Demand Curve Glimpses into the Indian Economy and Consumers Indicus Analytics

Demand Curve is a weekly series of insights into the Indian Economy and Consumer Markets. The series was produced by Indicus Analytics and published by Mint between March and September, 2009. The series draws mainly from the Products suite of Indicus Analytics. These are: District GDP of India Industrial Skyline of India Market Skyline of India City Skyline of India City Skyline of India – Neighborhood series Indian Financial Scape Indian Consumer Spectrum Housing Skyline of India Indian Development Landscape

Demand Curve is a weekly series of insights into the Indian Economy and Consumer Markets.

The series was produced by Indicus Analytics and published by Mint between March and September, 2009.

The series draws mainly from the Products suite of Indicus Analytics.

These are:

District GDP of India

Industrial Skyline of India

Market Skyline of India

City Skyline of India

City Skyline of India – Neighborhood series

Indian Financial Scape

Indian Consumer Spectrum

Housing Skyline of India

Indian Development Landscape

1. Heterogeneity in rural markets Unlike in urban markets where demand is highly concentrated, rural markets tend to be spread out. This increases the sales efforts and costs Most market size data on rural India takes the aggregate households or household spend for a predetermined geographical boundary. District boundary is the most used defining characteristic, though some of the more research savvy look at market sizes down to the block level, and almost no one looks at up-to-date village level data for their sales and market planning. Unlike in urban markets where demand is highly concentrated, rural markets tend to be spread out. This, of course, dramatically increases the sales efforts and costs. Consequently, though many rural markets look good on paper, in reality they are quite costly to service. The best way to compare rural locations is, therefore, to look at market density, or expenditure per unit area. The accompanying graphic provides the 10 best rural locations in India as per this parameter. We find that markets that are otherwise quite large, do not show up as the best in terms of market density. Large parts of Gurgaon have highly educated households with organized-sector jobs living in its rural areas. Moreover, high land values have also dramatically increased the wealth and incomes of its traditional residents. Gurgaon’s rural area, therefore, scores high because of the growing suburbia. The story of Kerala is different. Cash crops combined with returning international workers, continued repatriations and high educational profiles make its rural markets similar to urban markets. The story of Jharkhand and West Bengal’s districts is, however, different. These rural markets are characterized not by high per household expenditure, but a high population density. Source: Market Skyline of India

The districts of Malda, Murshidabad and Birbhum in West Bengal and Sahibganj in Jharkhand have extremely fertile land fed by the Ganga that has contributed to the high population densities in these areas. Cross-border trade with Bangladesh also contributes to the high market density levels. These four contiguous districts have a large number of poor, underprivileged tribal population, and poor education levels. These rural markets, therefore, are more agriculture-dominated, combined with low per capita incomes. Consequently, these are not premium markets such as the ones in Gurgaon or Wayanad, Kollam or Kottayam. They are large markets characterized by greater demand for low-quality, low-cost goods and services. Unlike in urban markets where demand is highly concentrated, rural markets tend to be spread out. This increases the sales efforts and costs

Density, therefore, is just one measure that companies interested in servicing rural markets need to look for. There is a large heterogeneity in the character of rural markets. The Union territories of Daman and Diu, Lakshadweep and Chandigarh top the charts in rural market density, while among the states it is Kerala, West Bengal and Haryana that lead. However, there are significant differences in the market characteristics in these states. Some such as those in Kerala are large markets of premium goods and services—but they have a mobile consumer base that can travel to neighbouring cities for major purchases. At the other extreme are the large markets such as those in West Bengal, that are characterized by a poorly educated, poor and underprivileged, relatively immobile but large consumer base. These markets would be low in purchases of premium products or durables. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets. Source: Market Skyline of India

2. Suburbs have come to be independent economic entities These sibling locations include communities that may be large such as Navi Mumbai or small such as Salt Lake or spontaneously arisen such as large tracts of Ghaziabad, with good urban planning such as Noida or without quality infrastructure such as Gurgaon No analysis on the top Indian cities can be complete without a mention of the suburbs around them. Typically, a suburb is a residential area or community outlying a city such that those living in the suburb can commute to the main city for their economic needs. Internationally, the term suburb conjures up images of a relatively unspoilt, less densely populated and predominantly residential community close to a city. In India, it is difficult to find such conditions. Whether it is Gurgaon, or Salt Lake, we find them to be economic entities quite independent from the larger city near which they are located. Source: Market Skyline of India

For instance, Noida, Ghaziabad, Faridabad, and Gurgaon are much more than mere suburbs of New Delhi. But they are also not large enough to be called New Delhi’s twins. These are younger cities which may, one day, even overtake New Delhi. There are quite a few such locations in India. There is Salt Lake near Kolkata, Navi Mumbai in Thane district, the communities on Bangalore-Hosur and Bangalore-Mysore routes in Bangalore rural district, Pimpri Chinchwad near Pune, and so on. And there are many more across the country, not as well known yet, but will be known soon enough. These cities typically fulfil an important need that the larger city was unable to offer. In the initial phase they may have been unidimensional but over time they have gained a distinct character and momentum of their own. The lack of office space in New Delhi, the lack of new residential areas in Kolkata and expensive real estate in Mumbai have contributed to the growth of Salt Lake, Gurgaon, and Navi Mumbai. Now all three are more than just real estate alternatives to larger neighbours. Source: Market Skyline of India These sibling locations include communities that may be large such as Navi Mumbai or small such as Salt Lake or spontaneously arisen such as large tracts of Ghaziabad, with good urban planning such as Noida or without quality infrastructure such as Gurgaon

These sibling locations include communities that may be large such as Navi Mumbai or small such as Salt Lake or spontaneously arisen such as large tracts of Ghaziabad, with good urban planning such as Noida or without quality infrastructure such as Gurgaon. Some have a large concentration of high-income households such as Gurgaon, others like those around Kolkata have a large number of poor, still others such as Navi Mumbai tend to have a large middle class. There is only one thing in common between them—they are in the geographical vicinity of a larger city. And they are increasingly becoming more important than their older sibling. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets. Source: Market Skyline of India These sibling locations include communities that may be large such as Navi Mumbai or small such as Salt Lake or spontaneously arisen such as large tracts of Ghaziabad, with good urban planning such as Noida or without quality infrastructure such as Gurgaon

3. Middle class accounts for bulk of urban spending What we find is that it is the middle bulge of expenditure by the middle class that accounts for the bulk of India’s urban consumer expenditure The bottom of the pyramid is the buzzword that has captured the hearts and minds of academics and marketeers alike. Though large in numbers, the consumer spend by this segment is quite low. What we find is that it is the middle bulge of expenditure by the middle class that accounts for the bulk of India’s urban consumer expenditure. About 61% of total urban income comes from households that can be classified as middle class—earning be-tween Rs75,000 and Rs 5 lakh a year. This segment comprises the lower middle-class earning between Rs75,000 and Rs1.5 lakh a year (10% of total urban income is from this category), the middle-class earning between Rs1.5 lakh and Rs2 lakh a year (29% of income share) and the upper middle-class earning between Rs3 lakh and Rs5 lakh a year (22 % of urban income). By market size, the largest urban middle-class markets are in the main cities, with Delhi in first place, followed by Mumbai, Ahmedabad, Bangalore, Chennai, Kolkata and Pune. There are also other attractive markets that are in the second rung and whose middle class spends between Rs5,000 crore and Rs10,000 crore a year. Source: Market Skyline of India

This group of urban areas includes those that benefit from proximity to the metros—Rangareddy to Hyderabad and Tiruvallur to Chennai. West Bengal has three districts in this list, Burdwan, Howrah and Hoogly, whose large population is a significant factor in expenditures by the middle class. There are other cities as well that are more than just suburbs of larger cities. Jaipur is not only the capital of Rajasthan, it is also the gateway to a large but thinly spread market in the interiors of the desert state. Nagpur is among India’s most cosmopolitan cities with people from Gujarat, Andhra Pradesh, Madhya Pradesh and also the east, found in large numbers. The fact that it is the closest to being at the geographic centre of the country helps a bit. Source: Market Skyline of India What we find is that it is the middle bulge of expenditure by the middle class that accounts for the bulk of India’s urban consumer expenditure

