The Lure of Emerging Markets– India

With growth looking more and more anemic in the developed world and the fundamentals (expenses outpacing revenue) clearly pointing to a lackluster demand going forward. Can products and services from the developed world find a market elsewhere? Can the Indian consumer market offer a road ahead.

Adopted from Economist, Daily Chart March 7th, 2011

A burgeoning and transitioning Indian economy with buyers on the move bodes well for businesses local and global. Do the numbers justify India’s rise or are we once again succumbing to temptations of finding growth where the fundamentals just don’t add up. Is now the time to step in and serve unmet, latent and unaddressed needs ?

In a two part analysis lets investigate what it means to do business with consumers in India analyzing fundamental drivers of demand, the market potential and the challenges of meeting those demands.

Part-I: Demystifying the Indian Consumer – Market potential, the real numbers

  1. Demystifying the Indian Consumer (Download)
  2. India Consumer Durables Market Forecast: 2011 – 2015 (Download

Part-II:  Go-To Market Challenges – Leveraging networks, Igniting demand.

  1. O Buyer Where Art Thou
  2. Channels – Leverage, Make or Buy

Demand – The Holy Grail

Fundamentally there are only two ways to generate demand for any product or service:

  1. New Sales: Attract new buyers who have never experienced the product category or service.
  2. Replacement Sales: Entice existing buyers to replenish, replace or upgrade their existing product or service.

At the macro level demand is driven by population growth, income growth, productivity gains, monetary policy, trade policy, innovation that renders products accessible and affordable or changes in the regulatory environment.

At the micro level demand is stimulated by awareness, cultural norms, cheap credit, accessibility, education levels, income levels, price, technology, product quality and lifecycle.

Demystifying the Indian Consumer

The Indian market is squarely divided between the urban and the rural. A projected consumer model1 of the Indian market resembles a direction post reflecting the many possible roads businesses can take to reach the various segments.

imageSource: NCAER; MGI Consumer Demand Model.  (Using 2010 $PPP)

The Globals and Strivers are where most MNC’s focus today. But it is the Aspirers and Seekers together making up about 160 million households by 2015 where the mass market will converge.  The Deprived numbering 70 million will continue to march along, relegated to the sidelines and will find it increasingly difficult to break through without government support.

Note: For a detailed discussion on the consumer segments refer to the McKinsey / NCAER report: The ‘bird of gold’: The rise of India’s consumer market. 

Rural and Urban Divide:

Employment Status: The most striking observation one can glean from the employment status of Rural and Urban India is that over half the workforce is categorized as being self-employed. Cash flows within this segment remains volatile something marketers need to keep in mind when projecting numbers.

Another significant proportion falls into the category of casual laborers. This base of the population survives one day at a time. Lastly, the vast majority of salaried professionals are public sector employees with a few participating in the private sector.

An average graduate earns $ 9,474 per year in leading cities, the comparable rural figure is just $ 4,789. The difference, in fact, is higher for illiterates as well –average of $ 3,684 in the elite towns versus just $ 1,184 in the villages2.

Note: The purchasing power of the Indian rupee is much higher than its exchange rate value in USD

image Source: RBI Monthly Bulletin, April 2011

Expenditures: Rural and Urban India spend almost equally on all fronts although the share of the wallet dedicated to food is marginally higher in the rural area. This can be attributed to differences in the average household size which stands at 4.7 for rural and 4.2 for urban3.


On an average, the urban Indian earns 85 percent higher than his or her rural counterpart, spends 71 percent more and saves nearly double.

How Indian Consumers Pay:

The retail industry, with transactions valued at USD 410 billion per year4 is predominantly cash based. India’s consumer durables market was valued at around USD 33 billion5 in 2010, with electronic products (computing devices, mobile handsets and audiovisual products) accounting for almost 76%.

India has 173 million debit cards users (13%) and 23 million credit cards users (2%). However cash continues to be the only mode of transactions for the 40% unbanked population in the country. Overall, 67% of transactions are carried out in cash, while only 33% are done through electronic means6 (60% of these are P2P transactions).

The penetration of PoS terminals in India remains low at 419 terminals per million inhabitants7 (2009). On an average, the debit and credit cards together account for only two card transactions per day per PoS terminal. The economics clearly point to a need for alternate payment mechanism.

