India set for consumer spending boom

22 July 2010

NEW DELHI: The rapid expansion of the middle class in India is set to drive a substantial increase in consumer spending in the country.

According to estimates from Gemini Investment Management, India's gross domestic product is likely to double in size during the period to 2014.

This will be equivalent to a surge of $1tr (€778bn; £655bn) overall - which marks a sharp acceleration given it had previously taken the Asian nation some 60 years to generate this amount of wealth.

A major factor behind this trend will be the rise of the middle class, which should contain 580 million people in 2025, compared with just 50 million in 2005. 

Gemini also suggested that the purchase behaviour of this demographic is going to make the transition away from necessities and towards discretionary items, where demand has been muted to date. 

"While China's growth has largely been funded by investment, the Indian story is about consumption," said Nitin Rakesh, Gemini's managing director.

"The country is eighth largest in the world by GDP but per capital income is still low and penetration rates in most consumer goods are minimal, meaning increasing spending will be a powerful driver." 

Among the companies which are best placed to tap in to this development is Hero Honda, the motorcycle manufacturer, which holds a 38% share of its sector and is predicted to see revenues climb as more shoppers enter the category.

Infosys, the IT and technology giant, will benefit from corresponding gains as Indian corporations seek to enhance their reach both locally and internationally.

The financial services industry is also in a strong position, with HDFC Bank and the State Bank of India just two of the players in leading roles.

One reason for this is that Indian households have traditionally been deeply conservative when it comes to managing their money.

The high savings rate, which currently stands at around 40% of GDP, could reach a value of $1tr over the next decade, Gemini said.

Similarly, the limited reach of credit cards and insurance at present means considerable room for businesses in these areas remain going forward.

Data sourced from Financial Times; additional content by Warc staff