McKinsey study says spending could quadruple to Rs70 trillion, spurred by ten-fold increase in middle-class population and three-fold jump in household income

New Delhi: The Indian consumer will spend over Rs200 a day on average by the year 2025, steered by a ten-fold increase in the country's middle class population and a three-fold jump in household income during this period.

According to a study by the McKinsey Global Institute, the aggregate consumer spending could more than quadruple to Rs70 trillion by 2025, from about Rs17 trillion in 2005.

"The dramatic growth in India's middle class, from 50 million to 583 million people, will power this growth," the international consultancy major said in a new study.

India's rapid economic growth has set the stage for fundamental change among its consumers. The same energy that lifted hundreds of millions of Indians out of poverty is creating a massive middle class centred in the cities... If India continues its recent growth, average household incomes will triple over the next two decades and it will become the fifth largest consumer economy by 2025, up from 12th now.

McKinsey said that by 2025, the country's middle class would grow from about 5% of the population to more than 40%, which, along with rising private income, would drive a sharp surge in consumer spending.

Taking into account the estimated consumer population in the age-group of 15-64 years, which is expected to rise to 950 million by 2025, the spending per consumer would rise to about Rs74,310 a year, over Rs6,000 a month or Rs206 a day.

Considering the population of the same age-group at about 700 million in 2005, McKinsey's consumer spending estimate for that year would be about Rs24,300 per person in a year, about Rs2,000 a month or just about Rs67 a day.

Middle-class families are those with disposable income between Rs1-2 lakh a year.

The forecast is based on 7.3% annual GDP growth assumption for next two decades, McKinsey said, adding this was reasonable if economic reforms continues.

Private consumption has already played a key role in India's growth than it has in that of other developing countries, the international consultancy major said.

In 2005, private spending of Rs17 trillion accounted for 62% of India's GDP, which is closer to the developed economies like the US (70%) and Japan (57%) than to China (37%) and other fast-growing emerging markets in Asia.

McKinsey said that the consumers' spending in years to come would also shift substantially from the informal economy (economic activities that is neither taxed nor monitored by government) to the more efficient formal economy of organized businesses and "that transition would lower prices and further boost demand".

The study warned, however, that "neither incumbents nor attackers will have an easy time" as bureaucratic hurdles and well-recognized infrastructure shortcomings would “frustrate many strategies."

Besides, the spending would be spread across hundreds of millions of households, many with very modest income and high sensitivity to price and value, it noted.

A number of domestic and multinational companies are already competing in the market and the challenges would force companies to be more dynamic to adapt the rapidly changing needs and incomes of the consumers.

McKinsey also sees a shift in spending power from the countryside to the cities, thus placing a bulk of India’s private consumption within easier reach of major companies.

"Today, 57% of private spending is spread across rural areas, but by 2025 cities will command 62% of the country's spending power," McKinsey said.