Nashik has risen on the back of its cooperative movement and the technologically progressive farmers in its vicinity. Rajkot is the capital of erstwhile Saurashtra, an important centre for small and medium enterprises. Baroda was known as the cultural and educational capital of Gujarat and though it has since the 1970s lost this position, its large industrial base continues to power consumer spending. The size and expanse of the great Indian middle class does not follow any standard patterns and theories. It is created via a combination of agriculture, industry, human capital, good infrastructure or trade. The story of every so-called tier-2 town is different, but there is one thing they have in common with each other—large middle-class expenditure. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets. Source: Market Skyline of India What we find is that it is the middle bulge of expenditure by the middle class that accounts for the bulk of India’s urban consumer expenditure

4. Smaller towns are more affected by the monsoon So far manufacturing & service industries have been flagging in these cities, but the combination of high agricultural activity & production of commercial crops makes these towns ideal locations for processing of these agricultural products Not everyone realizes that dependence on the monsoon is not limited to rural areas alone. Workers in many Indian cities are heavily engaged in agriculture and related activities, and for them, the monsoon will play an important role.Naturally, the smaller the town, the larger the share of agricultural dominance. As cities grow in size, agricultural land is taken over for non-farm activities, and industry and services proliferate. Metros, for example, have less than 2% of their workers in farm-related activities, and this, of course, includes fishing in Mumbai, Chennai and Kolkata. These Alpha cities have the largest market sizes, but at the other end of the spectrum are the Delta cities, a large group of 50 cities that are budding, or have the potential to turn into much larger centres. It is this group of cities that have a preponderance of labour engaged in primary sector activities. Clearly, along with the rural markets, these towns owe their income more to agriculture than to industry or service sectors, and consumer expenditures in these cities will, to a large extent, be vulnerable to the vagaries of the monsoon. Source: City Skyline of India

Source: City Skyline of India Many of these Delta cities are steadily gaining the necessary scales in terms of population and market size. Capitals of states and Union territories, such as Gandhinagar, Srinagar and Shillong, centres that are siblings of larger cities such as Gurgaon and Noida (near Delhi), industrial centres such as Durg-Bhilai (Chhattisgarh) and Bokaro (Jharkhand), historically important cities such as Udaipur (Rajasthan) and Mysore (Karnataka), large emerging centres such as Jamnagar (Gujarat), religious cities such as Varanasi (Uttar Pradesh) and Ajmer (Rajasthan), etc. If we look at the set of Delta cities that have at least 60% of their workers engaged in the primary sector, it is curious that they lie geographically almost totally in the south-central belt of the country; only Shimla is an exception. Durg-Bhilai, of course, is a mining centre. So far manufacturing and service industries have been flagging in these cities, but the combination of high agricultural activity and production of commercial crops, such as sugar cane, cotton, groundnut and chillies makes these towns ideal locations for processing of these agricultural products through further stages. However, these towns have not yet boomed into manufacturing centres. Purchases of many services and manufactured goods in these centres are directly affected by the performance of the agriculture sector. High-end hospitals in Gurgaon, for instance, are looking at the rural rich as an important new consumer segment to target in this era of manufacturing and services slowdown. Even the government is becoming more sensitive to the underlying economic structure. The first farmer special economic zone in the country is to be set up in Nellore district of Andhra Pradesh, and this should be a cue to other centres to develop accordingly and put in place the backward and forward linkages necessary to add value to the already existing agricultural resources within or close to urban areas. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

5. How multiple-income family types differ across cities As India and Indian consumers change rapidly, there is one churn that has already played out in urban India. The joint family is dead and the extended family is dying. It is now the era of nuclear families Households in India can be classified into three types: nuclear families where one married couple lives with, in some cases, unmarried siblings; extended families which have more than one married couple from different generations; and joint families where more than one married couple of the same generation live together, which are essentially multi-income families. That the joint family system is out of mode in urban India is clear from the fact that only 8% of the households belong to this category in India’s top 112 cities. Nuclear households dominate the urban landscape with almost 70% of households falling in this category, while extended families take up the remaining 23%, a sizeable share. This reflects, to some extent, the lack of housing capacity to accommodate nuclear families, a status that upwardly mobile urban Indians seem to aspire to. Source: Housing Skyline of India

Source: Housing Skyline of India Looking at the largest Indian cities, the alpha cities and the cities in the south have a larger proportion of nuclear families, while those in the west have a greater tendency towards more extended and joint family setups. Why is that the case? There are likely to be economic and socio-cultural reasons that have not been studied in great detail. But the patterns are clear. Households in the south are predominantly nuclear, have fewer children and tend to have higher incomes than their peers in the north and east. Resource allocation within the households, therefore, takes on a very different character. The western part of India has also benefited from greater economic growth. However, a significantly larger share of households continue to live in extended and joint families. Decision-making in these households tends to be different, with a greater number of people having a say in major purchases. At the other end, spur-of-the-moment purchase decisions will be less likely, especially in durables that the household members share in the larger and more complex households of western India. At the same time, per capita expenditure in larger households tend to be lower, leading to greater possibility of savings or purchase of luxuries, depending upon household preferences. As India and Indian consumers change rapidly, there is one churn that has already played out in urban India. The joint family is dead and the extended family is dying. It is now the era of nuclear families. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

6. How cities define size of households Cities that are growing rapidly and have high levels of in-migration also tend to have smaller households The majority of households in the top 112 cities in India constitute between three and five persons, including children and adults. Yet, at least a quarter of the households have at least six persons in it, and just 15% consist of one-two people living under one roof. Typically, cities in southern India and larger cities tend to have smaller households. This is partly due to lower fertility rates among women who are better educated and live in households with higher incomes—both more likely in the south and in larger cities. But education and awareness are not the only criteria that determine household size. Source: Housing Skyline of India

Source: Housing Skyline of India Cities that are growing rapidly and have high levels of in-migration also tend to have smaller households. Early migrants tend to be unmarried, and, even if married, may live by themselves. It is only after a few years of living in a new location, and after they establish themselves, do their families join them. It is for this reason that cities such as Allahabad, Kanpur, Srinagar or Gulbarga—with low economic growth and in-migration—tend to have a larger share of large-sized households. Cities such as Faridabad, Kanchipuram and Mangalore that are relatively more dynamic with high economic growth tend to have fewer large households. The size of a household has a huge impact on purchases of consumer goods. Larger households typically spend less on consumer goods on a per capita basis as they are able to share better. For the same reason, larger households are more able to afford better quality of consumer goods. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

7. India is witnessing a durables revolution As incomes increase, media reach increases, electrification spreads and education levels rise, and the demand for durables expand significantly Consumer durables include not just white goods, such as refrigerators, air conditioners and cars, but also goods such as furniture and kitchen appliances. The largest markets for durables are naturally states with large population. Yet, Maharashtra leads on account of higher income, followed by West Bengal and Uttar Pradesh. Interestingly, Kerala and Gujarat, states with considerably smaller populations, make it to the top five states in markets for consumer durables, with better income levels and infrastructure distribution. At a finer geographical level, the largest markets for durables are naturally in the larger cities, where greater incomes and population numbers warrant greater expenditure and also typically ensure better and greater supply. Source: Market Skyline of India

However, it is not that the poor do not consume such items. There are many essentials included in the durables category, such as utensils, basic furniture, etc. Consequently, total durables expenditure is defined by the income, size and location of a household, not to mention household preferences. Location, therefore, matters a lot. Areas that have better power availability make it feasible to use white goods; consequently, rural areas tend to have lower penetration of durables for the same level of income. At the same time, even if incomes are higher, smaller homes are less able to purchase more durables. To take an extreme case, a household living in an urban slum would tend to have fewer durables than a household with similar incomes in a rural area, or in a non-slum urban area. Similarly, we find that households that have greater education levels and those where there are a greater number of older persons tend to spend more on durables. Per household annual expenditure on durables, therefore, reflects many of these forces that work in tandem. Goa has among the highest per capita incomes in the country, insignificant slum population, greater education levels, etc. Not surprisingly, it has among the highest durables expenditure on a per household basis. The district of Ludhiana in Punjab comes next, driven mainly by its high incomes in both urban and rural areas. Households in Himachal are not surprising entrants into this league—a large part of Himachal’s youth reside in the plains, repatriating their surpluses to those at home. The easy availability of electricity, the colder climate and better infrastructure, all enable its households to derive the full benefits that durables offer. Mumbai, Kolkata and other larger cities tend to be lower in this categorization despite their higher incomes simply because they have large slum populations; hence, on a per-household basis, they show up as lower even though they remain the largest market for consumer durable purchases. As incomes increase, media reach increases, electrification spreads and education levels rise, we expect the demand for durables to expand significantly. Moreover, as rural roads are able to connect the hinterlands across the country, the costs of supply will also fall. In other words, a great durables revolution is currently occurring in the country, and whether India grows at 6% or 8% a year, this spread of household durables is likely to see a continued growth at a rate far greater than overall consumption expenditure.. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

