India's affluent consumer segment drives economic growth and premiumisation trends

Consumption forms a significant portion of India's GDP, with essential items such as food dominating consumer spending.

India 1, although relatively small in proportion to India's size,  remains sufficiently large to drive the country's economy and continue the premiumisation trend, according to Blume Indus Valley Annual Report 2024.

The report divides India into three segments, with India 1 serving as the primary consuming class and forming the market for most start-ups. Additionally, this segment is the breeding ground for the majority of start-ups before they expand to cater to India 2. India 1 comprises 30 million households, totalling 120 million people, with a per capita income of $15,000.

India 2, with approximately 70 million households and 300 million individuals, has a per capita income of $3,000. This emerging aspirational class exhibits significant consumption habits, albeit with a cautious approach towards payments. Sectors such as OTT/media, gaming, edtech, and lending cater to their needs, with the introduction of UPI and AutoPay facilitating small-ticket expenditures and transactions within this demographic.

On the other hand, India 3, consisting of 205 million households and 1 billion people, possesses a per capita income of around $1,000 and lacks the financial means to afford discretionary goods. Consequently, this segment does not currently fall within the target market for start-ups.

Consumption forms a significant portion of India's GDP, with essential items such as food dominating consumer spending. However, discretionary spending in India has steadily increased over the years. According to Blume's estimates, discretionary spending accounted for 21 percent of consumption in 1999-00, rising to 29 percent in 2022-23.

The report noted that despite the substantial expenditure on necessities, India tends to underconsume in various categories, partly due to the relatively small size of the consuming class.

However, over the past four to five years, there has been a notable doubling of consumption units across different segments. In 2020-21, 8 percent of Indian households belonged to the consuming class, marking a significant rise from 0.5 percent in 1995-96. The upper boundary of the consuming class appears to be approximately 30 million households. Within various premium consumption categories, there is a variation observed, with the number of unique users ranging from 25 to 40 million, or equivalently, 20 to 30 million households, the report added.

Nonetheless, the Indian consumption class is on a steady growth trajectory, displaying an increasing appetite for premium products.