Have you noticed the increase in Mercedes sightings lately? We are sure one of your neighbors must have bought a luxury vehicle recently. Forget luxury cars, have you noticed how common the Apple iPhone has become these days? Everyone around is planning a foreign trip, whether it is a dream destination in Europe or nearby tropical countries like the Maldives and Vietnam.
This trend is not only noticeable in big cities or among the well-off folks in South Bombay and Delhi. It is popping up in many Tier 2 and Tier 3 cities across India too. Seeing this, you might start to wonder if people are splurging more than usual or if their incomes have really gone up. Nowadays in India, both the wealthy and the upper middle class are enjoying and spending on more luxurious lifestyles.
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What Are Current Indian Spending Trends?
Knowing about these trends around spending money in India will give you some validation that the spending is actually happening. Let us quantify these spending habits in numbers to get an idea of what we are dealing with.
Sale Of Luxury Cars
Sales of luxury cars are generally used to observe the trend in disposable income. And Indian sales numbers paint a very pretty picture. In Q4 of FY24, Mercedes India's sales volume jumped by 15% on a YoY basis (Source: AckoDrive), while BMW by a whopping 50% at the same time. If we look at the growth from FY2023 to FY2024, Audi sales have increased by 33% (Source: TOI)
As per Santosh Iyer (MD & CEO at Mercedes) even the average age of people buying luxury cars have gone down from mid-40s to mid-30s.
If we consider volume growth, combined with the huge increase in the prices of these brands' entry-level vehicles and increased competition in the INR 30-50 lakhs segment, these growth numbers are quite phenomenal.
However, there is also an underlying trend observed in the sales of these brands. According to Mercedes, 30% of their sales come from non-metro Tier 2 cities, and they expect this proportion to increase as the HNIs from Tier 2 cities will drive the growth in the medium and long term.
Cities such as Kanpur, Udaipur, Madurai, Indore, Nagpur, and Goa are driving maximum growth in emerging markets. This shows that the wealth in India, which is clearly growing, is not necessarily concentrated in metros, but also in Tier-2 and Tier-3 towns of the country.
Sale Of Luxury Flats
The real estate cycle is back in full swing. Sales and rents are rising, new projects are multiplying, and real estate companies are making money like they did back in 2008.
According to conventional wisdom, if interest rates increase, residential real estate sales usually decline. But guess what? The exact opposite happened in India. Over the past 2-3 years, interest rates on home loans climbed from 6.9% to over 9.0%. Despite this, the number of homes sold in the top 8 metro cities more than doubled compared to the COVID-19 times. And here is something even more surprising: the share of affordable properties, under INR 50 lakhs, has decreased, while the share of luxury properties, over INR 1 crore, jumped from 19% to 35% in the last four years.
Source: The Ken
Even though 80%-90% of these homes are purchased with EMIs, the ability to afford higher EMIs for luxury houses during periods of high interest rates demonstrates a significant increase in the income of India's upper middle class and wealthy individuals.
How Are Indians Earning To Do Such Spending?
But spending alone cannot determine the nation's wealth; it also needs to be backed by income. What if all spending is done via borrowing? So, let us use the tool that can paint a relatively more accurate picture of wealth: the income tax return data.
Income Tax Return Data Analysis
According to FY2023 filing data quoted in The Hindu only 0.2% of total returns filed were over INR 1 Cr. This 0.2% represents almost 1.7 lakh people. This number is up by a whopping 48% from last year. While in the bracket of less than INR 5 lakhs, the filings have actually decreased by 12.3% in the last 2 years. The highest jump was witnessed in the INR 20-50 lakh income bracket in 2023, where the taxpayer base grew by a massive 54% when compared to the pre-COVID levels of FY2020. This growth obviously explains why consumer durables, tourism, and real estate are on the rise, as this bracket spends the most on discretionary expenses.
According to tax filing data of 2023, the total consuming class, which is generally considered above INR 8 lakhs of income, is roughly around 6 Crore Indians. This number has grown at a CAGR of 19% between 2017 and 2023, which is a massive growth in the country's consuming class.
Growth Of Personal Loans Market
The rise in personal loans or unsecured credit could be a reason why spending might exceed income in India. People are increasingly using credit to splurge on luxuries. Personal loans in India have soared recently, to the point where regulators had to step in and ask the underwriting teams at NBFCs and banks to slow down on issuing personal loans.
Giving out loans is not the problem. The issue is two-fold: taking a loan for discretionary or speculative activities and taking a loan to pay old debt. Retail loans, along with personal loans, have significantly increased in the past few years.
Source: Blume Indus Valley Report
On a lighter note, there is a less cheerful aspect of personal loans to consider. About 40% of borrowers have more than five loans, which account for roughly 10% of the total loan book. In 2023 alone, 23% of new loans were issued to individuals who had at least one delinquency. We are seeing a bit of a debt trap in the personal loan sector, primarily fueled by NBFCs rather than banks. This issue often appears in the small ticket loans (less than INR 1 lakh), which represent about 90% of the personal loan category.
But Are Indians Spending It All Or Investing As Well?
While spending is great for the economy as money moves within it, India is still primarily a savers economy by nature, so let us look at some of those trends which confirm that Indians are investing heavily as well.
