Emerging diamond

Apart from the huge increase projected in the number of rich households over the next five to six years (the number of “crorepati” households is to increase from 20,000 in 2001-02 to 140,000 by 2009-10, for instance), the most significant point about the NCAER’s income demographics survey The Great Indian Middle Class is the sea change projected in the country’s income structure.

The number of families earning less than Rs 90,000 per annum comprised 80 per cent of the population in 1995-96; this proportion of “deprived” families is expected to fall to 52 per cent by 2009-10. The middle class (households that earn Rs 2–10 lakh a year) will grow from 2.8 per cent of the total to 12.8 per cent, and the rich (earning more than Rs 10 lakh) from 0.2 per cent to 1.7 per cent.

In other words, with the number of “deprived” families still greater than the number in the next income class, and the number of rich even smaller, India’s demographics today is represented by the classic pyramid. What is interesting, though, is that this is slowly morphing into a rudimentary diamond (with the bulk of the households in the middle-income categories) since, by 2014-15, the number of the “deprived” is likely to be less than the number of households in the next income class.

In fact, in large cities like Delhi and Mumbai, and even in smaller ones like Nagpur and Varanasi, the diamond formation is already evident as the number of “deprived” families is smaller than the number in the next income class.

This has a much greater significance than many would imagine. Traditional wisdom has it that consumption graphs shoot up when a country’s per capita income crosses the $1,000-barrier. Given India’s current level of $600 and an annual increase in per capita income of a little more than 4 per cent, this will take till nearly 2020. What the sharp movement between income classes does, therefore, is to cut short this process since, when families move from a lower to a higher income class, their consumption patterns also change significantly.

The preliminary results from another forthcoming NCAER study give an indication of just how significant this could be. In the case of colour television sets, for instance, just 5 per cent of the population of the “deprived” own these goods. Yet, once you move to the next income category, of what the NCAER calls the “aspirers”, the proportion of households owning colour television sets goes up to a much higher 40 per cent. That story is repeated in the case of refrigerators. In other words, even if mean income levels don’t grow very rapidly, the income shifts are important enough to be manifested in the dramatic growth of product markets.

What happens if India doesn’t accelerate its rate of growth in GDP, as most government spokesmen now assume will happen? Clearly the NCAER projections of the number of rich households will be affected. But, as anyone familiar with the properties on income and other distributions will vouch, the movement at the “tails” (or at the higher income levels) is always many times more than at the middle—that is, while the mean income may grow at only ‘x’ per cent, the numbers in the higher income groups will continue to grow at 20–25 per cent each year. In short, the present consumption boom will pale in the face of what is coming round the corner.