A Billion Indians Left with No Discretionary Income: New Report Highlights Economic Disparities

The Blume Ventures report highlights that India's consumer market is not expanding much, with only 130-140 million people classified as consumers. While the wealthier class continues to grow richer, the middle class is facing stagnation, leading to significant concerns about future consumption and economic stability.

India is home to a staggering 1.4 billion people, yet a recent report suggests that nearly a billion of its citizens lack the financial resources for discretionary purchases. According to research conducted by Blume Ventures, a prominent venture capital firm, the country's consuming class amounts to just 130-140 million individuals, similar in size to Mexico.

There exists an additional segment of 300 million "emerging" consumers who are hesitant to spend, primarily due to their recent exposure to digital payments, offering convenience in transactions. However, the report emphasizes that the consuming class in India is more about "deepening" than "widening." This implies that the increase in wealth concentration is skewed towards those who are already affluent, rather than a broad growth across the economic spectrum.

This situation is influencing how brands position themselves within the market, propelling a trend towards "premiumisation." This development is characterized by a shift towards luxury and premium products, where brands are focused on catering to wealthier consumers instead of mass-market offerings. As a consequence, there is a notable rise in the sales of high-end products, from gated luxury housing to expensive mobile phones, while lower-tier alternatives are suffering. The "experience economy" is also booming, as evidenced by the overwhelming popularity of high-priced concert tickets for global stars entertaining in India.

According to Sajith Pai, an author of the report, businesses that adapt to these market shifts are thriving. "Those focused solely on the mass market or lacking a premium product selection have lost their market share," he observed. The findings align with the prevailing notion that India's post-pandemic recovery has been characterized by a K-shaped trajectory, where the rich are amassing wealth, whereas poorer demographics are facing diminished purchasing power.

Long-standing trends indicate a growing economic divide, with the top 10% of the population now commanding 57.7% of the national income—up from only 34% in 1990. In contrast, the bottom half's share has decreased from 22.2% to a mere 15%. Current economic challenges have exacerbated this situation; purchasing power is being eroded and financial savings are sharply declining amid spiraling debts.

Moreover, the actions of India's central bank to restrict unsecured lending have further hindered consumption, as many aspirant consumers relied heavily on borrowing. Pai notes that the cutback on easy lending is expected to affect overall consumption levels.

In the short term, there are hopes that rural demand driven by a record harvest and a recent $12 billion tax cut may provide a minor boost to spending, potentially increasing India's GDP by over half a percent. However, significant challenges remain on the horizon.

The middle class, historically a driving force behind consumer demand, faces stagnation in incomes, with wage growth remaining flat. A report by Marcellus Investment Managers indicates that income for the middle 50% of tax-payers has remained stagnant over the past decade, essentially halving in real terms.

This financial pressure has severely diminished savings among the middle class, raising alarms of a potential economic downturn. The Reserve Bank of India has flagged concerns that household savings are nearing a 50-year low, signaling an impending crisis for products and services associated with middle-class expenditures.

Additionally, the report points to the encroachment of artificial intelligence (AI) into white-collar job sectors, making these positions more elusive and threatening the employment landscape. The Indian economy, heavily service-oriented, must contend with the implications of decreasing consumption that could result from workforce displacement.

The government's recent economic survey has echoed these apprehensions, warning that the rising trend of labor displacement-driven by technological advancements poses serious ramifications for India's growth trajectory. The survey notes, "If worst-case projections materialize, it could redirect the country's economic growth path."

Overall, the landscape for consumer spending in India is fraught with complexities that reflect broader economic disparities, signaling a pressing need for structural changes to address the underlying challenges.