 5 0 History Forecast 1985 1990 1995 2000 2005 2010 2015 2020 2025 3,0 2,0 1,0 0,0-1,0-2,0-3,0-4,0-5,0-6,0-7,0-8,0-9,0-10,0-11,0 * Government expenditure figures are available through 2005. Source: McKinsey Global Institute 43

BACK-UP Macroeconomic base case Urbanization, rural growth and education Additional results 44

INDIA REMAINS LESS URBAN THAN ITS COUNTERPARTS IN ASIA, BUT DEFINITIONS VARY Urban share of total population, 2005 % 81 65 66 69 40 48 27 29 Urban population, 2005 million Vietnam India China Indonesia Malaysia Japan United States Korea, Rep. 23 318 530 108 17 84 210 39 Source: United Nations World Urbanization Prospects 2005; McKinsey Global Institute 45

BIRTHS AND MIGRATION WILL DRIVE URBAN POPULATION GROWTH Urban population, 2005 2025* million 523 100 1.6 x 318 105 Urban population, 2005E Net births Net migration Urban population, 2025F Share of total population or urbanization rate 29% 37% * Estimate of birth versus migration split assumes urban birth rate = 19 per 1,000 and death rate = 6 per 1,000 Source: McKinsey Global Institute 46

CLASSIFICATION OF CITIES AND TOWNS Mumbai Kolkata, Delhi, Chennai Bangalore Hyderabad Ahemdabad, Pune Surat, Kanpur, Nagpur, Lucknow, Jaipur, Kochi, Vadodara, Indore, Ludhiana, Madurai, Bhopal, Patna, Nasik, Agra, Varanasi, Rajkot, Meerut, Jabalpur, Dhanbad, Kozhikode.... Tiruchirapalli, Amritsar, Faridabad, Aurangabad, Allahabad Gwalior, Jodhpur, Raipur, Bhubaneshwar, Goa, Pondicherry Aligarh, Moradabad, Mangalore, Gorakhpur, Bhavnagar Tier 1: Major cities 8 cities Population > 4 million Total income >100 billion Indian rupees Tier 2: Mainstream cities 26 cities Population >1 million Tier 3: Climbers 33 cities Population >500,000 Rohtak, Rourkela, Udaipur, Anand, Faizabad, Hassan, Shimla, Roorkee, Gurgaon, Shillong Tier 4: Small towns 5,094 towns * Population for each city estimated using the average urban household size (from MGI model) and the estimated number of households in each city from NCAER (in the year 2001). Source: The Great Indian Middle Class, NCAER; McKinsey Global Institute 47

HIGHER INCOME HOUSEHOLDS CONCENTRATED IN LARGE CITIES, POOR IN SMALL TOWNS Proportion of households in each income class across city tiers, 2001 %, thousand, households 100% = 16,809 34,139 3,750 806 470 Tier 1: Major cities 15 Tier 2: Mainstream cities Tier 3: Climbers 13 9 33 50 55 60 16 Tier 4: Small towns 63 9 43 13 9 12 8 10 8 27 25 22 Deprived Aspirers Seekers Strivers Globals Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: The Great Indian Middle Class, NCAER; McKinsey Global Institute 48

RURAL EMPLOYMENT HAS BEEN GRADUALLY SHIFTING AWAY FROM AGRICULTURE Distribution of rural male workers by economic activity % Manufacturing Construction Trade, hotels and restaurants Transport, storage and communication 5 7 7 4 2 8 7 8 4 7 Others* Agriculture 75 67 1987 2004 * Sectors with minimal shift in this period (6% in other services, 1% in mining, quarrying, electricity and water). Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: Employment and unemployment situation in India (2004 05), NSSO; McKinsey Global Institute 49

AGRICULTURAL GROWTH IS FORECAST TO ACCELERATE FROM ITS RECENT HISTORICAL RATE Compound annual growth rate Agricultural value added in GDP billion, Indian rupees, 2000 3.1% 7,529 9,974 2.4% 5,462 4,299 1995 2005E 2015F 2025F Source: McKinsey Global Institute 50

ACHIEVEMENT IN HIGHER AND SECONDARY EDUCATION WILL CONTINUE TO BECOME MORE WIDESPREAD % of relevant population groups* Rate of secondary-school and higher-education enrollment 40 History Forecast Rate of secondary-school and higher-education attainment 40 History Forecast Secondary Higher 35 30 25 20 15 10 5 35 30 25 20 15 10 5 0 1985 1995 2005 2015 2025 * Enrollment is measured as a percentage of 15 to 24 year old population; attainment is measured relative to 15 and above population. Source: McKinsey Global Institute 0 1985 1995 2005 2015 2025 51

BACK-UP Macroeconomic base case Urbanization, rural growth and education Additional results 52

