Where Indian entrepreneurs can make money
HOW much money does an average family need to live comfortably in a big city in India? Rent in a middle-class neighbourhood would not be less than Rs 30,000. School fees and education (including books, uniforms and private tuition) will be another Rs 8,000. Tech expenses like phones, laptops and mobile and broadband bills would average another Rs 4,000. Health and medical insurance would be roughly Rs 3,000 per month. A home help would not work for less than Rs 5,000. Petrol bills would be another Rs 2,500 or even more. Food — including eating out or ordering in — would be at least Rs 15,000. Electricity would cost at least Rs 2,500 if one had to run geysers in the winter and air conditioners in the summer. Add to this the average cost of durables such as cars, refrigerators, washing machines, TV sets, air conditioners, geysers and mixer-grinders, which could easily add another Rs 5,000 to the monthly expenses. If you add up all these expenses, then a comfortable middle-class lifestyle would cost about Rs 75,000 to 80,000 per month. So, if a family wants to invest in a house or save for the future, they would have to earn at least Rs 1 lakh a month.
How many families in India earn that kind of money? Back-of-the-envelope calculations based on the estimates made by the Paris-based World Inequality Lab suggest that families at the 90th percentile make roughly Rs 1 lakh per month. So, one could say that households that are above that threshold account for the bulk of consumption in India. That would be about 40 to 45 million families. Out of these, most would spend a large part of their money on basic goods and services and provide a very small replacement demand for white goods and durables. To invest in big-ticket items, a family would not only have to have cash flow but also savings and assets of at least Rs 10 lakh. Again, using the same data, we can estimate that only those in the top 5 per cent of Indian families have that kind of wealth. That is roughly 20 to 22 million families.
So, if you are an entrepreneur selling a service, you can expect to be able to get roughly 70 to 80 million customers spread across 45 million homes. If you want to sell goods that are relatively expensive, your target customer base will not be more than 20 to 30 million. These numbers are more or less consistent with what successful startups have managed. For instance, in 2022-23, Zomato had about 58 million unique customers (some of whom, admittedly, would belong to the lower-middle income groups), while Blinkit serviced 20 million users in November last year. Even telecom companies that learnt the hard way that acquiring low-paying users could lead to losses are now targeting ‘high-value customers’ to enhance their earnings.
Various estimates and surveys show that the size of this consuming class has been more or less stagnant for the past 15 years. While the share of the top 5 to 10 per cent in the total national income has steadily grown, others below them have not been able to increase their consumption levels. This has shown up in crucial industries, such as automobiles: domestic passenger car sales, which grew at an annual rate of 12 per cent in the 15 years between 1992-93 and 2007-08, grew at just 2.5 per cent annually in the subsequent 15 years. India produced 11.1 million refrigerators in 2012-13 and 12.3 million in 2019-20, despite the fact that refrigerators are now bought even by better-off households in semi-rural areas.
If one looks at it from this standpoint, almost every large service provider and manufacturer has reached a saturation point. There is very little room for expansion, other than the rate at which the income of these top 5 to 10 per cent of households grows and any replacement demand that they generate. Anyone who wants to make big money in India, therefore, has to find a niche market with very high margins and steady revenues. And that is where the rich come in.
The average monthly income of families between the 98th and 99th percentile (just below the top 1 per cent of Indians) is about Rs 5 lakh per month. These people live in plush homes in tony neighbourhoods, eat at expensive restaurants, buy organic vegetables, use boutique ayurvedic shampoos and soaps, travel abroad for their holidays and send their kids to the most exclusive schools in India. There are about 4.5 million families who collectively earned about Rs 23 lakh crore in 2023-24.
Above them are another 4.5 million families who are ultra-rich, with an average income of about Rs 15 lakh per month. These people are of very limited value to Indian companies because their consumption basket overwhelmingly consists of imported goods, from the almond milk and muesli they eat for breakfast to the bath gels and shampoos they use in the shower. They buy the most expensive foreign cars and decorate their homes with expensive imported furniture and lamps. Their biggest contribution to domestic consumption is probably in the form of the infrastructure they use — expensive toll roads, air travel and high-speed broadband.
Their bigger role in aggregate demand is in the form of their investments in factories and offices and the inputs they consume — real estate, construction material, machinery, high-speed Internet, road and rail freight, shipping cargo, electricity, computers, cement, iron and steel. This is why the ultra-rich spur investment in international quality infrastructure — shiny offices, smart cities, bullet trains, super-fast highways. Most of these are entirely out of reach of not just the poor but even the lower-middle-income groups because they carry a hefty service fee. For instance, the new Atal Setu bridge that links Sewri and Nhava Sheva in Mumbai carries a one-way toll of Rs 250.
At the macro level, this concentration of wealth will make several industries highly profitable — high-value realty, infrastructure, banking, finance and insurance, luxury travel, hospitality and entertainment. Any young entrepreneur who wants to make money has this highly concentrated market to tap. The volumes will not be high, but the very high profit margins will make up for it.
The author is a senior economic analyst