8. Why some cities are getting younger and some are not One factor that influences the number of young people in a city is its attractiveness for migrants and then there are educational considerations New Delhi leads the country in terms of its population of young adults. At four million, the proportion of people between the ages of 18 and 24 in the city is 25%. Mumbai and the urban areas of Thane (this includes all satellite towns of Mumbai in Thane district, including Navi Mumbai) follow with 2.6 million and 1.8 million, respectively, while Bangalore is fourth with 1.3 million. Interestingly, Kolkata and Chennai do not make it to the Top 10—not just in terms of the absolute population of young people, but also in terms of proportion (in both cities around 18% of the population is accounted for by the young in the age group of 18-24 years). Both Kolkata and Chennai have a larger share of people above the age of 45 than other cities. One factor that influences the number of young people in a city is its attractiveness for migrants—Bangalore’s software industry and Surat’s textile and jewellery industries are natural magnets for the youth. Then there are educational considerations; cities such as Pune, Delhi, and Hyderabad have become hubs for higher education, bringing in students not just from within their states, but also from other regions. Yet, in most of these cities, as share of total population, the proportion of the young does not exceed 25%. In just six of India’s top 112 cities, this proportion is higher than 30%. On top of the list of the six is Noida, a New Delhi satellite. It has become the preferred base for students and single people, and is close enough to New Delhi for them to commute daily. Source: City Skyline of India

But what draws the youth to some cities? Educational opportunities are one factor, but not the most significant. A large number of young people in cities popular with the young are not graduates. These people largely find jobs in the so-called unorganized sector. Cities with high economic growth (Delhi, Pune and Surat being some examples), and, consequently, a bigger and thriving unorganized sector are, therefore, far more attractive than others with much better educational options. Population growth and high fertility rates in the city and in its surrounding areas are another factor and an important one. Allahabad is a case in point— high fertility rates in eastern Uttar Pradesh and Bihar have resulted in there being more young people in this area. And Allahabad is among the few large cities in that part of the country. Bokaro is another such area, and also one with a distinct advantage—its large mining and basic industry is a magnet for uneducated or marginally educated young people. Similarly, Kohima has the maximum opportunities in terms of education and jobs in Nagaland, and is, understandably, popular with the young. Smaller cities might have a larger proportion of young people than bigger ones, but the most number of young people continue to be clustered in the major metros or their suburbs. This is not surprising. Young people aspire most towards greater options and opportunities, and by their very size, larger cities are able to offer the largest menu of choices— for income and entertainment. The poor infrastructure in India’s smaller cities does not help matters, and this often chases away those who are going to build India’s future. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

9. People in large cities earn more but save much less If India’s top 112 cities are classified into metros, state capitals and other cities, we see that metros on an average have the lowest savings rate and highest per capita income India’s high savings rate is touted as a strong defence against any economic slowdown. These savings help in routing funds towards greater investment that in turn fuels growth. However, the spread and sustainability of India’s savings rate is unclear. Many believe that since households in the metros have higher incomes, they would also be the highest savers. The numbers do not bear this out. The disparity in savings rate in urban India point to many factors that influence such behaviour. Source: City Skyline of India

People in large cities earn more but save a smaller proportion of their income compared with residents of smaller cities. There are many reasons for this. First, larger cities usually have a greater share of slum population that typically save less. Secondly, many large cities also have a large number of immigrants who repatriate their monthly surpluses to families, which would otherwise have been saved. Thirdly, larger cities have greater avenues to spend. Better roads lead to more people buying automobiles, and better entertainment options and higher property rentals eat away a greater share of incomes. Hence, it is no accident that Mumbai, which has among the highest average incomes in India, does not have the highest savings rate. If India’s top 112 cities are classified into metros, state capitals and other cities, we see that metros on an average have the lowest savings rate and highest per capita income, while capital cities earn more and save more than non-capital cities. This is because capital cities typically have a larger share of people in government jobs where incomes tend to be higher and more stable for the same level of education as someone in the private sector, except at the top levels. However, there are significant differences within state capitals. Chandigarh, for instance, has a different economic structure than, say, Bhopal. Better infrastructure in state capitals, compared with other cities in the same state, has also led to greater levels of new economic activities coming up in these, whether it is Lucknow or Patna. The numbers indicate a clear pattern. Out of the top 30 cities, the smaller ones save at a much higher rate than the larger. Also, there are no north-south or east-west divides. In other words, it is not that people in southern India save more and those in the northern parts of the country save the least. There may be cultural differences across India’s economic geography, but they do not play out strongly where savings rates are concerned. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

10. The Indian rich- who are they and where do they live? Mumbai and Delhi are homes to very affluent neighbourhoods, in terms of the number of affluent households The affluent are those who have a large amount of wealth and spending power. This is also most likely to be reflected in their high-income profile. As is evident, the bulk of the affluent in India reside in urban areas; it is also likely that they are most concentrated in the larger metros. However, that does not imply that the affluent do not exist in other parts of the country. Large rural landowners, agricultural commodity traders, contractors, public servants, or those living in large farms or farm houses in the vicinity of (but not within) large urban centres are spread across India. They tend to travel nationally and internationally, and can access products aimed at them through many different sources. The affluent tend to be very different from those less economicaly fortunate. Affluent households tend to have lifestyles characterized by lesser physical work, greater expenditure on entertainment, less time spent on day-to-day necessities of household chores and occupation. They also have a different disease profile. Source: City Skyline of India – Neighborhood Series

Mumbai and Delhi are homes to very affluent neighbourhoods, in terms of the number of affluent households. Oshiwara in Andheri (West) is the richest neighbourhood in India, in terms of the number of millionaire families, with at least 15,000 households having annual incomes of at least Rs10 lakh. In fact, of the top 20 neighbourhoods in India, in terms of number of millionaire families, as many as 18 are in Mumbai. The top ranking neighbourhoods in Mumbai are Oshiwara, Sahar, Walkeshwar, Mahalakshmi, Versova Creek, Chembur West (Golf Club), and Borivali West. The richest neighbourhood (in terms of the number of millionaire households) in other major cities are: Rohini in New Delhi (overall rank 9), JP Nagar in Bangalore (overall rank 42), Adyar West in Chennai (overall rank 48) and Beckbagan-Ballygunge in Kolkata (overall rank 78). There are 166 neighbourhoods in the country’s five major cities that have at least 1,000 households having annual incomes of at least Rs10 lakh (out of a total of 626 neighbourhoods which together make up these five cities). Of these, 37 are from Bangalore, 11 from Chennai, 47 from New Delhi, nine from Kolkata and 62 from Mumbai. In terms of total income (sum total of incomes of all the households), the richest neighbourhood in India is Bhandup in Mumbai, with an aggregate income of a little over Rs6,400 crore. The top 15 neighbourhoods are again all from Mumbai. These include Oshiwara, Sanjay Nagar (Chembur East), Matunga-Sion, Sahar, Dadar Plaza, Chembur West (Golf Club), and Borivali West. Rohini, Preet Vihar, Rithala, Greater Kailash II and Greater Kailash I are the neighbourhoods with the highest incomes in New Delhi. The top neighbourhoods in Bangalore, Chennai and Kolkata are Padmanava Nagar, Thiruvanmiyur (East) and Jodhpur Park-Indian Institute of Chemical Biology, respectively. There are 181 neighbourhoods in the five major cities with aggregate incomes of Rs600 crore or more. Of these, 21 are from Bangalore, 10 are from Chennai, 79 are from New Delhi, two are from Kolkata and 69 are from Mumbai. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets. As is evident, the bulk of the affluent in India reside in urban areas; it is also likely that they are most concentrated in the larger metros.