Consumers in a Transitioning Economy:  A Moving Target

As a new middle class emerges across India, people will seek greater quality in what they pay for (food, housing and clothing). As incomes rise further, the same will look for convenience and pay for it. Finally once the Indian economy leaps into the league of developed nations buyers will seek customized offerings and services. This scenario has played out numerous times and each time the pattern has repeated itself in every country that made the leap from underdeveloped to the developed.

MovingConsumerShortBreadFactorIndia will be no different although the needs, composition  and behavior of the different segments may deviate.

Note: For an in-depth look at the lifecycle in an emerging market refer to the pioneering work by Alonso Martinez and Ronald Haddock, The Flatbread Factor,  the finest work to emerge from the strategy landscape over the last decade.

Moving Segments, Changing Needs 

Over the years a gradual shift from a joint family system to nuclear family has taken hold across India. The trend will only accelerate further as incomes rise and people demand more freedom, expression and personal space.

India is already witnessing the arrival of new consumers expressing themselves boldly by trying and adopting new offerings triggered by: 

  1. INCOME Effect: As the 2nd fastest growing economy, with 8% plus growth people have more to spend.
  2. MINDSET Change: The post liberalization population numbering 35% is just coming of age.  
  3. AWARENESS: Access to information brought on by increased media proliferation, technology reach and 15 million foreign travellers annually.
  4. ASPIRATION Effect: Desire to experience new things as a consequence of moving up the value chain and the need to fit in by emulating others.  

By 2015 the various consumer segments in India will demand and pay for goods and services differently. Some of the opportunities that will open up:


The Numbers Game:

When all said and done, it ultimately boils down what level of sales can the economy sustain given the consumer makeup and country specific environment they live in. The best way to gauge the health of an emerging economy is to project Consumer Durable (CD) Sales.

Consumer Durable (CD) sales are a bellwether of broader trends and underlying fundamentals in the economy. CD Sales are primarily driven by discretionary spending which correlate strongly with per capita growth in GDP earnings. CD penetration rates are a good indicator of shortcomings in the economy on account of infrastructure, credit availability and stability in household earnings.

Here is what one projection on achievable CD sales looks like and the assumptions made.


CAGR for Consumer Durable Sales (2011-2015E)CAGROne should pay close attention to the adoption rates for the basket of consumer durables under consideration. The adoption rates are a way to cross check sales projections and ensure that sales mirror the size of the consumer segments.


Sizing up Demand:

To develop the same sales estimate from bottoms up one has to look at potential market size among all the available segments and put together a detailed plan to capture individual buyers. One such framework that maybe employed is depicted below.


GBL: Globals (High Income), MMI: Middle Middle Income, UMI: Upper Middle Income

I will leave it those interested to arrive at individual targets for CD sales at each of the segments under consideration.

In Part-II of this discussion we will investigate how having established a sales target one can go about selecting a Go-To Market Strategy to realize the set objectives.

Note: It may appear to the reader that I am biased towards the Indian Market. It just so happens that I can relate to the Indian market better on account of my origin and roots. The worst thing any marketer can bring to his profession is an inherent bias in selecting target markets.

A lack of in depth knowledge and expertise on China and Brazil has hampered my ability to conduct a similar analysis on their market potential.


  1. NCAER; MGI India Consumer Demand Model
  2. NCAER- Inclusive Urbanization Needed, Oct-2010. The numbers are adjusted based of the 2010 $PPP.
  3. National Sample Survey Office (NSSO), Report No. 531
  4. A.T. Kearny Global Retail study, 2010
  5. Confederation of Indian Industries Data, Dec-2010
  6. Mobile Payments in India – Deloitte/ASSOCHAM, April-2011
  7. Bank for International Settlements
  8. McKinsey – Comparing urbanization in China and India, July-2010 (Pg-2)
  9. Energy in India for the Coming Decades, Anil Kakodkar, Chairman, Atomic Energy Commission, India
  10. India- Energy Efficiency report, ABB, Jan-2011 (Pg-2)
  11. World Bank, GDP Forecasts.
  12. International Energy Agency (IEA)
  13. International Monetary Fund (IMF)
  14. Planning Commission of India
  15. India Census – 2010
  16. Modeling Diffusion of Electrical Appliances in the Residential Sector, Michael A. McNeil and Virginie E. Letschert, August 2010
  17. Bass Diffusion Model

Update, Oct 28th 2011: The Implications of the Global Web for US Startups, Point Judith Capital (some interesting data)

Update Oct, 22nd 2011: Economist Special Report : Business in India, rightly captures the challenges of doing business in India and impediments to its growth.

