Insight Report Future of Consumption in Fast-Growth Consumer Markets: INDIA January 2019 A report by the World Economic Forums System Initiative on Shaping the Future of Consumption Prepared in collaboration with Bain in 2018, the focus was on India. India is one of the fastest- growing economies in the world. It is also one of the most diverse, with many regional, spiritual and cultural nuances. Over the coming years, the confluence of robust economic growth, a vibrant consumption landscape, greater connectedness and key social reforms will create a massive opportunity to advance inclusive and responsible consumption for decades to come. Developed in collaboration with Bain & Company, this report builds on in-depth consumer surveys conducted across 5,100 households in 30 cities and towns in India, covering all key demographic segments. It also draws from over 40 in-depth interviews with private and public-sector leaders. This leads to rich insights on Indias present and future outlook on consumption. The report highlights the most significant implications for businesses that aim to thrive in India over the next decade. It also lays out a call to action for all stakeholders in Indias growth to build an inclusive future for India. The project team of the World Economic Forum would like to extend its appreciation and gratitude to all parties who played a key role in developing this Insight Report: the Bain & Company team led by Nikhil Ojha and all participants who contributed via our workshops and interviews. We are confident that our collective effort will contribute to realizing a prosperous future with sustainable benefits for both business and society. Jeremy Jurgens, Managing Director, Head of Centre for Global Industries and Strategic Intelligence, World Economic Forum Zara Ingilizian, Head of Consumer Industries and Future of Consumption System Initiative, Member of the Executive Committee, World Economic Forum6 Future of Consumption in Fast-Growth Consumer Markets India Executive Summary India is on the cusp of a tremendous opportunity for both economic progress and improvement in the general well- being of its citizens. India is currently the worlds sixth largest economy and one of the fastest-growing large countries, with an annual gross domestic product (GDP) growth rate of 7.5%, a momentum that is expected to sustain over the next decade. Domestic consumption, which powers 60% of the GDP today, is expected to grow into a $6 trillion opportunity by 2030. This consumption growth will be supported by a 1.4 billion strong population that is younger than that of any other major economy. Household savings have historically been high as thrifty and cautious Indian families put away more than a fifth of their incomes for a rainy day. This buffer provides support to domestic consumption expenditure even through challenging cycles in economic activity. The vision for the future of consumption in India is anchored in the growth of the upper-middle income and high- income segments, which will grow from being one in four households today, to one in two households by 2030. At the same time, India will also lift nearly 25 million households out of poverty, to reduce the share of households below the poverty line to 5%, down from 15% today. Thus, India represents a relatively broad-based pattern of growth and benefit sharing, in contrast to the global scenario of increasing inequality wherein the richest 10% of the population is capturing an increasing share of national incomes and, consequently, wealth. Since the beginning of the journey of liberalization in 1991, the average Indian consumer has witnessed an exponential growth in the options available in every consumption category. One of the most visible changes has been in the car industry that went from three major models in the mid-1990s to more than 30 today. The liberalization era has also witnessed a massive growth in the IT/ITES 1sector, that today employs nearly one-fourth of the 12-13 million employees in Indias organized private sector. Growth in IT/ITES jobs has been an engine for job creation and has represented an aspirational stepping-stone for numerous young Indians over the past 20 years. The generational cohorts that were in their peak-consuming years during the past two decades (30-50-year-olds today) were born between the 1970s and the 1980s. These cohorts still carry with them memories of a more constrained era when consumption options were fewer and thrift was a greater virtue. Over the next decade, one of the biggest changes in India will be the coming of age of liberalizations true children the nearly 700 million people born through the late 1980s to the 2000s 2 . These individuals will have grown up in a more open and confident India and will not carry the cultural or economic baggage of their predecessors. This is a generation on the move that aspires to a materially better life, backed by the ability to spend and make it a reality. One of the most challenging and exciting implications for companies in India is the opportunity to shape consumption patterns in terms of categories consumed, brands purchased or ways of accessing products and information. Companies will need to look beyond Western assumptions and rules of doing business. Indias unique combination of preferences, aspirations and prudence will require innovation specifically for this market. Related, future consumption growth will come from the many Indias from the rich and densely populated metro cities and also from 7 Future of Consumption in Fast-Growth Consumer Markets India the geographically dispersed thousands of developed rural towns whose aspirations have begun to converge with those of urban India. Businesses will need to tailor offerings to serve these aspirations, while innovating to solve for challenges (such as access to physical and digital infrastructure) that differentially influence consumption choices across the many Indias. India has historically leapfrogged generations of technologies the jump straight to mobile phones bypassing the stage of widespread landline connectivity being an oft-cited example. The Indian business landscape now abounds with numerous other indications of a similarly varied path to growth. Digital entertainment and subscription video have eliminated the need for owning personal media. E-commerce is taking a share from traditional retail at a speed that “modern” organized retail has struggled to emulate. Youngsters in crowded cities are embracing alternative forms of transport before car ownership. Mobile-based payment models have acquired greater acceptance in a shorter time than credit cards did over the past two decades. A massive increase in internet penetration will lead to more than a billion internet users in India by 2030. Online connectivity, and the resultant access to information, is proving to be a key driver of differences in aspiration and the desire to spend and upgrade consumption, even among people at similar income levels. Those who are more connected have a keener sense of what is “desirable” and are willing to invest in more comfortable living including a greater spend on household durables and services. As a vast majority of India is connected over the next decade, this pattern will become a driver of overall consumption