Two Indias: One buys Rolls, other struggles to pay school fees, says data

The Indian consumption story is largely dependent on its wealthiest residents, which probably explains the recent craze over ‘premiumisation’ of cars, weddings, clothes and mobile phones.

Estimates from Blume Ventures, Bernstein and Goldman Sachs highlight interesting trends in the Indian purchase power scenario. The top 10 per cent of wealthy Indians, it appears, now account for two-thirds of all discretionary spending across the country.

The wedding industry has been logging exponential growth year on year since at least the COVID pandemic ended, as the super wealthy fuel mass hysteria for showstopper weddings. Expensive SUVs now account for nearly half of all car sales in India as preference for small cars and even hatchbacks shrinks.

Also read | Inflation leaves Indian middle class, and its buying capacity, shrinking

Creamy layer

It is no surprise that the spending power of this set of rich Indians is multiple times that of the less wealthy: the creamy layer of spenders shells out five times the average per-capita expenditure on just buying clothes and footwear and six times the per-capita average on packaged foods.

When it comes to purchasing consumer durables — refrigerators, television sets, air fryers, high-end mobile phones and what not — this section spends as much as 13 times the average per-capita expenditure.

In other words, the less wealthy are no match for the top 10 per cent consumers in this country.

Two Indias

According to estimates from Blume Ventures, Bernstein and Goldman Sachs, while the top end of consumers spends lavishly, two in three Indians have no capacity to spend on a takeaway meal, buy a four-wheeler, or even afford their children’s education. This section is forced to dip into household savings to spend on any discretionary item.

Sandwiched between the super wealthy and the relatively poor Indians is the vast middle class — Blume and others have estimated this to be 23 per cent of the population.

This means, nearly every fourth Indian is in the income middle, and this section of people accounts for the remaining one-third of the discretionary consumption pie.

Also read | Tax relief or economic mirage? The middle-class dilemma

India’s super wealthy

Bernstein's 2024 estimates indicate that 65 million Indians had an income exceeding $12,000 (over Rs 10 lakh) and another 65 million earned anywhere between $6,000 and $12,000 (about Rs 5-10 lakh) annually. But a vast majority, 790 million Indians, made under $3,300 (under Rs 3 lakh).

UBS estimates suggest 538 million Indians earned less than even $1,500 (well under Rs 1.5 lakh) in a year.

India1 (the top 10 per cent of the country’s earners, as described by Blume Venture) is a high-income country within a country and this category will be an advanced economy well before India (as a whole) becomes a developed country.

If we were to consider only the 140 million rich Indians or the 10 per cent consumption determiners, India’s global rank in per-capita income would be above Russia, China, Indonesia, and Vietnam.

And Blume underlines what has been whispered about for some time: the gap between the rich elite Indians and the not-so-rich will only widen and this phenomenon will pose fresh challenges.

GDP growth slowing

India’s economic growth has been slowing and the First Advance Estimates put out by the government project the slowest GDP growth in four years this fiscal at 6.4 per cent, as urban demand stagnates, private investments fall and sticky inflation punctures incomes and expenditures of the common man.

Also read | With lower income-tax, can RBI's repo rate cut boost urban consumption?

The Second Advance Estimates, released on February 28, see GDP growing 6.5 per cent in FY 2024-25. Nominal GDP is expected to witness a growth rate of 9.9 per cent in FY25. Both the growth rates have been revised upward from their respective First Advance Estimates.

Growth in consumption is essential to fire up the GDP since private final consumption expenditure accounts for a lion’s share — around 60 per cent — of the GDP. But Blume says consumption even by the 10 per cent wealthy elite is not growing much, basing its analysis on tepid growth in air travel after COVID recovery, two-wheeler sales volumes remaining muted and plateauing food orders on Zomato.

Income tax relief

In the midst of all this consumption talk, one of the key personal income tax proposals made by Finance Minister Nirmala Sitharaman in the Union Budget has been excluding salaried Indians, who earn up to Rs 12 lakh in a year, from paying any income tax.

Watch | Income-tax break unlikely to boost consumption: Ex-IMF India Rep

Many experts believe putting more money in the hands of the ‘middle class’ through this tax relief will fuel consumption growth. Sitharaman said this income tax relief will lead to Rs 1 lakh-crore in revenue foregone for the exchequer, which comes to 6-8 per cent of total income tax collection.

But the salaried are just a fraction of the great Indian middle class, as explained through Blume Ventures’ dataset. Economist Rathin Roy has already termed the Budget a ‘Suit Boot’ Budget, saying it does nothing for the aam aadmi and that taxpayers are a fraction of the population in any case.

So, giving some relief to taxpayers does nothing for the vast multitudes of people who continue to pay the previous rates of goods and services taxes (GST) in any case. Government data has put the number of income tax payers in India at less than 3 per cent of the population.

Hinterland gallops

In another interesting finding, there has been an upsurge in rural demand for biscuits, shampoo, hair oil and even large cars even as consumers in urban pockets hold back purchases. While the resurgence in rural spending is good news for a large number of consumer-facing businesses, it shows the deep distress which has been building across income segments in our large cities.

Many experts have been pointing out the damage this urban-rural divide has caused to India’s overall economic growth.

Maruti Suzuki India, the country’s largest car maker by sales, posted 15 per cent growth in retail sales across rural markets in the October-December period (Q3 FY25) this fiscal while growth in retail sales in urban pockets was just 2.5 per cent. So, the difference in the growth rates between the two pockets was a significant 12.5 percentage points. It is pertinent to mention that Maruti has lost out to other manufacturers in overall market share in recent years due to the increased craze for big SUVs.

All-round worry

Slowing urban consumption is the worry elsewhere too. Rohit Jawa, MD and CEO at Hindustan Unilever Ltd, India’s biggest fast-moving consumer goods (FMCG) company, pointed towards slowing demand in general for FMCG products over the last six months to say that there has been “demand compression” in urban markets and that this would likely continue for another quarter or two.