The Great Indian Consumption Story

The economic growth of any country depends on 3 key components – physical capital, technological change, and human capital. Physical capital includes land, infrastructure, our savings, etc. while technological change is defined by newer or more efficient ways of doing things that lead to an increase in the overall productivity. Human capital is the labour force of the nation, and the more of it a country has the better it usually is. Combined with physical capital and technological change, these 3 resources engender a country’s economic growth.

India’s large labour-force is one of the main reasons why economists, investors, and businesses across the world believe India will continue to witness spectacular economic growth in the future. The growing Indian economy will create new business & industries and lead to increased jobs, which in-turn will lead to increased income & consumption.

More than 70% of Indians today are classified as poor, but with continued economic growth it’s expected that most Indians will see increased incomes and slowly enter the middle-class – in fact, more than 45 crore people expected to be added to this category over the next 15 years.

As income increases, so does spending – but spending habits change differently at different income levels. With limited income, a person first spends on necessities like food and rent. Once that is taken care of, people are left with their discretionary income that can be spent on a variety of goods and services. When people enter the middle-class, their basic consumption spending is already in place and the increased disposable income tends to get spent on things like education, clothing, entertainment, beauty, travel & leisure, etc.

Whether one spends more of their discretionary income on travel or education or clothes depends on many factors like income level, family wealth, and personal preferences. But what is undeniably true for the middle-class is that more of their discretionary income is spent on these “aspirational” goods and services. In fact, I’d imagine that many readers will be able to relate with this progression and can think back on how their spending & consumption habits changed with an increase in their disposable income.

Whenever someone spends, someone else benefits & earns from it.

As India’s growing population enters the middle-class and increasingly spends its disposable income, there will be many products, brands, and companies that will benefit from this trend. Sectors like FMCG, Retail Apparel & Fashion, Automobiles, Electronics & Appliances, Jewellery, Travel & Leisure, etc. will be big beneficiaries as India earns and spends more.

In order to benefit from this demographic trend, we have created The Great Indian Middle Class smallcase which invests in diverse companies such as VIP Industries, Maruti-Suzuki, and INOX Leisure that are expected to benefit from the growth in the Indian middle class. The portfolio is rebalanced every quarter to ensure that only companies which remain true to this theme based on the most recent data are included in the smallcase. This smallcase would be ideal for investors looking to invest in the consumption theme and/or who believe in the long-term growth potential of the Indian economy.