Praveen Jagwani, CFA | Nov 2020
The Megatrend of Middle Class Consumption
By 2030, the global middle class is expected to comprise 5.3 billion people, up from 3.6 billion presently. The consumption power of these 5.3 billion people will deliver a third of the global GDP. Most of this growth will be in Asia, with China and India together representing 66% of the global middle-class population and 59% of middle-class consumption.
While the middle class is rapidly expanding in Asia, it is shrinking in the developed countries due to ageing population, economic turmoil and increasing unemployment. By 2030, India will be the world’s largest middle-class consumer market, surpassing both China and the USA. India’s GDP (PPP terms) is expected to register a growth of 387%, second only to that of Egypt.
India is adding approximately 4 million people to the middle-class each month. Rising Purchasing Power means faster access to the aspirational standard of living that has long characterised a middle class lifestyle. Companies that harness the consumption appetite of the Indian middle-class consumers will flourish because 65% of India’s GDP comes from Domestic Consumption.
GDP Forecast on Purchasing Power Parity basis in USD Trillions
Purchase of household appliances is one of the most reliable benchmarks of the upward mobility of a middle-class household. Rapid urbanisation and rising incomes drive the demand for refrigerators, televisions, microwaves, mobile phones and ceiling fans. In the emerging markets, the expected growth rates in India are among the highest, offering an opportunity for scalable manufacturing. As of Oct’20, most FMCG & Consumer Durable firms in India are operating at 100% production capacity, and yet all E-commerce sites of India have exhausted their stock of washing machines and refrigerators.
Penetration of Household Appliances
Investing in global corporations that derive a portion of their revenue from India is an inefficient way to play the India story. For example, Nestle-India is the 13th largest contributor to Nestle’s global revenue. Nestle’s global sales in the past decade have been flat to declining while Nestle-India continues to grow at a CAGR of around 14%. Hindustan Unilever (HUL) the Indian listed company contributes nearly 10% to Unilever’s global turnover, whereas the US subsidiary contributes16.3%.We expect that by 2027 HUL will become Unilever’s largest subsidiary, based on its estimated growth rate of 9%, the fastest among Unilever’s markets.
Investing in companies like Nestle-India and Hindustan Unilever gives investors direct participation in the consumption boom of middle-class India.
Impact of the Pandemic
Mindful of India’s high population density and insufficient healthcare facilities, Prime Minister Modi ordered a complete shutdown of the country for 68 days, from March 25th until June 1st. Consequently, the country’s economy shrank by 23.9% for the Apr-Jun quarter.
Since then, however, animal spirits of optimism and consumption have returned. Sales of household appliances, two-wheelers, cars and mortgages are among the categories of consumption leading the recovery. One of the main findings of Credit Suisse’s 2020 Global Wealth Report released this month is that only China and India saw gains in household wealth in the first half of 2020. India’s household wealth grew by 1.6%.
Our analysis is that the historical absence of a public safety net has meant that the Indian middle-class do not naturally look to the Government for handouts. Over the decades, they have learnt to fend for themselves. This resilience borne of self-reliance makes the Indian middle-class a consistent engine of growth. They have shrugged off the pandemic as just another temporary setback in life.
The Power of the Internet
The ‘Work From Home’ paradigm has boosted digital transactions across the world. In India, they have crossed Pre-covid levels.
India was ranked as the second-largest online market worldwide in 2019 after China. The number of internet users is estimated to increase in both urban as well as rural regions, indicating a dynamic growth in access to the internet.
The Indian online grocery market is estimated to exceed sales of $3.2 billion in 2020, witnessing a significant 76% jump over the previous year. According to a PwC report, India is gearing to emerge as the world’s sixth-largest OTT (over-the-top streaming) market by 2024. The market is expected to grow at a CAGR of 28.6% over the next four years to touch revenues of US$ 2.9 billion.
India’s growth rates in nearly every consumption metric are higher than those of other emerging markets. Businesses that effectively understand the Indian consumer and harness their rising disposable income will thrive. Investing in such Indian companies will result in compounding shareholder returns in the coming decades.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy
or position of the UTI Group.
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