India is often viewed as a vast market of 1.3 billion people, but this perspective overlooks the complexity of its diverse population. Economically, India is divided into three distinct segments, often referred to as "India 1, 2, and 3." Each segment experiences different levels of wealth, access to services, and spending capacity which we will talk in this blog.
A Breakdown
India 1: Represents the urban, affluent, and upper-middle-class segment. They have access to modern infrastructure, luxury goods, and international services. This group drives consumption trends in technology, luxury goods, and services and benefits the most from India's economic growth and this is the India most new startups focus on which we will discuss later in this blog.
India 2: This is the aspirational middle class that has access to basic amenities and strives for better living standards. They balance between affordability and aspiration, forming a crucial market for consumer goods and services like education, healthcare, and retail.
India 3: Constituting the majority of India’s population, this segment is still largely rural and economically disadvantaged. Many people in India 3 lack access to basic necessities such as electricity, clean water, and formal banking. Their purchasing power is minimal, and they are often excluded from major market segments.
The Wealth Gap
The gap between India 1 and India 3 is staggering. In developed countries like the USA, basic amenities such as gas, electricity, and household appliances are accessible to nearly everyone, but this is not the case in India. For example, according to the World Bank, as of 2022, approximately 6% of Indian households were still without access to electricity. In rural areas, the figure is even higher.
According to Oxfam’s 2023 report, India’s top 1% holds more than 40% of the country’s total wealth, while the bottom 50% controls just 3%. This extreme disparity influences market behaviour and challenges the assumption that India is a unified consumer base.
Indian Startups
Many Indian startups focus on the affluent segment of India 1, given its higher disposable. Cred, a fintech startup specifically targets credit card users by offering rewards for timely payments. However, according to the Reserve Bank of India, only about 5% of India’s population held credit cards as of 2023, highlighting how narrow this focus is. In contrast, about 70% of the U.S. adult population owns at least one credit card. This stark difference shows that many Indian startups, including Cred, primarily cater to India 1, leaving India 2 and India 3 underserved.
Who Pays the Most Taxes in India?
India 1 not only enjoys higher purchasing power but also bears the lion's share of the country’s tax burden. According to the Ministry of Finance, only 1.5% of India’s population pays income tax, yes just 1.5% from 1.3 billion people. This group contributes disproportionately to the nation’s tax revenues, while a significant portion of India’s population, particularly in India 3, falls below the taxable income threshold.
Why the Gap is Increasing
Several factors are contributing to this growing divide:
Urbanization: The rapid growth of cities has boosted incomes for India 1 and some in India 2 but has left rural India 3 behind, creating a larger gap between urban and rural populations.
Education and Skills: Higher education remains accessible to India 1 and parts of India 2, but India 3 lags behind, limiting upward mobility. This skills gap perpetuates income inequality.
Access to Capital: Financial inclusion is still a challenge in India. While fintech companies like Paytm are trying to reach India 2 and 3, formal banking and credit systems still disproportionately favour the wealthy urban population.
The Rise of Indian Spending Power
Despite these challenges, India’s overall spending power is rising, particularly in India 2. A growing middle class, increasing income levels, and a push towards financial inclusion are driving consumption across various sectors. According to Boston Consulting Group, India’s middle-class population is expected to double by 2030, accounting for nearly 45% of the total population.
Startups and businesses are now exploring ways to cater to this rising spending power. Companies like Reliance and Tata are leading the way in expanding affordable products and services to India 2 and parts of India 3. As digital penetration increases and mobile phones become ubiquitous, businesses have new opportunities to reach previously untapped segments of the market.
Conclusion: Bridging the Gap
India is not a homogeneous market of 1.3 billion people. The economic divide between India 1, 2, and 3 means that businesses and policymakers must adopt a more nuanced approach to cater to these different segments. While India 1 remains the primary focus for startups and global brands, the real opportunity for growth lies in addressing the needs of India 2 and India 3.
As India’s middle class expands and spending power rises, businesses that can adapt their strategies to serve this broader audience will drive the next wave of economic growth. At the same time, addressing systemic issues such as education, financial inclusion, and infrastructure development will be essential for closing the wealth gap and creating a more inclusive economy.
Lessons for Marketers
Marketers should recognize the immense growth potential in India 2 and 3, which are underserved but rapidly evolving markets. Tailoring products to fit the needs and affordability of these groups is key to unlocking future growth.
References:
Oxfam India Report, 2023 - https://www.oxfamindia.org
Reserve Bank of India, Credit Card Usage Data, 2023 - https://rbi.org.in
World Bank, Access to Electricity in India, 2022 - https://worldbank.org
Boston Consulting Group, Middle Class Growth Projections, 2023 - https://bcg.com
National Statistical Office, Inflation Data, 2023 - https://nso.gov.in
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