growth. India is often compared to China, the other Asian behemoth. The Chinese economy is structurally different, with a lower share of consumption expenditure in the GDP at about 40%, and a much higher rate of household savings at 37%. However, in terms of the relative choices made by households across different elements of the consumption basket, India most closely mirrors China and looks very different from the patterns of other large economies. Both countries are very similar in their high share of mobile powered internet connectivity, as opposed to other modes of access. Chinese business model innovations, ranging from mobile-based fin-tech, artificial intelligence powered e-commerce to ecosystems at the centre of a wide variety of services, provide very relevant templates for Indian businesses to learn from. The coming decade presents numerous opportunities for businesses to serve the growing needs and demands in India. Richer, younger, more confident and more connected consumers will pave the way for tremendous innovation in products, services and business models. To unlock the full potential of this opportunity and ensure equitable growth, the private sector and governments will need to proactively address three critical challenges: 1. Skill development and future-focused employment generation will be critical to direct the potential of Indias young workforce. As nearly 10-12 million working- age persons get added to India annually over the next decade, it will be critical to provide them with gainful and more formal employment and reduce the skills-gap that exists today. 2. Social and economic inclusiveness of rural India is also a key imperative, especially as connectedness creates aspirations. Currently, multiple “access” barriers, such as poor physical and digital connectivity and lack of financial inclusion, constrain the spend and well-being of rural dwellers. Innovative efforts by businesses and governments, like the impetus to cashless, digital transactions, can accelerate the inclusion of rural India. 3. A broad set of stakeholders will need to evaluate and respond to the challenges of creating a sustainable and healthy future through better access to healthcare, reduction in pollution and better urban planning to reduce congestion. Companies, governments and civic society have the opportunity of a lifetime to advance responsible consumption and shape positive outcomes for India over the next decade.8 Future of Consumption in Fast-Growth Consumer Markets India The macro context of India India is the largest democracy in the world and the second most populous nation, with nearly 1.35 billion people. It is also the sixth-largest economy, with a GDP of $2.6 trillion in 2017. In purchasing power parity (PPP 3 ) terms, India ranks third behind the United States (US) and China. As one of the worlds fastest-growing economies, with a current and projected annual GDP growth of nearly 7.5% 4 , India is a critical engine of global economic growth. Indias economy has some structural strengths that have enabled robust economic growth and allowed the economy to be relatively resilient to the vagaries of global economic patterns: Domestic consumption driven economy: Nearly 60% of Indias GDP is driven by domestic private consumption, as compared to 40% in China. 5Hence the economy is protected to a great extent against external shocks and cycles of low or high public investment. Healthy savings: Compared to low personal saving rates in many developed countries in the west and east (6%-7% in the US, 9%-10% in Germany, 4% historically in UK, 2.5% in Japan 6 ), Indias households have maintained a high savings share of their income at 22%. This may have been a necessity due to lack of access to consumption or lack of social security nets. As access to goods and essential services (e.g. healthcare) improves, these savings will continue to provide a buffer for further consumption. Working age majority: With a median age of 28 years, India is a nation of young working-age persons who drive both income and consumption. It will continue to remain young up to 2030 with a median age of 31 years, compared to 40 years in the US and 42 years in China. Having stayed a relatively closed economy for many years after independence, India initiated reforms in 1991 for a more liberalized economy. These reforms have made the country competitive on a global stage by opening up to global businesses, doubling down on the services sector and improving the business environment through lower tariff barriers and taxes, and deregulation of many sectors. In recent years, lower interest rates coupled with declining inflation have further supported consumption growth. The economy is also supported by healthy investment rates and a strong services sector, including technology services exports. India was the 10 thlargest recipient of global foreign direct investment (FDI) in 2017, with a record FDI of nearly $60 billion in 2016-2017, with robust momentum continuing into 2018. 7The investment-friendly environment could be credited to many enablers (Table 1 in Appendix), key among them being: Policy reforms such as increased FDI limits in most sectors, including retail, manufacturing and telecom driving increased participation of foreign investors and easier investment norms for non-resident Indians Active campaigning by the government for investment and trade cooperation, including Make in India and Start-up India to create a supportive environment for manufacturing and entrepreneurship respectively Increased ease of doing business through changed processes such as a uniform Goods and Services Tax across India since mid-2017 and easier norms for opening, obtaining licences and investing in new businesses Large-scale infrastructure development projects such as smart cities, industrial corridors, road, rail and shipping hubs, and power projects. Overall, economic growth and policy reforms have led to a strongly positive global sentiment regarding Indias future. In 2017, the credit rating agency Moodys upgraded Indias sovereign credit rating by one notch after 14 years 8and upgraded the outlook on India from positive to stable. India has jumped 23 places in a year to rank 77 in the World Banks Ease of Doing Business Ranking for 2019. Looking ahead, favourable demographics will drive strong consumption growth while a stable and reform-focused policy framework will support an environment conducive to business and investment. However, to unlock Indias massive implied economic potential, the country will need to accelerate and sustain its upward trajectory on key human development indicators and aim for inclusive progress. The future presents an opportunity for India to tackle challenges on employment, skills, health and sustainable living at a national level, and undertake efforts to further reduce economic and human development disparity at a regional level. There is also an opportunity to strengthen the ecosystem for innovation and entrepreneurship, to allow India to reap the full potential of a young and inherently entrepreneurial population that now has access to knowledge and technology that can drive innovations to solve real needs and challenges. Business, government and policy leaders have a truly unique opportunity to become custodian