India may be looking to emerge as the third-largest economy in the world in the next two or three years, but in terms of vehicle density, it ranks near 150th among nations. That is a very telling piece of statistic.What’s noteworthy here is that India ranks even lower than even Pakistan and Bangladesh on vehicle density. India’s vehicles per 1,000 persons is also just about a 10th of the number for United Kingdom and almost a 15th of the tally for the United States.
VEHICLE DENSITYCountryCars per 1,000 peopleNew Zealand934United States850Australia776Canada677France671Japan670Spain642Germany627United Kingdom560South Korea530Brazil400Russia361China231South Africa188Pakistan69Bangladesh60India57Afghanistan55Vietnam53Source: World Population Review
Last week, Maruti-Suzuki Chairman RC Bhargava flagged India’s low vehicle density, blaming it partly on high regulatory costs that come in the way of making cars affordable. “How can you expect high growth if 88% of the country’s households are below the levels of income where they cannot afford these cars costing ₹10 lakh and above… It’s not as some people seem to think that India has become affluent, and everybody wants to buy expensive cars. That would happen if the number of people having income above ₹12 lakh increases from 12% to 50%. But that’s not true today,” he said.
What his observation highlights is a much bigger problem for the economy—a lack of mass consuming power. Given the inward nature of India’s economy, the income challenge is set to become a big impediment to consumption growth.THE AFFORDABILITY PROBLEMIf we consider a minimum ₹10 lakh annual income as the criterion for affordability, only 12.4 million taxpayers would qualify. If we assume all taxpayers earning ₹5 lakh or more but less than ₹10 lakh are double-income families, we could add another 20 million households. That’s about 32.5 million taxpayers out of a universe of 75.5 million taxpayers in the 2024 assessment year, as per the Central Board of Direct Taxes (CBDT). As a percentage of the country’s 1.44 billion people, this would be just 2.26%. That’s an astonishingly low number.Now, let’s look at the nature of household spending in India for some perspective. Indians spend between 40% or more of their income on food. Within the non-food spends, conveyance accounts for up to 8.5%, medical for up to 6.8% and consumer durables for up to 6.5%.
INDIA HOUSEHOLD CONSUMPTION, FY24ItemRuralUrbanFood47.04%39.68%Conveyance7.59%8.46%Medical6.83%5.85%Consumer Durables6.48%6.87%Source: MOSPI
To put this into context, let’s take the monthly EMI required to be paid for a Maruti Alto. This is pegged at a little over ₹11,000. Even if we assume that 8% of an individual’s income is spent on the EMI (not factoring fuel and running costs under conveyance), the minimum annual income required would be ₹16.5 lakh per year. This will further shrink the target customer base.In short, the size of India’s consuming population for most non-essential goods is far smaller than the oft-touted per capita potential numbers for various sectors, and, unless there is an urgent push on employment generation, the situation could get worse, rather than better.THE WEALTH EFFECTAfter a hiatus of over a decade and a strong run in the equity and bullion markets, a revival in the realty market has resulted in a wealth effect for the well-heeled. This has likely driven the premiumisation boom as the income growth in most sectors has not been very spectacular in the past few years.In fact, hiring in a key economic engine, IT services, has been tepid in the recent past. The consumption driven by this wealth effect is unlikely to be as resilient and sustainable as the demand fuelled by employment and income growth. Also, the universe affected is far smaller. Consider this — luxury car sales have seen healthy growth in the past two years, crossing the 50,000 vehicles per year mark. But when examined in the context of the over 4 million cars sold in the country yearly, it is a trifle.So, looking at luxury and premium sales as an indicator of economic health is a flawed approach. The reality is that most of India is still not part of the consuming class, which needs to change quickly.
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