11. Indian cities should make space for low-cost housing Rising slum and squatter settlements in cities is a clear sign that the demand for the low-cost housing is not being met through formal housing stock. In the next six years, urban India needs to build at least 10.5 million houses to meet the demand for housing that accompanies rising levels of urbanization. With the financial crisis bringing affordable housing back on the radar of promoters and builders, it is worthwhile to estimate the extent of unmet demand for low-cost houses. As much as 65% of the demand in India’s top 112 cities is for houses measuring less than 1,000 sq. ft. This translates into approximately 6.8 million new homes. Interestingly, about 70% of the demand would be for houses with two rooms or less. This means 7.4 million new houses need to meet these specifications. This is because 90% of the urban households have incomes under Rs 5 lakh per annum. Source: Housing Skyline of India

Thus, the demand for majority of the urban housing would be in this category. Greater housing demand originates from two sources—those who have arrived earlier and residing in makeshift tenements, shacks and slums, and those who are expected to migrate into these areas. The requirements are different. Typically recent in-migrants require smaller areas, but as they stay on, their families join them and expand, and their incomes and wealth also increase. This translates into requirements for marginally larger carpet areas. The cities that have the largest requirement for such housing are those that attract migrants—Mumbai and New Delhi and their surrounding areas, Bangalore, Pune, Surat, Coimbatore, etc. These cities either saw large migration in the recent past but are slowly stagnating (for instance, Mumbai), or continue to have great levels of in-migration (New Delhi, Surat and Pune, for example). Either way, these cities are already bursting at their seams. The need to expand opportunities in other cities is paramount, as is the need to get a better grip on land utilization within these cities. Typically, government bodies have almost monopolistic control over land, and this is a serious problem as land management is riddled with bureaucracy and poor governance. What is needed is a much more aggressive and forward-looking approach that looks at the requirements for each city specifically. Ensuring there is regular availability of land for low-cost housing within a city is among the first and foremost steps. The supply side constraints for provision of low-cost housing are well known and these problems have been made worse due to the rapid increase in real estate values. As a result, the largest action in urban housing has been in suburban areas surrounding the large cities— rural Bangalore, Ranga Reddy near Hyderabad, the Gurgaon, Noida, Faridabad and Ghaziabad quadrilateral surrounding New Delhi, and Howrah and North and South 24 Parganas near Kolkata are well-known examples. The bulk of new housing is occurring on converted agriculture land around these cities. This need not have been the case, had local governments been more responsive to emerging requirements. Unfortunately, unplanned and unstructured development is a hallmark of urban India and is unlikely to change very soon. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

12. Beta cities - on the threshold India’s tier II cities have benefited to a large extent from the boom of the past few years but need to get their act together to draw investment and attention away from the tier I cities. Just as emerging economies are those that stand on the threshold of advancing into the big league, there are emerging cities in India: the cities that have the potential to match the larger cities in market size. Indeed some among them will become elite cities eventually. These Beta cities, as opposed to the Alpha top-tier cities of India, have diverse characteristics. Many of these cities are state capitals such as Jaipur and Lucknow, benefiting from better infrastructure and public services. Cities such as Jamshedpur and Faridabad have been industrial centres for decades now, but seemed to be content giving precedence to other newer centres that have grown. Some such as Indore have been threatening to make it big for many years, but never quite managed it. Some others such as Kanpur have somehow lost their way. Source: City Skyline of India

Cities such as Thane and Thiruvallur have boomed, thanks to their proximity to metros. Except for Kanpur, all have had double-digit, or close to that, annual growth in their market size over the past two years. Whatever be their current status, these Beta cities, or India’s tier II cities, are among the largest urban markets and can at anytime break into the elite club the way Surat and Coimbatore have. They have benefited to a large extent from the boom of the past few years but need to get their act together to draw investment and attention away from the tier I cities. What is needed is a concerted plan of action to improve infrastructure and governance. These cities will over the next few years grow in importance and in a range of areas. Many of these cities were in the past specializing in a few sectors and industries; but with growing population and large-scale in-migration, they are steadily growing in the range of activities that are undertaken within and in their vicinity. The bulk of these cities have quite poor public infrastructure (since serious urban investment in the past has been limited to state capitals); but that is already changing rapidly. Supply always finds a way to meet the demand, even if the governments are unresponsive. High incomes in Indore, for instance, and availability of credit led to high auto demand; when the urban government could not provide that, residential areas started to put up their own roads. Residents of Patna are working with the government for improved law and order, the industrial community in Ludhiana is working together to improve the city, and there are many such examples. Cities such as Coimbatore and Surat have in the past already shown how cities and administration in the second tier towns of India are slowly but steadily creating urban communities that will one day totally change India’s urban landscape. These cities currently are much smaller than the top metros, but many have per capita incomes that are higher than those in the top metros, and most of them have sustained double-digit growth. It is only a matter of time before they become important metros in their own right. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets. India’s tier II cities, are among the largest urban markets and can at anytime break into the elite club the way Surat and Coimbatore have.

13. Finance institutions need to focus on expanding market On average, only 16% of Indian households have taken loans from institutional agencies--commercial banks and cooperative societies. Financial inclusion is a stated policy of the government and the central bank, but it will take some concerted effort to bring more of the population into the network of formal financial services. The current spread of formal finance network is quite inadequate. At least 60% of Indians do not have access to the banking system. Even though the average number of people that a bank branch serves is around 15,000, there are six states where each branch serves around 20,000. These states are mostly in the east. The inadequate spread of banking is reflected in the data on credit as well. On average, only 16% of Indian households have taken loans from institutional agencies—commercial banks and cooperative societies. Non-institutional agencies, including moneylenders, friends and relatives, have a higher reach at 22%. Again, sharp regional differences show up, with Kerala coming up high on indicators of banking and finance. As many as 14 of the top 20 districts that have access to institutional credit are from Kerala. The districts of Kottayam, Kannur and Idukki top the list, with at least 65% of households taking loans from institutional agencies. Kerala, however, has some peculiar characteristics that help explain this widespread integration with the formal financial system—high literacy and educational levels, well-connected rural areas as density of population is high, and remittances from overseas migrant workforce. All these make for an environment more conducive towards higher access to formal finance. Source: Indian Financial Scape

At the other end of the spectrum are districts where less than 1% of households have taken credit from institutional agencies. These are mostly in Assam, Manipur, Meghalaya, Arunachal Pradesh, Jammu and Kashmir and Mizoram, where the banking system is extremely underdeveloped given constraints of a low density of population, poor connectivity and law and order concerns. In regard to the penetration of non-institutional loans, the focus shifts from Kerala at the top end. Here, the top 24 districts have penetration ranging from 50-53% and are mostly located in Tamil Nadu and Andhra Pradesh. These are the states where microfinance and self-help groups have spread into the hinterland. The districts languishing at the bottom remain the ones from the hill states. In fact, 64 districts have less than 7% penetration of non-institutional loans. Of these, two are from Andaman and Nicobar, 13 from Arunachal Pradesh, 14 from Jammu and Kashmir, seven from Meghalaya, eight from Mizoram, four from Sikkim, 13 from Uttarakhand and three from West Bengal. At a broader level, there is a clear need for better services in the hill states. The question remains whether the government measures of banking correspondents, using post offices, etc., will reap dividends in expanding the financial network in areas where topography and socio-economic characteristics remain tough barriers to overcome. Essentially, there are two clear characteristics of household access to finance. One, the bulk of the population is financially underserved and rely on informal lending. Two, non-institutional agencies have together achieved a much higher penetration than institutional agencies. The need of the hour is for financial institutions to focus more on expanding the market rather than flog the existing ones. And for this, innovative use of technology just might be the way to go. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

14.New manufacturing sectors in eastern India The phenomenal growth in the Jharkhand and the Chhattisgarh has seen the share of manufacturing in their GDP rise dramatically as they have attracted industrial projects India’s manufacturing sector has been coming off its high growth path since the first quarter of 2007. Large parts of India remain outside the impact of this downturn, as their economies are largely related to agricultural or tertiary sectors. In fact, 10 states with the highest manufacturing sector GDP account for 70% of the manufacturing output in the country. Maharashtra, Gujarat and Tamil Nadu are India’s top three industrialised states, and while the top eight positions have remained static since 2001, two new states, Jharkhand and Chhattisgarh have moved up into the top 10, displacing Rajasthan and Punjab, respectively. The phenomenal growth in these two states, since their inception, has seen the share of manufacturing in their GDP rise dramatically as they have attracted industrial projects. Looking at the share of income that originates in the manufacturing sector, these two states have shown higher levels than Maharashtra, Haryana and Tamil Nadu. Source: District GDP of India This graph shows the share of various states in India’s manufacturing output and their income from the manufacturing activity in 2007-08

