Why India? Why now?

India has witnessed great social, political and cultural change since early 1990s. As the world’s largest democracy, it’s most diverse nation and one of the fastest growing economies, India is now, sixty years after Independence, widely regarded as an emerging superpower. India’s gross domestic product passed the trillion dollar mark and this is the first time in history that it has been valued so high. But, the most interesting fact is that it will pass the next trillion-dollar mark in nine years at most- by 2016 at the latest.  And the composition of that second trillion dollar market will be very different from that of the first.

The findings from the latest study, The Bird of Gold- The Raise of India’s Consumer Market published by the McKinsey Global Institute (MGI), reveal that if India continues on its current high growth path, over the next two decades the Indian market will undergo a major transformation. Income levels will almost triple and India will climb from its position as the 12th largest consumer market today to become the world’s fifth largest market by 2025.  As Indian incomes raise, India’s middle class will swell by over ten times from it’s current size of 50 million to 583 million people. By 2025, over 23 million Indians- more than the population of Australia today- will number among the country’s wealthiest citizens. While much of this new wealth and consumption will be created in urban areas, rural income growth will benefit too. Forecast for India’s real GDP growth rate over the coming two decades generally range between 6 to 9 per cent per year. MGI forecasts real compound annual growth of 7.3 percent from 2005-2025, a marked acceleration from the 6 per cent growth of the previous two decades. In this growth rate, average real household disposable income will grow from 113,744 Indian rupees in 2005 to 318,896 Indian rupees by 2025, a compound annual growth rate of 5.3 per cent. This is significantly more rapid than the 3.6 per cent annual growth of the last two decades with the exception of China, and much quicker than income growth in other major markets. For example, US average real household income increased at a compound annual growth rate of 1.5 per cent over the past two decades; for Japan the figure was 0.25 per cent. Rising income will create a 583 million-strong middle class. India’s raising real incomes have already had a significant impact on poverty reduction.

In 1985, 93 per cent of the population had an annual household income of less than 90,000 Indian Rupees, or less than $1,970 per year or $5.40 per day- an income bracket categorized as deprived. By 2005, this had dropped by about two-fifths to 54 per cent of the population, with the biggest fall occurring since 1995. Thus more than 103 million people moved out of desperate poverty in the course of one generation. This is all more impressive given that India’s population grew by 352 million during this period. MGI’s forecast shows that overall economic growth will continue to benefit India’s poorest citizens and that the deprived segment will further drop from 54 per cent of the population in 2005 to 22 per cent by 2025. India will become the fifth largest consumer market by 2025. The aggregate consumption in India will grow in real terms from 17 trillion Indian rupees today to 34 trillion by 2015 and 70 trillion by 2025- a fourfold increase.

After income growth, the second largest factor driving India’s development as a consumer market is its continued population growth. India’s strength has always been in numbers and today it is the second only to China in this respect. However, China’s strict adoption of a one-child policy means that India’s population is growing significantly faster by comparison.

According to UN projections, India will overtake China to become most populous country in the world by 2030. The rapid population growth will give India a youthful demographic profile as its dependency ratio (the ratio of children and elderly to income earners) drop from 60 today to 48 by 2025. This signifies a rapidly growing labour force and quickly expanding consumer base. Between 2010-2030, India will add 241 Million people in working-age population (and that means the children who are currently in our education system), Brazil will add around 18 million, while China will add a meager 10 million people during the same time. So even with all the drawbacks that India has, this particular Indian aspect is going to prove pivotal in making India the world leader in coming years.

The demographic outlook for the BRIC countries  (Brazil, Russia, India and China) could hardly be more different. In terms of the demographic transition model, India is at the beginning of stage three (declining fertility, population growth), Brazil and China are at stage four (low mortality and fertility, population trending towards stability), while Russia is already at stage five (sub-replacement-rate fertility, declining population). Not surprisingly, the differences in the projected change in the working-age population the economically relevant variable are very significant in both absolute and relative terms. [Source: DB Research]

The demographic developments in the BRICs over the next 10, 20, 30 years will vary greatly. This will impact not only economic growth prospects, but also savings and investment behavior and potentially if somewhat difficult to quantify financial market growth prospects.

India is demographically in a substantially more favorable position than China and Russia.Brazil’s demographic window (defined here, non-technically, as a falling dependency ratio) will close around 2020-25, while in China and Russia it is closing right now. India, by contrast, will enjoy a very favorable demographic momentum for another three decades. So even though in current scenario, India may not exactly be mentioned in the same breath as US, UK and China, the picture in next couple of decades will be quite different.

So, it's wise to be in India, at this moment and experience the "wave".