Years of high-speed growth in the 8% range is transforming and enlarging India's middle class. By 2025, India is expected to emerge as the world's fifth-biggest consumer market as incomes and living standards continue to improve, according to a study by the McKinsey Global Institute. Nearly 300 million Indians are expected to escape poverty and India's middle class will leapfrog by a factor of 10-from 50 million today to roughly 583 million 18 years from now.
Average annual household disposable income is projected to rise from $2,784 to $7,804 during the same period. If it does, this would be fantastic news for India's 1 billion-plus population that has experienced high poverty rates during most of the postwar era, not to mention local and foreign companies that will profit from the rise of India's supersized middle class. Here's a look at the big spending areas likely to be most affected.
High Octane
Lured by this emerging market's vast potential, General Motors, Fiat, Honda, and other foreign carmakers have announced Indian investments valued at roughly $1.5 billion.
Right now, India's entire industry-local producers and transplants-collectively manufacture about 1.4 million vehicles a year. That's expected to double by 2008, and if it does, India will surpass Britain and Canada in total car production. The government hopes to see India auto sales jump from last year's $34 billion to $145 billion in 2016. In that case, the domestic auto industry could represent about 10% of India's gross domestic product.
White Hot
India's searing mobile-phone market has the world's biggest handset makers—Nokia, Motorola, Samsung, LG, and Sony Ericsson—scrambling to get a piece of the action. With good reason: The country's mobile subscriber base is now approaching 150 million and is expected to reach 450 million by 2010. Every year, 17 million to 18 million new users enter the market.
Buying Power
By 2015, India’s consumer market will be as big as Italy’s, and will grow into the fifth biggest worldwide 10 years after that. India’s expanding middle class has prompted big Indian conglomerates such as Tata, Reliance, and Bharti to expand into retail. Foreign brands such as Nike, Samsung, and Sony have tied up with local players, and Wal-Mart is entering the fray via an alliance with Bharti.
Quality Care
Foreigners in search of high-quality, affordable medical care love India, and the country is well known for global companies like Ranbaxy that make generic drugs. Yet as India’s middle class grows, its health-care sector will have to expand much more to keep pace.
Passing MarksIndia needs a dramatic upgrade of its system of state universities and private colleges. True, the various Indian Institute of Technology campuses are world-class and have long turned the country's smartest kids into stars. But that is an exception, and competition for those slots is ferocious. A study last year by McKinsey concluded that only 25% of India-trained engineers and 15% of the system's finance and accounting professionals had the skills to work for a multinational company. That’s a problem if India is going to really leverage the talents of the world's largest pool of young people. Some 60% of India's 1 billion-plus population is below the age of 25.
Drink Break
Spending on food and beverages represents about 56% of average household consumption, and foreign chains such as Starbucks view India as a critical emerging market in the decades ahead.
Better Lives
If India’s high-speed economic growth rates stay on track, as is widely expected, nearly 300 million Indians are expected to escape poverty. While urban India is likely to experience the biggest income gains, rural India’s average income growth per household is projected by McKinsey to accelerate from its 2.8% average over the last two decades to 3.6% over the next two.
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