A Shrunken Middle Class
But now, as a report in this newspaper (May 20) shows, those hopes appear to have been exaggerated. MNC after MNC is discovering that it had overestimated the size of the market whose backbone, it was assumed, was the middle class. Sony, Daewoo, Nokia, Motorola, Honda, LG Electronics, to name just a few are either ruing their earlier enthusiasm as inventories pile up or deciding to wait and watch before proceeding.
There are important lessons to be drawn from this experience. One is that even if, in numerical terms, the Indian middle class is as large as suggested, its purchase preferences are not the same as that of the developed country middle classes. This difference manifests itself in very high price elasticity so that people would rather compromise on quality than on price. In other words, a 50 per cent improvement in quality doesnt mean that the consumer is willing to pay 50 per cent more for the product. Another lesson is that because of this high price sensitivity, the market is probably far more segmented than it is in the developed countries. It is a different matter, of course, that in each segment there can be millions of consumers. But it is not possible for one firm to cater to all, or even most, of these segments. Proctor and Gamble, in the 1960s, used to market 68 brands of soap in the US, and thus cater to different market segments. But that sort of thing is not possible in all products.
A third inference is less direct. It has to do with the middle class psychology in India. Asset creation via home-ownership has emerged as an important trend since the early 1980s. This means that home loan repayments take up a large chunk of post-tax incomes. Typically, a middle class home-owner would be paying around a third of his income as loan repayment. After other expenses, there isnt all that much left for spending on consumer durables, whether bought outright or on instalments. Taken together, these factors suggest that the market behaviour of the Indian middle class and what drives its revealed preference need to be studied in greater detail.