News: India's middle class to reach 583 m by 2025-report

(RTR 03/05/2007) New Delhi - India's middle class will reach 583 million from the current 50 million by 2025 if high economic growth holds and the government undertakes reforms, a report by management consultancy firm McKinsey said on Thursday.

It also said if India's high economic growth were sustained, incomes would triple over the next two decades and India would become the fifth-largest consumer market by 2025, from 12th place now, surpassing Germany.

"The emergence of a huge middle class is not a question of if but when for India," Adil Zainulbhai, country managing director of McKinsey and Company, was quoted as saying in a statement.

"Indian incomes will almost triple if the government forges ahead on a systematic reform programme, promotes competition, contains the fiscal deficit and inflation and invests in infrastructure, healthcare and education."

India, Asia's fourth-largest economy, has grown at an average 8.6 per cent in the past four years, and the central bank forecasts it will expand 8.5 per cent in the fiscal year to next March.

McKinsey said its forecasts assumed real compound annual growth of 7.3 per cent from 2005-2025.

Data about who and how many constitute India's expanding middle class is hard to come by in a country where only 32 million of the 1.1 billion population pay income tax.

But their swelling ranks are the force behind rising domestic demand and forecast 9.2 per cent economic growth in 2006/07.

McKinsey defined the middle class as households with annual disposable income of $4,380-21,890, which totaled 13 million households or 50 million people in 2005.

It said average real rural income growth per household would accelerate to 3.6 per cent a year over the next two decades from 2.8 per cent in the previous 20 years.

Consumption in rural areas would reach the current average urban household level by 2017, it said.

Overall average real household disposable income would reach Rs 318,896 ($7,740) by 2025 from 113,744 in 2005, a compound annual growth rate of 5.3 per cent.

"The upcoming changes in the Indian consumer market offer substantial opportunities and challenges for Indian and multinational businesses alike," Subbu Narayanswamy, a partner at McKinsey was quoted as saying.

India has seen high growth in sales of cars and mobile phones in the past couple of years, with the total number of wireless subscribers up 68 per cent to 166 million in March from the same month in 2006.

Domestic car sales topped 1 million units in 2006/07.

Shopping malls are springing up in major cities like New Delhi and Mumbai, and signs of increasing prosperity are visible in the rising number of luxury foreign cars on the roads.

In rural India, however, bullocks and camels often pull carts, while tractors frequently double as transport for workers returning from the fields.

McKinsey said income growth would be the biggest driver of increasing consumption, rather than a change in savings behaviour or population growth, and by 2025, consumers in urban areas would be responsible for 62 per cent of consumption even though they were only likely to represent 37 per cent of the population.

Food, tobacco and beverages represent 42 per cent of consumer spending today but this was forecast to fall to 25 per cent by 2025, with transport and healthcare taking second and third position.