It is no accident that Chhattisgarh and Jharkhand have had high manufacturing growth. Being newer and smaller states, they responded more rapidly than their larger—and in some cases better endowed—neighbours. The result is for all to see. As Orissa, eastern Madhya Pradesh, Bihar and West Bengal get their act together, large-scale manufacturing based on primary inputs will rapidly enhance incomes and lifestyles in eastern India. Currently, there are few large urban markets in eastern India. After Kolkata, there is Patna, a distant second, and then, Bhubaneswar, an even more distant third. Asansol, Dhanbad, Ranchi and Raipur continue to be small markets. But this is changing. The emerging trends can already be seen. For instance, many of the cities in eastern India have not gone through the realty downturn that has characterized much of urban India. With the slowdown, which districts would be affected the most? Some are the standard manufacturing heavyweights in the country—Surat, Bangalore, Pune, Ahmedabad, Mumbai, Chennai, Coimbatore, etc. The manufacturing growth centres of the 1990s and 2000s were predominantly in the west and south and had an international focus. But the new growth centres are different. Two districts, that have become part of the top 10 manufacturing districts in recent years are Gurgaon, which has attracted large investments in auto manufacturing, and Raipur in Chhattisgarh, which has two industrial growth centres at Urla and Siltara. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets. The phenomenal growth in the Jharkhand and the Chhattisgarh has seen the share of manufacturing in their GDP rise dramatically as they have attracted industrial projects

15. Changing lifestyles and urban landscape of Indian cities As marketers look increasingly at small towns, they will need to differentiate between the attributes of cosmopolitanism and westernization India is changing rapidly in many different ways and its cities are changing even more rapidly. Typically, we find that most new technologies, attitudes, fashions, etc., come about first in the metros, then spread to other larger cities, and eventually encompass the entire urban landscape. Classifying cities according to their market sizes into four categories, we have 10 alpha cities, which include the four metros and Hyderabad, Bangalore, Ahmedabad, Pune, Surat and Coimbatore, the cities that are the first to adopt change. Looking at one of these new changes—the emergence of the mall—we find the highest concentration of mall users in these cities. With the largest urban markets, high incomes and nuclear families, these cities have been ideal places to usher in the mall culture in India. Source: City Skyline of India

Alpha cities are also the most open to changing lifestyles and more westernized and cosmopolitan in character than other Indian cities. However, there are a lot of variations. For instance, Surat and Coimbatore are among the largest markets, but have low westernization levels. Similarly, the cosmopolitan character tends to be greater in larger cities, but is not necessarily high in all large cities, where cosmopolitanism is defined in terms of the share of people communicating in different languages—not including English. Kolkata is a large city, but not as highly cosmopolitan as Nagpur, a beta city. Dhanbad is another gamma city which is not usually thought of as highly westernized or cosmopolitan, yet as the coal capital of India and it attracts people from across the country. Various dialects of Hindi, Bengali, Oriya, etc., are some of the more popular languages there. As marketeers look increasingly at small towns, they will need to differentiate between the attributes of cosmopolitanism and westernization. Chandigarh, for instance, is quite westernized, but not really a cosmopolitan city. Its markets are, therefore, characterized not only by English signages, but also by a highly homogeneous set of products typically consumed by Hindi- and Punjabi-speaking communities. Nagpur, on the other hand, has communities that have retained their historical characteristics—Newspapers in Hindi, Gujarati, Oriya, and not just Marathi and English, have significant sales in that city. Surat started off as a predominantly Gujarati city, but large numbers of migrants from the Hindi belt, Orissa and some of the other eastern states are rapidly changing its character. Surat is quickly becoming a cosmopolitan city, but it is neither a highly westernized city nor, given the trends, does it appear that it will become one in the near future. The economic activity that has pushed the growth of a city has long determined its character. Bangalore’s high human capital-oriented growth required highly educated people from across the country. In the last century, this could only be met through those who had been taught in English. A delta city, Varanasi’s growth also required human capital, but religious tourism required a different kind of expertise, hence despite the presence of Banaras Hindu University, its migrants took on a non-westernized character. Gurgaon’s high-value manufacturing growth required greater skills, but Dhanbad’s mining activities could welcome those who were uneducated and unskilled. Consequently, the two markets are also highly different. They both have people from different communities and regions, but one set are better educated, better paid and English-speaking; the other, less educated, less paid, and more comfortable with their mother tongues. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

16. For poor migrants, technology to help in financial inclusion Two states from where migration is relatively high and remittances a major source of income are Kerala and Bihar. Interestingly, the two stand at the opposite ends of the Indian development landscape Migration in search of work ensures that cities maintain their high growth rates. When people move out of their homes for work, their families often stay behind, living on remittances sent by their working relatives. Two states from where migration is relatively high and remittances a major source of income are Kerala and Bihar. Interestingly, the two stand at the opposite ends of the Indian development landscape. They have the highest and lowest literacy rates in the country, 90.9% and 47%, respectively, according to 2001 figures. Source: Indian Financial Scape

The disparity in such a basic indicator as literacy level translates into a significant difference in the skill set of the labour force that goes out and sends back money. Kerala, with its educated workforce and high development indicators, has traditionally sent its labour either abroad or to other states in higher skilled jobs. Bihar, on the other hand, has labour moving to other states in low-skilled jobs, primarily as farm and construction workers. In fact, looking at the districts where at least 30% of households receive income from remittances, two insights emerge. The first is that migration can be from both high-income and low-income districts, and that there is a difference in the reasons behind migration. Himachal Pradesh and Kerala both figure in this list. Both states have achieved a lot on the developmental front such as providing access to education, health and raising connectivity of villages through a good network of roads. The states differ highly in topography, density of population and type of workforce. Hamirpur in Himachal Pradesh, for instance, has many working in the defence services or working in the plains. There is also a considerable seasonal migration from the state during the winters as farm labourers move out to work in Punjab and Haryana. Districts from low-income states such as Uttar Pradesh and Bihar also rank in this list, where households in the throes of poverty send out their men to bring back enough for sustenance in the villages. Since the nature of remittances is so different for low-income and high-income districts, integration with the formal financial sector also varies. Districts from Kerala and Himachal Pradesh have a higher dependence on institutional sources of credit, compared with those from Uttar Pradesh and Bihar. The latter have low penetration of banking services. Thus, the poor and the underprivileged who migrate to other states are rarely able to use modern banking facilities. This affects their ability to save in banks, which, in turn, affects their ability to avail credit from these institutions. In other words, growth in microfinance notwithstanding, modern banking institutions are generally unable to service those who most require them, even if those people have the wherewithal to save and invest. The poor migrant is one such segment. But, increasingly, new technologies are expected to come to their help. With the onset of mobile banking and money transfers through mobile phones, the migrants would be able to transfer funds to families back home even if banking facilities are sparse in those areas. With urbanization expected to increase rapidly, about 10% of India’s population is expected to migrate to cities from rural hinterland in the next decade. Since most will send money back in their initial years, rural India is expected to gain from a large and dispersed source of funds. And new technologies will enable what the banks are missing out on. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

17. India needs cities network for easy rural urban shift India’s richest city Mumbai’s per capita income is $2,675 (Rs1.28 lakh), lower than the Chinese national average of $3,529 India is set to be the fastest growing economy in 2010, surpassing even China, according to the World Bank. Meanwhile, Mumbai dreams of becoming another Shanghai and the Bandra-Worli sea link is supposed to be one of the many steps in that direction. Yet, India has a long way to go to catch up with China. India’s richest city Mumbai’s per capita income is $2,675 (Rs1.28 lakh), lower than the Chinese national average of $3,529. Rising incomes are associated with urbanization and India has been lagging behind on this count. The pace of urbanization has actually slowed in the country. During 1971-81, the annual average rate of urbanization was 3.79%, but declined to 3.09% between 1981 and 1991 and to 2.73% between 1991 and 2001. During 1971-81, the annual average rate of urbanization was 3.79%, but declined to 3.09% between 1981 and 1991 and to 2.73% between 1991 and 2001.

