India’s ’Affluent’ class to reach 100 million in three years, will boost premium goods sales

Goldman Sachs Group Inc. has in a report released on January 12 forecast that India's "affluent" class is set to reach 100 million in the next three years. This it says will lead to premium goods companies in the country faring better compared to broader competitors.

The report titled Rise of 'Affluent India' said robust economic growth, a stable monetary policy, and high credit growth over the past decade have boosted the purchasing power of high-earning Indians. It adds that 60 million people or 4.1 percent of the population now earn over $10,000 per annum, compared to 24 million in 2015. To be sure, however, this is a small percentage of the overall population.

Who comprises ‘Affluent India’?

Goldman Sachs has classified the top 4 percent of the working-age population in India with per capita income exceeding $10,000 annually as 'Affluent India'. They contrast with India's average per capita income of approximately $2,100. The 'Affluent India' group, amounting to about 44 million in the working-age category, is projected to reach around 60 million when considering the total population of 1.42 billion.

This growing demographic, consisting of approximately 60 million consumers and 12-14 million households, is indicative of the widespread adoption of discretionary products and services in India. Notable statistics include around 40 million air travelers annually, approximately 30 million monthly users engaging with online food aggregators, 30 million broadband connections, and roughly 26 million international travelers departing from India each year, the report highlighted.

Strong Wealth Effect a Factor

The increase in wealth, the report notes comes from various factors. India's market capitalisation has surged by more than 80 percent in the last three years, driven by increased retail participation. From 2020 to 2023, the price of gold also witnessed a substantial 65 percent rise. Consequently, the combined value of Indian holdings in equities and gold has grown from $1.8 trillion to $2.7 trillion. Property prices experienced a notable increase of approximately 30 percent from FY19-23, in contrast to a 13 percent rise observed from FY15-19.

It added that growth in the 'Affluent India' segment is expected to cause a sustained expansion in top-end consumption, with categories such as leisure, jewellery, out-of-home food, healthcare, and premium brands across various sectors being the primary beneficiaries.

In terms of equity, the report identified a strong preference for brands and network efforts such as Apollo, Devyani, Eicher, MakeMyTrip, Phoenix, Sapphire, Titan, and Zomato. It found that companies catering to top-end consumption exhibit faster growth compared to those targeting broad-based consumption.

Over the last 12 months, stocks from Goldman Sach's 'Affluent India' list have seen a 7 percent upgrade in their FY24 consensus revenue estimates, while broad-based consumption names experienced a 3 percent downgrade.

India's Ascension to the Third-largest Economy by 2027

The International Monetary Fund (IMF) predicts that India, currently the world's fifth-largest economy, is poised to become the third-largest by 2027. This growth is attributed to the increasing spending power of the middle class, particularly benefiting companies offering premium brands in leisure, jewelry, out-of-home food, and healthcare, according to Goldman.

Goldman's report highlights a substantial increase in the value of financial and physical assets in India over the past three years, contributing to the growing wealth in the country. While traditional assets such as gold and property remain important, there has been a significant shift towards households investing in equities through direct stocks or mutual funds in the last five years.

What Fuelled the Gains?

The three main asset classes experiencing notable value growth from FY19-23 are gold, equities, and property. Equities and gold have seen the most substantial increase, with property prices appreciating at a higher rate in the last 3-4 years.

The market cap of the Indian stock market surged by 80 percent from January 1, 2020 (just before the market decline due to COVID-19 disruptions) to January 1, 2024. During this period, there has been a rise in retail investor participation in the Indian equity market.

The number of 'demat accounts' has increased from around 41 million in FY20 to approximately 114 million in FY23. Additionally, the flow of household savings into shares has significantly risen since FY17, maintaining a consistent high over FY17-23, indicating sustained increased participation in the equity markets amidst strong returns.

Equity ownership by consumers is through direct retail shareholding and mutual funds, both witnessing growth in recent years. The total ownership of BSE 200 by direct retail investors has increased from 8.5 percent in Dec-19 to 9.8 percent in Sep-23, while domestic mutual funds' ownership has risen from 8.1 percent in Dec-19 to 9.2 percent in Sep-23.

Further, Indian households possess approximately 25,000 tons of gold, representing about 10-11 percent of the world's physical gold stock, according to the World Gold Council. The price of gold has risen from an average of ₹39,900/10gm in January 2020 to an average of ₹62,200/10gm in December 2023, marking a ~65 percent increase. The total value of household gold stock in India has grown from $1.1 trillion to $1.8 trillion from 2019 to 2023, contributing significantly to the rising wealth effect in 'Affluent India.'

While property prices haven't surged as steeply as gold and equities, there has been a noticeable change in the pace of increase in property prices in India in recent years. According to Propequity data, average property prices in India have risen by approximately 30 percent over FY19-23, compared to a slower increase of about 13 percent over FY15-19.

Spending Power Disparity Persists

Notably, however, despite the overall economic growth in India, a divide in spending power between the top earners and the middle class persists. With a GDP per capita of less than $3,000 a year, only 30 million Indians can afford a vehicle, even though more than 960 million debit cards have been issued, and 93 million have post-paid cell phone connections, as per the report.

This indicates that while certain sectors are witnessing a surge, challenges related to income inequality and access to basic amenities still exist in the evolving Indian economy.