Update Oct, 17th 2011: India could become one of the top 10 e-commerce hubs in the world by 2015

Update Oct, 16th-2011: Top US based corporate giants like Wal-Mart, Starbucks, Morgan Stanley, New York Life Insurance, Prudential Financial, Intel, Dow Chemical, Pfizer, AT&T, Boeing, and others lobbying hard to enter India

Mobile Banking – An Acute Emerging Market Need

India’s Mobile Banking Potential:

A precursor for any open market economy to flourish is the free flow of capital and goods between buyers and sellers. 

Myth and Reality:

Out of 1.2 Billion Indians only 240 million citizens have access to banking services; Whereas 764.76 million people have mobile phones. McKinsey estimates that 180 million1 new job seekers will enter India’s workforce over the next two decades—a potential demographic dividend. 30% of India’s population lives in urban areas. The 4.5 million wealthy households that consume luxury products and services are concentrated mainly in the top 10 cities.The Labor force participation by occupation is Agriculture (52%), Industry (14%) and Services (34%). A vast majority of the population living in Tier-2 / Tier-3 cities are either small business owners, entrepreneurs or self-employed laborers.

The Indian economy depends far less on exports compared to its other brethren’s in Asia. Most of the growth is fueled by domestic consumption.

Bigger Pie / Bigger Slice:

An emerging middle class estimated to be increasing by 20 million a year, with a median age of 26 when weighed against the backdrop of 400 million people in India that do not have a bank account, severely dampens the market potential. One look at how MNC’s have fared over the past decade is ample proof of what went wrong with the rosy projections.

An estimated 37.2 %2 of India’s population falls below the poverty line (BPL). Microfinance was supposed to serve the needs of the poor but went wary with its focus more on credit delivery rather than help people escape poverty.

The banking system can evolve as a key gatekeeper that can bring together missing parties, unleash spending, enhance trade and in the process create new opportunities for livelihood.  

India’s Banking Reach

The number of bank branches in India is 85,3003 of which 32,000 branches are in the rural hinterland where almost 70 per cent of Indians live. Almost 38 per cent of banks have branches in rural India and 40 per cent of the country’s population has bank accounts. The average population per bank branch with above statistics is 13,900.

Last Mile Challenges – High Cost of ATM’s

If current statistics are to be believed India’s ATM density is around 35 ATM’s per million people which is abysmally low compared to the US’s ATM density of 1300. At last count the number of installed ATMs stood at 69,324 (January, 2011).

Setting up an ATM currently costs around Rs.8 lakhs ($18,000), including the VSAT, interiors, signage’s, etc. Rental costs would differ from area to area and would range from Rs.5,000 ($120) a month in small towns to Rs.50,000 ($1200) a month in upmarket areas in metros. The total expenditure per ATM would be around Rs.25 lakh ($56,000) over a 5-7 year period. The cost for a bank to set up say around 1,000 ATMs will be at Rs.100 crore ($22 Million).

In India the ATM network is mainly operated by FSS called FSSNET used to connect ATMs of 32 Nationalized banks. A cost of Rs.20 is incurred per transaction on these platforms deeming them unsuitable for micro-transactions, the lifeblood of rural India.

The economics can deter anyone from reaching out to segments that are deemed unprofitable to serve.

Opportunities – Abound

All is not lost yet, extreme rural poverty has declined from 94 percent in 1985 to 61 percent in 2005, and projections are that it will drop to 26 percent by 2025.

The challenges of serving India’s rural hinterland, where 70% of the population resides, are enormous – poverty, weak infrastructure, illiteracy coupled with the high costs of serving customers in the last mile.

A solution for these challenges is Technology coupled with Innovative Business Models that can bring about both change and create opportunities for businesses. Serving customers at the Bottom of the Pyramid is not going to be easy or promising.