Last year, China’s urban population crossed 600 million, 46% of its population; two decades ago, people in cities comprised just 20% of the total. According to China’s ‘Blue Book of Cities’, the country has 116 metropolises, with nearly a million people in each. India has 62. While such gigantic cities do not have to become an objective of Indian planning, there is no point in going the other extreme and romanticizing rural life. The average population in an Indian village is 1,161 persons, that is, roughly 200 households. This does not make the village economically viable as an independent entity. In fact, 91,555 of India’s villages have a population of less than 200, making provision of basic amenities a difficult and expensive proposition. More importantly, Indian cities are characterized by some of the worst infrastructure and public services in the world. This is natural, given that we typically spend insignificant amounts to upgrade and maintain urban India. The Jawaharlal Nehru National Urban Renewal Mission seeks to correct this problem. However, it currently covers only 60-odd large cities. India has thousands of large and small cities. While small villages are economically unviable, very large cities have their own set of problems, with concentrated pollution affecting health and life of its citizens, high land values contributing to sub-human living conditions in slums, etc. India needs to build its smaller cities, where most of its urban population will eventually reside. Unless there is a rural-urban movement facilitated in a cohesive manner, the benefits of urbanization will be lost to the vast majority of the population. Productivity and growth of the economy will also suffer. Southern India is the most urbanized. Incomes are, therefore, higher and development more widespread than in the north and the east. If we rank Indian cities by per capita income, nine cities from this region come in the Top 25, seven from the western states, five from the north and four from the east. Interestingly, India scores over China in the spread of its population and urban areas across its land area. For all its high growth, China still has a problem with regional disparity. Its eastern belt is way ahead of the interior regions and the top rich cities all lie on the coast. India has similar problems of imbalances, but the differences are not as large. In India, the western and southern states rank much higher than the northern and the eastern ones. The top four richest cities are all south of the Vindhyas and two are from Maharashtra. They are followed by Ahmedabad, Surat and Delhi, which has the seventh highest per capita income among cities. Since eastern India is growing rapidly in the last few years, it is expected that more and more cities in the east will cross the small city-large city divide. Ranchi, Raipur, Dhanbad and scores of smaller urban centres are growing rapidly on the back of large-scale manufacturing investments in these areas. However, this growth will be constrained if there is no even allocation of resources from the Centre to these cities. For India needs large cities, but even more than big cities, it needs a well spread out network of cities that will enable the rural-urban transition of workforce more effectively. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

18. Rural markets help makers of consumer goods grow steadily States where sale of personal and home care products is high are those with either higher incomes or large populations One sector that continued to gain steadily despite the economic slowdown was the market for personal and home care products. A reason for bucking the trend was these companies have discovered rural markets, which now contribute a little more than half the total sales for such products in the country. States where sale of personal and home care products is high are those with either higher incomes or large populations. Maharashtra has the highest share of 16%, with high disposable incomes in the Mumbai-Pune belt and a large population. Andhra Pradesh is second due to its rapid growth in urban incomes, along with West Bengal, where population along with steady income growth in the 1990s is the predominant factor for high sales. Uttar Pradesh, the most populous state, comes in at fourth with 8% share of the market. District-wise analysis shows that the largest concentrated markets for these products are naturally in the large metros or their suburban districts. But Medinipur in West Bengal, on account of its large population, stands out. The other is Surat in Gujarat, which also has a rapidly growing population as well as income. Both are easy entry points for sales networks. In recent years, the list of states where growth has exceeded 10% a year since 2006-07 also includes Orissa, Chhattisgarh and Uttarakhand. But these markets are still small. Gujarat, on the other hand, is a large market, and also tops growth performance.

The main reasons for the growth in rural areas in the recent past have been improved incomes, good monsoons and the government’s rural employment guarantee programme, among others. As rural markets have now been perceived as untapped high-potential markets, firms are adapting their distribution networks and marketing strategies to increase rural penetration. Traditionally, rural incomes and expenditures show high volatility due to the vagaries of rainfall which determines most of India’s farm output and volatility in prices of farm products. But this is changing slowly but steadily. Agriculture is increasingly accounting for a lower share of rural incomes. Repatriations from migrants, increased role of the services sector and an increased role of unorganized and organized manufacturing are steadily chipping away at the overall share of agriculture incomes in rural areas. Also, government interventions such as the National Rural Employment Guarantee Scheme—the government’s flagship welfare programme that ensures 100 days of employment to a member of a poor rural household—greater agriculture credit, increased role of groundwater for irrigation and government purchases of farm products at predetermined prices have helped in reducing volatility in rural incomes. Rural households today depend on more than one source for their incomes. An individual may work in a farm or at a construction site or migrate to an urban area temporarily. Other individuals within the household may be involved in home-based work. This diversification helps stabilize household purchases. However, agriculture incomes still have large enough multipliers in rural areas to affect rural purchases of personal and home care products. The current monsoon has not yet showed all its cards, but it has held back enough for the makers of these products to be concerned. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

19. East India set to make swift progress Orissa, Chhattisgarh and Jharkhand have returned growth rates higher than the national rate since 2000-01 While it is well known that the eastern states of India have been lagging behind the rest of the country for decades, it is less appreciated that these states have been reinventing themselves in recent years.

Orissa, Chhattisgarh and Jharkhand have returned growth rates higher than the national rate since 2000-01 and, ironically, the global slowdown may in all probability benefit this region by raising its relative importance in the country. The eastern states comprising Bihar, Jharkhand, West Bengal, Orissa and Chhattisgarh have economies that are still making the transition away from the primary sector. They are now all set to reap rich dividends in the current scenario, where domestic markets are being relooked at as sources of growth, agriculture is on the verge of a technological revolution and India’s export-dominated centres are no longer as attractive to investors. With the National Rural Employment Guarantee Act implemented in the last couple of years and higher agricultural prices, eastern India’s predominantly rural economy has benefited. Construction is another booming sector as various infrastructure projects are being undertaken; in fact, Bihar has reported a phenomenal average annual growth of 46% in construction over the period 2004-05 to 2006-07. Moreover, with the government stimulus packages aiming at increasing infrastructure investment, demand for steel, cement and heavy engineering will increase, and these production units are largely in the eastern region. One force that favours eastern India in the long term is human capital/workforce.

One of the reasons why southern and western India have been leading India’s growth is that they have had higher shares of population in the working age group. But with higher fertility rates, the eastern states, which have reached the levels in the western states already, are all set to catch up with increased share of working population as in the southern states by 2016. According to the Registrar General of India estimates, the population in the working age group of 15-59 will increase from 58.4% of the total in 2001 to about 66% in 2016 in the eastern states. Clearly, for a bright future, it is imperative that the state administrations be responsive to emerging opportunities. This process, however, has already begun. Governments in Bihar, Orissa and Chhattisgarh have made positive moves to improve governance and West Bengal has made a beginning in trying to restore its past glory in manufacturing. But there are many challenges ahead. The poor quality of governance has contributed to an increasing Naxalite problem. These groups are active, well networked and spread. Go a few kilometres beyond the boundary of most cities, and Naxalite activity is evident. There is a deeply entrenched distrust of market forces and the opportunities that they could provide. And for good reason. A poor ethical record, exploitation of the uneducated and illiterate, misuse of power, broken promises and so on. have been the tools used by small traders, and large companies, not to mention the government.

Markets cannot function in a society that is ruled by distrust and suspicion. And markets cannot function when the state cannot ensure security of life or property. Rebuilding trust is a necessary precondition for the full potential of the east to be realized. And so there is a long way to go, especially in improving the urban centres of growth. Kolkata and its surrounding areas—Raipur, Asansol and Ranchi—are the only urban markets that rank within the top 40 urban markets in India. These markets are relatively smaller and are dependent to a high degree on cash-based transactions; credit is difficult to obtain for both businesses and consumers. But do not count these cities out. For it is a rich region where investment worth hundreds of thousands of crores of rupees will rapidly come in once the problem of distrust in markets and state is addressed. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

20. The North’s geography of growth While Chandigarh tops the chart with high growth and the highest per capita income in the country, Madhya Pradesh (MP) is at the bottom of the pile, with less than 5% growth this decade Most north Indian states have turned in growth performances lower than the national average this decade. Despite the huge population advantage, these states have lost out to the west and the south, which have led India’s economic growth. While Chandigarh tops the chart with high growth and the highest per capita income in the country, Madhya Pradesh (MP) is at the bottom of the pile, with less than 5% growth this decade. In recent years, growth in Punjab has slowed as diversification of economic activity has not been sufficient and farm productivity has been stagnating. On the other hand, Haryana has made full use of being partially included in the National Capital Region (NCR) to move into the manufacturing and service sectors..

