On Saturday, Goldman Sachs’ latest report called “Affluent India” went viral. Investors couldn’t stop talking about it; the Indian government handles shared it, and social media influencers went gaga over it.

In case you missed it, in today’s Finshots, we wanted to break down what’s in it for you.

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The Story

Goldman Sachs’ central idea is simple — India’s affluent class is going to dictate consumption activity in the economy. They’re probably going to even determine product features. Right now, they estimate that there are 60 million people who earn $10,000 (~₹8 lakhs) annually. And they expect this population to grow to 100 million in 2027.

To back this up, they point to the income tax filing data.

Apparently, the number of folks filing tax returns stating they made over ₹10 lakhs annual income in the past 5 years has grown by 19% annually. In contrast, the overall growth in the number of people filing taxes has grown only by 8%. So they expect this trend to continue.

Mind you, it’s not just GS that has relied on income tax data to show the rise of this affluent class.

Last year, SBI Research also dug into this and said that the weighted-mean income a decade ago was around ₹4.4 lakhs. And that it is now ₹13 lakhs. They believe this is partly because more people have transitioned from the lower-income group to the higher-income group.

India seems to be moving up the income ladder.

So, who benefits from this rising Affluent Class?

Well, whenever a country sees such a shift, the first thing that comes into play is discretionary consumption. Suddenly, people have more disposable incomes and have economic security. They’re not concerned as much about being vulnerable.

Just think about America in the 1950s. The country had a fairly young population, wages were rising, and consumerism kicked in. In fact, as one article put it, the “American consumer was praised as a patriotic citizen in the 1950s, contributing to the ultimate success of the American way of life.”

There’s something similar playing out in India too, no? Especially if it’s about ‘Made in India’ products and services.

Also, this consumption has a large elasticity — meaning that if income rises by 1, consumption might rise by 1.25.

One reason for that could be that people are more willing to indulge in credit-based consumption. For instance, the GS report clearly shows that the number of credit cards issued in India has doubled in the past 4 years. And the amount spent on credit cards has risen by 2.5 times.

But where do people moving up the income ladder spend their money?

Well, GS looked at China and Brazil which are ahead of India on the per capita income spectrum and found that leisure activities, hotels, and eating out make up a bulk of spending as people upgrade lifestyles. And they believe that’s what India could gravitate towards too. Because while overall consumption activity in these countries is around 3 times higher than in India, when it comes to these specific segments, it’s nearly 20 times higher.

So yeah, that means companies that sell products catering to this fast-growing income bracket over other segments end up doing well for themselves. And it seems to be playing out already as

GS points out:

These trends are visible in FMCG (Nestle India growing faster than Hindustan Unilever), footwear (Metro growing faster than Bata), fashion (Trent growing faster than V-Mart), passenger vehicles (SUVs growing faster than entry-level cars) and 2-wheelers (Eicher growing faster than the industry)

Also, back in April 2023, we wrote about companies trying to play this premiumisation game.

We said that manufacturers are adding more features to products and selling them at a much higher price. They’re okay with moving fewer products off the shelf. They believe that the higher prices they squeeze out of these customers can maintain their profits and margins. Maybe even improve it. And this seems to be working. The average selling price (ASP) for products in India has increased. Across multiple categories — such as refrigerators and shoes.

That supports the theory that the affluent are on a consumption drive, no?

But while all that’s fine, we do want you to keep a few things in mind as well.

For starters, Goldman Sachs hasn’t revealed anything out of the ordinary. It’s just that they’ve managed to capture people’s attention by spinning a great story about the potential of consumption growth. And let’s just say that it’s in Goldman Sachs’ best interest to sell the story. Because that’s how they’ll make money. They sell these investment ideas to big institutions who want to hear a good story about India. But whether this affluent segment will really move the needle for a lot of companies remains to be seen.

Secondly, one of the predictions in the report is that within 4 years, the number of people who can be classified as affluent will rise to 100 million. But, you would assume that more people come into the bracket anyway when incomes start getting adjusted for inflation. I mean you could be earning ₹5.5 lakhs today and if you assume an average annual hike of 10%, you’ll end up being classified as affluent in 2027. But you’ve not necessarily become wealthier, no?

And finally, many folks have been conflating this affluent category mentioned in the report with India’s middle class.

However, as per the report, only 4% of India’s working-age population has a per capita income that places them in this affluent category. So if this is the middle class, does that mean over 90% of India is lower-income?

Or maybe it simply means that this small subset of the population that seems to be driving consumption is the country’s rich. And the only thing that companies will have to wonder is if this tiny segment is enough to drive long-term consumption growth in the country. After all, we’ve been hearing tales of the great Indian Consumer for over a decade already.

Will it be different this time?

We don’t know. But we’ll just leave you with what Nikhil Ojha, senior partner with Bain & Co, told the Financial Times earlier this year about consumption:

“Anyone who is looking at the Indian economy from the rear-view mirror is going to underestimate not just the quantity but also the quality of the changes in consumption that are coming in India.”

Until then…

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