INDIAN CONSUMPTION WILL BE DOMINATED BY THE MIDDLE CLASS Share of total consumption by income bracket %, billion, Indian rupees, 2000 Household income brackets thousand, Indian rupees, 2000 6,679 10,098 16,896 34,089 69,503 100% 2 0 1 Globals (>1,000) 6 5 7 12 8 6 20 15 8 12 32 51 35 24 Strivers (500 1,000) Middle class 77 35 Seekers (200 500) 54 36 1985 1995 24 2005E 10 2015F 17 3 2025F Aspirers (90 200) Deprived (<90) Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: McKinsey Global Institute 53

HALF OF URBAN CONSUMPTION WILL COME FROM UPPER INCOME STRIVERS AND GLOBALS Share of urban consumption by income class %, trillion, Indian rupees, 2000 Household income brackets thousand, Indian rupees, 2000 2.2 100% 2 6 28 0 4.0 2 6 10 7.2 12 8 17 17.4 18 10 43.1 26 Global (>1,000) 56 33 Strivers (500 1000) 64 55 53 Middle class 37 Seekers (200 500) 1985 26 1995 7 2005E 17 2 2015F 1 4 2025F Aspirers (90 200) Deprived (<90) Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: McKinsey Global Institute 54

ASPIRERS WILL DRIVE RURAL SPENDING OVER THE NEXT TWO DECADES Share of rural consumption by income class %, trillion, Indian rupees, 2000 Household income brackets thousand, Indian rupees, 2000 100% 4.5 0 2 6 9 6.1 4 0 7 17 9.7 3 4 9 16.7 6 6 15 26.4 12 8 Global (>1,000) Strivers (500 1,000) 47 33 Seekers (200 500) 84 72 55 39 Aspirers (90 200) 37 18 8 Deprived (<90) 1985 1995 2005E 2015F 2025F Note: Figures are rounded to the nearest integer and may not add up to 100%. Source: McKinsey Global Institute 55

CONSUMPTION BY NEW-TO-BRACKET CONSUMERS WILL BE SIGNIFICANT, ESPECIALLY IN THE MIDDLE CLASS New-to-bracket consumers Existing consumers New-to-bracket share of cumulative consumption 2005 2025* %, trillion, Indian rupees, 2000 100% = Globals 22 78 111.5 Strivers 43 57 93.4 Seekers 41 59 262.6 Middle class Aspirers 11 89 245.8 Deprived 70.9 * Calculated by determining the number of households that have shifted income class, assume they consume at new bracket levels in the first year, and then consider them new to that bracket for three years. Source: McKinsey Global Institute 56

FROM ASPIRER TO STRIVER THE EVOLUTION OF SPENDING FOR A TYPICAL HOUSEHOLD Average household consumption thousand, Indian rupees, 2000 497 69 Health care 46 Education and recreation 47 Communication 119 Transportation 94 7 16 7 11 5 40 3 1 2 214 22 7 48 6 12 63 13 18 24 49 13 42 23 90 Personal products and services Household products Housing and utilities Apparel Food, beverages, and tobacco Aspirer 2005E Seeker 2015F Striver 2025F Source: McKinsey Global Institute 57

SHARE-OF-WALLET ON FOOD IS ALREADY LOW IN MIDDLE- AND UPPER-INCOME BRACKETS % Share-of-wallet of urban households in 2005E All India average share-of-wallet evolution 100% Food, beverages and tobacco Other spending categories 39 61 28 21 72 79 100% Food, beverages and tobacco 42 34 25 Aspirers Seekers Strivers Share-of-wallet of rural households in 2005E 100% Food, beverages and tobacco 58 47 35 Other spending categories 58 66 75 Other spending categories 42 53 65 Deprived Aspirers Seekers 2005E 2015F 2025F Source: McKinsey Global Institute 58

FOOD CONSUMPTION WILL ACCELERATE SIGNIFICANTLY EVEN AS ITS RELATIVE SHARE DECLINES Compound annual growth rate Total consumption of food, beverages, and tobacco* billion, Indian rupees, 2000 Per-capita consumption of food, beverages, and tobacco* Indian rupees, 2000 17,296 12.102 4.5% 3.2% 9.035 3.0% 7,147 11,547 5.207 1.1% 6.058 6.454 5,622 3,931 Share of total consumption % 1985 1995 2005E 2015F 2025F 1985 1995 2005E 2015F 2025F 59 56 42 34 25 59 56 42 34 25 * Approximately 90% of spend on the broad category food, beverages, and tobacco is on food. Source: McKinsey Global Institute 59

FIVE CATEGORIES WILL ACCOUNT FOR MORE THAN 80 PERCENT OF CUMULATIVE CONSUMPTION OVER THE NEXT 20 YEARS Breakdown of total cumulative consumption across categories (2005 2025) trillion, Indian rupees, 2000 784 248 148 87 79 Total growth Food, beverages, and tobacco Transport Housing and utilities Health care 74 Personal products and services 148 54 41 32 22 Other Education and recreation Apparel Communication Household products Source: McKinsey Global Institute 60