Two smaller states have done extremely well in recent years. One is Uttarakhand, which has gone ahead of its parent state Uttar Pradesh (UP) to grow at levels higher than the national average. The other is Himachal Pradesh, which has become the Kerala of north India. Despite a predominantly rural population and limitations of topography, it has improved connectivity and social indicators. Unfortunately, the low-income states of UP, MP, and to a lesser extent Rajasthan are still to get their act together. According to market size, Delhi leads the cities in the north with its large population and a large middle class. Though Chandigarh has a per capita income twice that of Delhi, the smaller population gives it second place in northern urban markets. Though the large urban markets come from all the large states in the north, if we look at clusters of commercial activity, only two stand out—the NCR and the cluster formed by Chandigarh, Ludhiana, Rupnagar and Ambala. Looking at two interlinked parameters, unemployment rates for 2008-09 and the employment growth rate from 2006-07 to 2008-09, the top cities are Panipat, Gurgaon, Faridabad, Noida, Delhi, Jaipur, Hisar, Chandigarh, Ludhiana and Ghaziabad.

The geography of growth and opportunities in the north appears to be fairly clear—take the route from Delhi to Jaipur and whatever comes along the way is where opportunities are improving. Next, visit Chandigarh and its vicinity and growth along the route is more than anywhere else. UP and MP, however, have not been able to build such an urban network. Kanpur, north India’s industrial hub at one point, has now become a garbage dump with high pollution levels. Lucknow, despite having the best infrastructure in the state, hasn’t been able to emerge from political intrigue. Varanasi and Allahabad could have become great knowledge and educational centres but did not. It is the same story in MP—Indore and Bhopal were unable to cash in on the opportunities that came from liberalization, and Gwalior and Jabalpur have retained their sluggishness. The cities of Rajasthan, however, are changing more rapidly. With the Delhi-Mumbai corridor going through some of the major cities in the state, Jaipur is the biggest gainer, and with the availability of water in Jodhpur and its vicinity thanks to a canal bringing in water from Punjab, and a relatively proactive government, both incomes and prospects appear better than MP or UP. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

21. NE India - small, but with great prospects ahead This region is moving into the national spotlight, with some states performing better than the national average both in terms of economic growth as well as socio-economic progress States in the North-East (Assam, Arunachal Pradesh, Meghalaya, Mizoram, Manipur, Nagaland and Tripura, and we also include Sikkim) have not been typically at the top of the mind of marketing professionals. But this is about to change. The region has been grappling with problems of geography and ethnicity for many years, but with liberalization and technology, high economic growth has been unleashed in the region as well. Steadily, this region is moving into the national spotlight, with some states performing better than the national average both in terms of economic growth as well as socio-economic progress.

While markets in the North-East are much smaller than other regions in India, this region has been attracting interest recently as communication and transportation links improve. Its economic structure is also changing. The region has traditionally been more primary sector dependent than the rest of the country—but this will change rapidly in the coming years. The Union government has been trying to build a stronger manufacturing base in the area, but its distance from demand centres in the rest of country and the lack of close access to a port have been impediments. Investment has been coming in on various fronts in recent years. Nagaland is all set to have the North-East’s first special economic zone (though it is unlikely to be a major success), an agro-processing complex that will build on the state’s remarkable agricultural and horticultural achievements in recent years. Last April, the biggest steel plant in the North-East started operations in Tripura, while JSW Steel Ltd is expanding retail outlets all over the region as well. Meanwhile, Meghalaya has become a cement production hub as its limestone deposits have attracted cement manufacturers, thanks to the latest boom in construction. The Asian Development Bank (ADB) recently put up a $200 million (Rs978 crore) loan for improving basic infrastructure in the capitals of these states—the first time that ADB has shown interest in this region..

The North-East is a large region, but constitutes a small share of total consumption expenditure. Its largest and most important cities tend to be capitals that have been built and sustained through government expenditure, much of it flowing from the Centre. Given the low population density and topography, consumer markets are scattered and small in size. Only two cities make it to India’s top cities in market size—Guwahati at rank 53 and Agartala at rank 97. Of the other major cities, Shillong and Imphal have expenditures of less than Rs2,000 crore, and Aizawl, Itanagar, Kohima and Gangtok all have market size of less than Rs1,000 crore. These are not large markets yet, but they will grow steadily. There are many reasons for that. First, the region’s strategic location makes it imperative for the Indian government to develop it as a major hub. It is at the centre of a triangle formed by large markets in the rest of India, southern China and South-East Asia. It is only a matter of time before Bangladesh and Myanmar will allow transportation networks to West Bengal, South-East Asia and the Bay of Bengal. Moreover, the aspirations of the youth in the region, like in the rest of the country, are oriented towards joining the international mainstream. Already, the region’s educational attainments surpass those of many economically advanced states of India. Many more higher education and professional institutions are being set up, and quality centres of higher learning are now not just limited to Shillong. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

22.Tier II cities can break into the elite club any time These cities currently are much smaller than the top metros, but many have per capita incomes that are higher than those in the top metros, and most of them have sustained double digit growth Just as emerging economies are those that stand on the threshold of advancing into the bigger league, there are emerging cities in India, the cities that have the potential to match the larger cities in market size. Indeed some among them will become elite cities eventually. These beta cities, as opposed to the alpha top-tier cities of India, have diverse characteristics. Many of these cities are state capitals, such as Jaipur and Lucknow, benefiting from better infrastructure and public services. Cities such as Jamshedpur and Faridabad have been industrial centres for decades now, but have seemed to be content giving precedence to other newer centres that have grown. Some such as, Indore have been threatening to make it big for many years, but never quite managed it. Some others, such as Kanpur, have somehow lost their way. Cities such as Thane and Thiruvallur have boomed, thanks to their proximity to metros. Except for Kanpur, all have recorded double-digit or close to that annual growth in their market size over the past two years. Whatever be their current status, these beta cities, or tier II cities, are among the largest urban markets and can any time break into the elite club the way Surat and Coimbatore have. They have benefited to a large extent from the boom of the past few years, but need to get their act together to draw investment and attention away from the tier I cities. What is needed is a concerted plan of action to improve infrastructure and governance.

These cities will over the next few years grow in importance and in a range of areas. Many of these cities were in the past specializing in a few sectors and industries; but with growing population and large-scale in-migration, they are steadily growing in the range of activities that are undertaken within and in their vicinity. The bulk of these cities have quite poor public infrastructure (since serious urban investment in the past has been limited to state capitals); but that is already changing rapidly. Supply always finds a way to meet the demand, even if the governments are unresponsive. High incomes in Indore, for instance, and availability of credit led to high auto demand; when the urban government could not provide that, residential areas started to put up their own roads. Residents of Patna are working with the government for improved law and order, the industrial community in Ludhiana is working to improve the city, and there are many such examples. Cities such as Coimbatore and Surat in the past have already shown how tier II towns are slowly but steadily creating communities that will one day totally change India’s urban landscape. These cities currently are much smaller than the top metros, but many have per capita incomes that are higher than those in the top metros, and most of them have sustained double digit growth.It is only a matter of time before they become important metros in their own right. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets. These cities currently are much smaller than the top metros, but many have per capita incomes that are higher than those in the top metros, and most of them have sustained double digit growth

23. Demand Curve - The rapidly growing stable markets of southern India Good Governance, and high levels of public security have contributed to the success of the southern states About 30 of India’s top 112 cities are located in the four southern states—Andhra Pradesh, Karnataka, Kerala and Tamil Nadu; but the bulk of them are in India’s most urbanized large state, Tamil Nadu. About half of the state’s population lives in cities and most of these cities have a strong manufacturing base. While Chennai as the state capital is the financial and commercial hub, Thiruvallur also has a large tertiary sector. These two cities with their higher incomes and diversified activity rank at the top of the list of urban markets in the states and among the top 25 of the country. Others that make it to the top 50 urban markets of India include Kancheepuram, Kanyakumari, Madurai and Salem. Kancheepuram, the city of a thousand temples and silk saree centre, has also attracted investment from large production houses—Ford, St Gobain and Hyundai, etc., while steel city Salem is also a major textile centre.

From Karnataka only Bangalore makes it to the top 50 urban markets and Kerala’s Thiruvananthapuram and Kochi rank here. Four of the top 50 urban markets are from Andhra Pradesh: Hyderabad and areas surrounding Rangareddy, Visakhapatnam and Vijayawada. Despite their high ranking in India’s urban markets, it would not be correct to place all four states of the south in the same basket—each has a distinct socio-economic identity. While Tamil Nadu has the highest urbanization level, Kerala has one of the lowest. Yet, incomes in Kerala are high, with a highly literate and skilled population bringing in remittances from abroad. Rural incomes in Kerala are also higher than the levels seen in other states. In fact, in terms of character, it is difficult to distinguish between rural and urban markets in Kerala. Karnataka and Andhra Pradesh, both larger states, have significant regional imbalances within and urban clusters are few and concentrated. Karnataka’s urban markets are highly concentrated in the southern part in and around Bangalore. The region around Mangalore ranks a very distant second in the state. Some of the northern parts of Karnataka are not very different from parts of Bihar and UP or even sub-saharan Africa on many socio-economic parameters. The same is true for the region around Dharmapuri in Tamil Nadu. But all in all, urban centres are much better spread in south India. Moreover, they are well networked with surrounding rural areas through a relatively well-maintained rural road network. This ensures that some part of the higher value demand from rural areas is fed by urban areas in these states.