Capital Market Investments 🚀
The pandemic brought many first-time investors into the market, especially in the Mutual Funds industry, which now has an active SIP Book (Systematic Investment Plan) of $18.8 Billion. The mutual funds' AUM will also be close to INR 50 trillion in 2023, which was just INR 8 trillion in 2012. This is an exceptional growth of about 19% CAGR!
Another important stat is the number of demat accounts, which has risen to around 9 Crore unique accounts. It is very clear that more and more Indians are now sensitized to the idea of investing and do not want to miss out on this area.
Given the substantial returns in the Nifty 50 and even more so in the broader markets, this period represents a rare opportunity for retail investors to realize significant gains. Consequently, investments in the capital market have shown impressive performance. For further insight, here are additional figures from the Blume Indus Valley Report.
We can also look at the NPS data, where the AUM has touched a massive INR 11 lakh crore. While last year's growth was partially fueled by the market rally, the chart below shows a clear trend that Indians are also very serious about saving money for their retirement.
Source: Hindu Business Line
Steep Growth Rate In SDIs And Other Alternatives
A similar trend is being seen in non-equity investments as well. Retail investments via bond platforms has increased 650% in the last calendar year (Source: BSE). Recently, ICRA released a report expecting the SDI issuance market to grow to INR 100 crore in FY24. The volume increased close to 33% compared to 2020.
This is fantastic news as retail investors did not even have access to such instruments before and now they are actively looking for such opportunities to get more returns based on their risk profile.
Read more: Securitised Debt Instruments: Why Are Brokerages Being Bullish On SDIs?
We have noticed similar trends in other alternatives, even in the unregulated category, such as invoice discounting, agri-financing, direct leasing, etc.
What Is The Catch? Will This Growth In Wealth Sustain?
We have talked quite a bit about the increase in household income, but one should question, how is it all so hunky-dory and will it continue to replicate for all parts of our large population. In many ways India's consuming class is reaching its limit both in terms of the number of customers and the value per customer. The number of taxpayers has almost doubled since the last 10 years, and the unique demat accounts and aspirational class are already running the show by single-handedly carrying India's consumption.
India 1, 2 and 3
Most of the companies split their target market into 3 segments: India 1,2 and 3.
India 1 is the creme-de-la-creme, the wealthy and the upper middle class, who are running the show on the demand side. Generally, it is assumed that the income of the people falling in this bracket easily lies upwards of INR 10-12 lakhs. This is a competitive market, as every new and existing brand, from traditional players to startups and home-grown brands tends to target these consumers. India 1 hardly makes up 8-9% of the overall population, which is around 30mn households and 120mn people. In fact, Kishor Biyani, went further down in India 1 to explain how he views the consuming class of India.
Diving deeper, we find India 2, a vast market with 60 million households and 250 million individuals, where the average income per person is INR 2-3 lakhs annually. This segment is rapidly growing and already plays a significant role in driving demand. Over the next few years, many of these households are likely to ascend to India 1, thanks to smarter investments and advancements in their careers.
Lastly, let us talk about India 3, where companies often feel exhausted trying to tap into the market. This segment includes about 200 million households where consumption is quite small compared to the overall market. Not many people are focusing on this group, but it is actually a huge untapped market. To really reach them and help them step up into the financial and investment ecosystem, you would need a massive distribution system, something on the scale of the India Post Office or SBI branches.
According to a few experts, India 1 is punching above its weight, and volume growth here may saturate for a while. The opportunity to sell premium products here is much larger though. The major volume growth will be thanks to India 2 and the portion of people moving up from India 2 to India 1.
Below is an infographic by Blume that beautifully shows the penetration of various sectors. We can see that airlines still have a huge headroom for growth, while services such as broking and broadband seem to have reached their limits.
Conclusion
Let us wrap up by looking at some big-picture factors that really stirred up interest in the markets. The difference between the GDP growth numbers and the Gross Value Add (GVA) numbers told us two different stories. Basically, GDP growth includes private consumption, government spending, and private investment. For Q3 of FY24, our year-over-year growth was 8.4%, while the GVA, which represents the value added to goods on the supply side and adjusts GDP for taxes and subsidies, grew by only 6.5%.
Why does this number matter to us? Well, last quarter, the difference between GDP and GVA was 150-200 basis points, which is quite a jump from the usual 20-50 basis points.
This difference comes from higher tax collection and significant government spending. Economists are concerned because the GDP growth is fueled by government spending rather than household consumption and private investment. In fact, private investment is at record lows, suggesting that companies are wary about household demand. This ties in with the earlier numbers we saw, where consumption by India 1 was at its peak.
We will definitely need to wait and see how the private sector steps up in terms of capital expenditure, and how households manage their consumption. These early signs might just be temporary. Based on what we have seen before, with the surge in India 1 and a significant increase in consumption, it is clear that Indian households are starting to grow wealthier. There is a concern that the gap between the consuming and non-consuming classes may be widening, but if the economy continues to perform well over the long term, those at the bottom of the pyramid should be able to catch up.
That is it for this long article. Thank you so much for reading the first article in WealthX series powered by Grip Invest & ALT Investor. There are a lot more interesting pieces to come out of this, and hopefully, you all will enjoy them. If you have any feedback, please do not hesitate to reach out to us at ALT Investor or Grip Invest.
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