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March 2010

Don’t Underestimate India’s Consumers

By Uday Chitale
Murtuza Vajihi
Chartered Accountants
Reading Time 4 mins

Accountant Abroad

“Don’t Underestimate India’s Consumers”,
says John Lee
who is a fellow at the Centre for Independent Studies, Australia and visiting
fellow at Washington’s Hudson Institute. He has authored the book ‘Will China
Fail?’ His analysis of the distinction of current domestic market push in China
and India makes interesting reading.

Western multinationals are often attracted to China’s size,
but they’re bypassing Asia’s true shopping powerhouse

The scale of China has always fascinated merchants. In 19th
century England, spinning-mill owners were convinced they would reap profits
beyond their dreams if they could just get every Chinese to buy one
handkerchief. Alas, the one man one handkerchief plan never took off, and for
multinationals hoping to tap China’s masses, the country continues to
disappoint. Since the global economic crisis, Beijing has constructed a way
around a slump. Roads, ports, railways: Name it, and China is building it. But
its consumers aren’t pitching in. As a percentage of the gross domestic product,
Chinese consumption is the lowest of any major economy at less than one-third.
Almost all the country’s growth this year has come from infrastructure spending
or speculation in domestic assets.

Western multinationals should consider fantasizing about
India instead. The momentum for its bounce back comes from Indians, including
the poor, buying their way to growth. The demand for handbags, air travel, and
fine dining in Mumbai may have eased, but domestic consumption accounts for
two-thirds of the Indian economy — twice China’s level!

China’s problem is that its top-down, state-led model of
development (not to mention its artificial suppression of the Yuan) structurally
impairs domestic spending. According to Minxin Pei, director of the Keck Center
for International & Strategic Studies, three-quarters of China’s capital goes to
the 120,000 odd state-controlled entities and their many subsidiaries, leaving
40 million plus privately owned businesses to fight for scraps. The upshot:
Business profits tend to end up in state coffers, not Chinese wallets. Wage and
income growth, even for China’s urban residents, hovers at about half the level
of GDP growth over the past 15 years.

India’s bottom-up private sector model, for all its chaos and
bureaucracy, provides a stark contrast. While the nation badly needs
infrastructure, its consumers are in a far better position to spend. India can
now boast of an overwhelmingly independent middle class about 300 million
strong, as against China’s 100 – 200 million, depending on the parameters.
Profits from India’s businesses, large and small, go into Indian pockets rather
than the state coffers.

The contrast sharpens outside these two nations’ cities. Half
of China and two-thirds of India live in rural areas. That’s about 700 million
people in each. The rural half of China is falling behind. Back in the
mid-1980s, the mainland’s urban-rural income ratio was 1.8. It now stands at
about 3.5. Although per-capita incomes have risen, an estimated 400 million of
mainly rural residents have seen net incomes stall or decline over the past
decade. Yasheng Huang, a professor at the Massachusetts Institute of
Technology’s Sloan School of Management, estimates that China’s absolute levels
of poverty and illiteracy have doubled since 2000! In India, they’ve been
halved. The urban-rural income gap has steadily declined since the early ‘90s.
Over the past decade, economic growth in rural India has outpaced growth in
urban areas by almost 40%. Rural India now accounts for half the country’s GDP,
up from 41% in 1982. World Bank studies show that rural China accounts for only
a third of GDP and generates just 15% of China’s growth. Meanwhile, rural India
is chipping in about two-thirds of the overall growth.

Jagmohan S. Raju of the University of Pennsylvania’s Wharton
School points out that every major Indian consumer company knows it can’t
succeed without reaching the villages. That’s why Indian companies arguably lead
the world in innovative low-income products. Telecom provider Bharti offers the
world’s lowest call rates; Tata Motors sells the world’s cheapest car. And the
push for the villages has led to a well-developed consumer marketplace
throughout India.

For Western brands chasing the luxury market, both China and
India offer abundant opportunities. But when what you sell is suited to — and
scaled to — millions of city and country dwellers, it makes sense to aim your
ef¬forts at India — at least for now.

(Source :
Bloomberg BusinessWeek,
February 1 & 8, 2010)

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