Technology to the Rescue – Mobile Penetration

India has achieved a tele-density of about 65 per cent, thanks to the major contribution from mobile phone services. According to TRAI the total number of Telephone subscribers in India reached 806.13 million5 at the end of January 2011. Tele-density in Urban stood at 150.67% and that in rural at 32.11%.

McKinsey research forecasts that the total number of Internet users will increase more than fivefold, to 450 million, by 2015. Total digital-content consumption will double, to as much as $9.5 billion. Including access charges, revenues from total digital consumption could rise fourfold, to $20 billion—twice the expected growth rate of China


With falling handset prices, strong government support (UID, National Rural Employment Guarantee, Inclusive Banking Policy) and aggressive rollout by mobile service operators the projections will soon be a reality.

However a “cookie-cut” approach to taming this large market will not work. What is needed is a localized offering developed from ground up that can cater to the diverse and heterogeneous Indian market.

Payment Networks:

International Payment Networks like VISA and MasterCard are both present and doing well in India. However both these networks carry with them the legacy of originating in the western world, catering to the needs of well developed markets with an organized retail sector and serving a largely homogenous customer base. India, with its diverse languages, heterogeneous markets, rampant illiteracy, poverty and underserved infrastructure offers insurmountable challenges in achieving higher penetration rates.

According to the data released by Reserve Bank of India (RBI) for 2009-2010 there were 18.3 million credit card users and 181.4 million debit card users in India.

Mobile Payment Networks:

Private mobile payment gateways have come up to meet the demand of micro payments like OxiCash, mChek. However, both cater to the urban pre-paid segment, utilize debit / credit-card networks and are primarily positioned to serve as an E-Wallet for the end-user.

National Payments Corporation of India (NPCI)

The future of India’s Banking and Commerce lies in a Mobile Payment Network like the one proposed and being deployed under the National Payments Corporation of India (NPCI), a government backed initiative. The envisioned architecture (Figure 1) proposed under the NPCI looks very comprehensive.


Figure 1: National Payments Corporation Network Architecture.

What’s unique about this network among other things is the ability to authenticate users using both conventional PIN and biometric technology, a must for serving rural customers, low transaction fees (Rs. 0.10 per transaction) and seamless integration with financial institutions. In addition technology has been leveraged and deployed to circumvent infrastructure and regional barriers in reaching the last mile.


Source: NPCI

Mobile Value Added Services & NPCI Network

Now it is up to businesses and entrepreneurs to harness this network at the backbone to deploy Mobile Value Added Services (MVAS) that can both develop trade and foster inclusive growth. The opportunities are boundless:

  1. Real-time Commerce.
  2. E-Business
  3. E-Billing
  4. E-Health
  5. E-Education
  6. E-Banking
  7. E-Logistics
  8. E-Entertainment 
  9. E-Travel


Source: ASSOCHAM Financial Pulse Study – Emerging Landscape in Mobile VAS Industry

It is a win-win situation for all stakeholders involved – Higher ARPU (Mobile Service Providers), Transaction Fees (Financial Institutions), Enhanced Trade and Commerce (Market Participants), Wider Tax Base (Government), Financial Security (End Users)

Closing Remarks:

I have spent the last six months travelling extensively across India, studying the ground reality, gathering first hand data, understanding the pitfalls, challenges and opportunities with doing business in one of the fastest growing emerging markets. While I am ecstatic of its potential one must tread this important market very carefully for the political, legal, cultural and infrastructure challenges are daunting and not for the faint at heart.

However with extensive market research, immaculate planning, localized offerings and innovative business models I am convinced one can succeed in what is shaping up to be the most important market of our generation. 

Recommended Reading:

Myths and Realities of Being an Entrepreneur in India (Knowledge @ Wharton)


I am thankful to officials (Government, Banks, Businesses), friends and eager citizens of India for their support and warm hospitality.


  1. India’s urban awakening: Building inclusive cities, sustaining economic growth – McKinsey Global Institute
  2. Planning Commission of India.
  3. Reserve Bank of India (RBI)
  4. Retail Banker International (RBI)
  5. Telecom Regulatory Authority of India (TRAI).
  6. McKinsey Digital Consumer Survey, 2010
  7. National Payments Corporation of India (NPCI).
  8. Learn Telecom