Two factors that have contributed to the success of southern states are good governance and high levels of public security. Law and order has been maintained while bureaucracy has delivered on many fronts, relative to the northern states. Land reforms have also been more successful in Tamil Nadu and Kerala than in other states and a more decentralized government has helped. Moreover, despite being highly dependent upon the international economy, these urban centres have managed to bear the international economic slowdown well—this indicates that these are not only rapidly growing markets, they are also very stable. Manufacturing, services and agriculture have all benefited from good governance and higher education in the region. Interestingly, though the south will remain an important source of urban consumption, it would not be very different in character from other parts of India. It is becoming fairly clear that socio-economic or cultural differences are not affecting the size or character of urban consumer markets to a large extent. High levels of consumer expenditure are seen in Chennai—what was considered by many to be a conservative spender. Hyderabad shows levels of conspicuous consumption, not very different from New Delhi. Bangalore’s large professional class behaves not very different from that in Mumbai, where consumption expenditures are concerned. In other words, though all cities are different, with different cultural and socio-economic characteristics, consumption characteristics are not that different once we account for the incomes, education and socio-economic characteristics of the individual consumer. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

When there is high uncertainty about income flows, precautionary savings take precedence over satisfaction of present consumption needs 24. Demand curve - Who saves most in urban India? India’s savings, at around 33% of gross domestic product (GDP), are among the world’s highest. Of this, households save about two-thirds or 22%, much higher than that in most countries. But there are large differences between states. India is known for its stereotypes— south Indians are said to save a larger share of their income, while north Indians are believed to be spendthrift. But looking at urban incomes, this is not justified in practice. The only southern state in the top five rankings on urban savings rates is Kerala, which has significant remittances from outside the state. Nagaland, which has seen high income growth since 2000 at 9.2% per annum, tops the chart of urban savings rate. Bihar is also among the top saving states in India when we look at household savings as a share of household incomes. There is no cultural issue here, but strong economic reasons why some locations have greater savings than others. Nagaland has high urban incomes and Bihar has low credit options but poor governance and lack of supplementary laws prevent creditors from giving credit; households, therefore, need to save more to buy assets such as homes or land. Both states have law and order problems that also affect consumption options. When there is high uncertainty about income flows, precautionary savings take precedence over satisfaction of present consumption needs.

When there is high uncertainty about income flows, precautionary savings take precedence over satisfaction of present consumption needs At the district level, on a per capita basis, we find that high savings districts are spread all over the country. Gautam Buddha Nagar in Uttar Pradesh to Vadodara in Gujarat, to Tiruvallur in Tamil Nadu to Singhbhum in Jharkhand—we find many districts that have a high propensity to save on a per capita basis. What are the key factors that determine savings? First is, incomes, and some locations are growing more rapidly than others. Second, available avenues to spend—those that have better security of property and life, and have better infrastructure, tend to score well on this count. Third, availability of avenues to save—locations that have a better financial sector infrastructure would tend to do better. Fourth, pre-committed expenditures—locations where there is lack of credit availability, or those where the dependency ratio (dependants per earner) is high, tend to perform poorly on this count. Fifth, a combination of these is then supplemented by available return or interest to impact savings at the household level. Hence, the current environment of uncertainty and economic slowdown would affect different locations differently. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

25. The new contours of rural affluence Rural affluence does not stem solely from agriculture. A large number of households in Kerala benefit from remittances as well as returning migrants. Who are the rural rich? We use a simple definition—households having annual income greater than Rs5 lakh a year, or slightly more than Rs40,000 per month. Gujarat, due to its large cash crop production, Uttar Pradesh because of its large size, Kerala, with its cash crops plus returning migrants, and Punjab and Haryana account for the largest number of rural rich. But if we look at the concentration of the rich, namely, the percentage share of rich households to the total households, we find a different picture. The small states of Goa and Delhi are also included in the Top 5. Why is rural Gujarat more prosperous than UP, despite the fact that the latter has much better soil and a far better agricultural ecosystem? Gujarat has made rapid advances in rural infrastructure for the last many years, it has a high proportion of land devoted to cash crops, and its farmers have benefited from Bt cotton, a biotech crop. On the other hand, Punjab and Haryana have a stagnating agriculture with tapering or falling productivity increases.

Nagaland, at the other end of the country, has taken to cash crops in a big way, cardamom being one of its rapidly growing crops. Being a small state, though, the market size is smaller than in other states, and connectivity still needs significant improvement. Still, this is one state that has been doing particularly well in agriculture in the recent past. The district-level story yields even more interesting insights. Three districts from Kerala make it to the top of the charts. Wayanad, with its commercial crops and plantations of coffee, tea, pepper and rubber, leads in the number of rural rich households and has also become an attractive tourist destination. Midnapore in West Bengal is the only district from the east in the list. A large district with a high population density, Midnapore has seen farm production grow steadily in the last two-and-a-half decades. But rural affluence does not stem solely from agriculture. A large number of households in Kerala benefit from remittances as well as returning migrants. Gurgaon in Haryana has seen rapid increases in land values in its urban area. With prospective developers buying up large tracts of land, many of Gurgaon’s rural inhabitants have entered the ranks of the affluent by selling their land. To some extent, the story is similar for Surat in Gujarat, one of the most rapidly growing cities of the 1990s and 2000s. Rural affluence today is not only about agriculture, though it does have a strong role to play. In a country where the share of agriculture in the economy is falling steadily, it is but natural that many areas would have non-agriculture related stories. Yes, manufacturing, trade and construction are the new drivers of rural affluence. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

26. Cities of the west: powering India, but for how long? A heady combination of location, history, circumstances, and perhaps the most important—initiative is what makes western India fare better What is it that makes western India tick? The great manufacturing and commercial base of Maharashtra is well known, Gujarat’s sustained dynamic rise has been well documented; but Goa, Dadra and Nagar Haveli, and Daman and Diu are not far behind. What explains this? Closeness to large ports is an important advantage. So is the relatively easy access to capital given that India’s financial hub is in Mumbai. Human capital is created within this region and whatever migrates into it is well absorbed. And perhaps the most important—overall governance is far superior in these states than in most other parts of India (though the southern states are not far behind, if not ahead, in this criterion). The answer, therefore, lies in a heady combination of location, history, circumstances, and perhaps the most important—initiative. A large entrepreneurial ecosystem has been nurtured and evolved, thereby further attracting talent into the region.

Mumbai is no longer the only important metro in the west; Ahmedabad and Pune have rapidly grown to become important commercial and industrial centres. Silvassa and Daman are using their proximity to these big centres and expanding their industrial and services sectors. But these are not the only success stories. Take for example Surat, the most rapidly and consistently growing large city in the country through much of the 2000s. Already ranked within the top 10 urban economies in India, Surat is all set to surpass many of the larger cities in the next decade, just as Mumbai surpassed Kolkata in the 1960s. Pune’s success in manufacturing and now IT is well known, but Nashik is also growing rapidly. The most important factor in long-term progress is sustained effort. This is the reason behind Gujarat’s growth, both in the 1990s and 2000s. And that is why, despite being a heterogeneous state with diverse requirements, Maharashtra remains among the states with the best infrastructure. The same holds good for Goa, Daman and Diu, and Dadra and Nagar Haveli. These states have made a good headstart over others, but there are significant challenges ahead in keeping this achievement up, and with higher exposure to international markets, this region is also the worst hit during a global crisis. Growth has contributed to rapid in-migration, which has affected the demographic and socio-economic structure of the cities. And different cities are responding differently. While increasingly Maharashtra’s politics is reflecting opposition to incoming talent, that of Gujarat has been relatively more sanguine. While Goa has generated large employment opportunities, its youth are suffering among the highest unemployment rates in the country. The communal stresses that were once observed in Gujarat continue to simmer. This region’s success has shown that economic growth throws up other challenges that need to be addressed at the educational, political and social levels. Otherwise, growth will be affected, stunting progress for all. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.

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