January 19,2018

India’s Growing Middle Class

India has a population of 1.2 billion and one of the fastest growing middle classes in the world. Right now that demographic is estimated at about 50 million people, roughly 5 percent of the population, but a continuing rise in personal incomes is expected to enlarge that segment to about 583 million people, or 41 percent of the population, by 2025. With an average annual GDP growth rate of 5.8 percent, India is one of the fastest growing economies in the world. Over the past decade, hourly wage rates have more than doubled and India’s consumer market, currently the world’s thirteenth largest, is expected to become the fifth largest within one generation’s time.

This bodes well in for the future of e-commerce in India. Indeed, it already is. According to Economic Times, the global rate for online shopping is around 8-10 percent, but in India it’s growing at 30 percent. A significant chunk of this is accounted for by more international travel – increasing rates of online ticket purchases – but clearly there’s tremendous potential for the domestic market as well.

Consider, for example, the possibilities for social buying sites in India. Social buying sites, also called daily deal sites, are that wildly successful phenomenon – a union of social networking and e-commerce – which has taken the United States by storm and is quickly spreading around the world. Social buying sites work by offering deeply discounted (50 percent or higher is standard) products or services from companies in a specific geographical location. The companies that make the discounted goods available are rewarded with widely disseminated advertising at no up-front cost, and in some cases a guaranteed certain number of sales. The sites themselves make money by keeping a cut from every deal bought.

The model has proven a vastly lucrative. Groupon, the company credited with igniting the social buying trend, made history with some of the fastest rate of growth on record, burgeoning from 400 subscribers in December 2008, the year of its launch, to 44 million in December 2010. Groupon’s success has inspired hundreds of competitors. This year Groupon is expected to achieve revenue of a billion, and some of Groupon’s competitors are not far behind.

Not surprisingly, social buying site companies have their eyes on other growing markets around the world. India is attracting a lot of attention, and for good reason. Not only does India have a burgeoning consumer class, but this explosive sector wants to spend.

According to the latest McKinsey report, the rising middle class in India spends more of their discretionary income on non-necessities than equivalent emerging markets in other countries. “Private consumption has already played a much larger role in India’s growth than it has in that of other developing countries. In 2005 private spending reached about 17 trillion Indian rupees1 ($372 billion), accounting for more than 60 percent of India’s GDP, so in this respect the country is closer to developed economies such as Japan and the United States than are China and other fast-growing emerging markets in Asia.” The same study predicts that aggregate consumer spending could more than quadruple in coming years.

Also, India’s huge middle class will be concentrated in the urban areas, which are expected to nearly double in population within the next fifteen years. McKinsey: “Opportunities will blossom as millions of first-time buyers step up to cash registers and as the bulk of consumer spending moves from scattered, hard-to-reach rural areas to more concentrated, accessible urban markets.” This is great news for social buying sites, which work best in urban settings where companies and people are condensed. Also, the shift to urban centers marks a movement away from the informal economy, with its individual traders, to the more efficient formal economy of organized businesses.

For e-commerce to thrive, the consumer class must be literate, have access to and ease with the internet, and be able to use credit cards. All these factors are on the rise in India.

India’s population ranks fourth in internet use in the world, with accelerated growth rates particularly in the past several years. Also on the rise is the popularity of social networking sites, particularly Facebook. Facebook was the most viewed site after Google and Yahoo in India in 2009 and its popularity continues to grow, suggesting that social networking has a promising future in the Indian market. In the United States, the popularity of social networking sites correlated with that of social buying sites.

Studies show that young professionals are the demographic most inclined to engage in online social networking. They tend to be educated and have incorporated internet usage comfortably into their lives. This demographic is growing rapidly in India. It is predicted that by year 2015, around 65 percent of the Indian population will be in the age group of 15-35 years. This generation find online transactions easy to navigate, and since youth are early adaptors of all technology, this seems to be a positive indicator for the Indian e-commerce market.

Groupon and other social buying sites are already actively expanding into the Indian market and acquiring start-up social buying sites. By their nature, a social buying site that hosts one deal per day is limited in how many businesses it can accommodate in any given area. The market in India is far larger than a single site could service.

However, for a social buying site to be successful in India, it will have to adapt to an India-specific world. First, it will have to be sensitive to and responsive to specific demands of this emerging Indian middle class. Studies suggest that health – specifically private health care – and education are areas of high consumer demand. Health care is predicted to account for 13 percent of the purchases of Indian households in coming years, a rate that rivals that of the U.S., with its famously expensive health care expenditures. And in education it is predicted that households rising from poverty will make educating their children a priority, while higher-income urbanites will be spending more on better-quality education and education products.

Updated: April 29, 2016 — 8:10 am