Where the Middle Class Rules

When two elephants fight, the grass suffers. So goes the African saying, and a few years ago it would have been true of the Indian market.

By Ruchir Sharma

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Published: Tue 18 Aug 2009, 10:18 PM

Last updated: Mon 6 Apr 2015, 12:46 AM

But the bitter and very public corporate battle between the billionaire Ambani brothers, who control the Reliance Group of companies, has produced surprisingly little collateral damage so far.

For a long time, the popular notion was that as the Reliance Group went, so went the Indian stock market. Now investors can ignore the family feud because the market is so much bigger.

At the start of this decade, Reliance was one of five Indian companies with a market value of more than $5 billion. Currently there are 40 such companies, the total value of the market is more than $1 trillion, and the Reliance Group accounts for less than 10 percent of the total.

The reduced focus on the Reliance Group is part of a broader trend, in which the obsession with the top of the pyramid is shifting to a growing interest in the bulging middle. In 2006 and 2007—the heyday of the growth boom—all eyes were on the wealth of India’s richest few. As the stock market surged, the media kept a close tab on how many Indians were making it to the Forbes list of billionaires.

At the end of 2007, 10 Indians were on the top-100 list— trailing only the Americans and Russians in number.

Many companies targeted their growth strategies at high-income households, and the cocktail circuit was abuzz with details of the latest iconic apartment deal. In the commercial capital, Mumbai, apartment sales topped $2,500 per square foot—twice the going rate in cities like Shanghai. Last year’s global meltdown led to a sudden stop in all such activity.

As India now emerges from the boom-bust growth cycle, the masses are firmly leading the recovery even as the upper classes remain conspicuous by their absence at stores.

Two-wheeler sales are up nearly 15 percent so far in 2009, compared with an average growth of 5 percent over the past five years. Small-car sales have increased by 20 percent in recent months, while purchases of luxury cars are down 20 percent from a year ago.

Consumer-goods companies are reporting a bipolar market: widely used products from hair oil to soaps are selling well, but more expensive skin-treatment items are not. The mounting realisation that the real growth opportunity in India lies lower down the price curve is forcing many companies to redraw their strategies. Retailers used to place high-end brands close to the entrance of their malls, hoping to woo customers to chic brands, but they ended up intimidating them with high prices. Retailers are now reshuffling the front window, giving pride of place to goods the middle class can afford.

Similarly, in the real-estate market, the latest catchphrase is “affordable housing.” The average unit cost of an apartment in India’s five leading cities is down by 50 percent over the past year, not just due to falling prices but also to a reduction in the size of the average home.

Developers have learned the hard way that selling in India is a volume game.

Their earlier idée fixe that penthouses and villas were where the glamour and margins lay has given way to the reality that the market for such products is extremely limited. Even at the peak of the boom in 2007, there were only 100,000 Indians with an estimated financial net worth of more than $1 million. That contrasts with 100 million middle-income households with an estimated annual income of $2,000 to $10,000. This segment is growing at the fastest pace, and many new members of this class have yet to buy their first motorcycle, car, or apartment.

The political class in India has been very conscious of the need to make growth more inclusive and therefore spent much of the revenue windfall from the high-growth years on increased welfare spending. Furthermore, these households are carrying relatively low levels of debt, making them less vulnerable to swings in the global business cycle.

Analysts have hyped the potential of the Indian middle class for a long time, but now it has reached critical mass.

At the same time, it is still not as affluent as in other countries, such as China, where sales this year of luxury cars and Burberry apparel are growing at an impressive 10 to 20 percent. India’s per capita income of $1,000 is less than a third of China’s, and the average Indian consumer remains highly price-sensitive, with a limited appetite for expensive, high-margin products.

The positive fallout of the past year’s economic turmoil is that it has shown where India’s real potential lies.

The more quickly companies throw in their lot with the rising middle, rather than the overhyped and overestimated rich few, the more successful they will be in India.

Ruchir Sharma is head of emerging markets at Morgan Stanley Investment Management (www.newsweek.com)

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