Only 1 in 10 Indians Can Afford Non-Essential Spending: Report

A recent study from the venture capital firm, Blume Ventures, shows that 90% of Indians, around 1 billion people, do not have any money for personal use beyond the necessities.  

In a report published by Blume Ventures, they claim that the top 10% of India’s upper class, which largely exceeds Mexico’s population of 130-140 million, are the only ones capable of consuming and spending money leading towards capital growth in the market.  

This upper class is indeed the one which have lead towards growth in consumption but it has resulted in an increase in consolidation of wealth. Furthermore, there are approximately 30 million emerging or aspiring consumers who have started spending more, but they still remain very careful with their money.  

Widening gaps in policies and inequality.  

The Blume report noted that despite being in a strong competitive position coupled with growth in consumption, India is still 10 years behind China. Lower than China, India’s per capita consumption is set to be $1,493, which is way lower than China’s amount of $1,597 in 2010.

India’s economy is at a pivot point with consumption growth, an increase in stock market values, an increase in new business formations, and a rise in funded new businesses. However, the nation’s economy also faces multifaceted structural issues, as the report claims. It focused on the increasing wealth disparity, falling saving rates, and a worrying reliance on informal instruments like gold as an investment. 

As stated, consumer expenditure contributes to almost 60% of India’s GDP. while this is true, purchasing per person is still vastly constrained compared to other similar economies. While the upper strata, termed as ‘India1’ or the top-most 10% in earning have control over 66% of discretionary spending, lower-income groups are overdependent on limited financial services and tend to under-invest in automobiles and basic needs. 

The report further pointed out that the strata above the poorest Indians who comprise the middle class is not growing sustantially. In fact, what is happening is a sharp increase in the upper class, triggering the phenomenon of premuimisation, where firms refrain from producing mass-market products and instead solely focus on high value brands. Such as the rising share of luxury condominium units, high end smart devices, expensive entertainment options like overseas concerts and sports.

Between debt and gold: The balancing act of savings 

Weaker systems of land and contract enforcement make real estate an unreliable investment option for a large portion of the Indian population. The report cites the preference for gold as being more liquided and beneficial than real estate, especially with 47 million land related cases stuck in courts making real estate an unreliable loan collateral.

A drop in monetary savings, in tandem with a growing preference for gold, has enormously increased household debt. This comes after personal loans skyrocketed due to the obvious access to credit provided by fintech and other non-banking companies. Consumer debt continues to rise at an unprecedented level, despite the RBI increasing borrowing costs by raising interest rates to 6.5%.

Shifts in Startup Activity and Venture Capital Funding Patterns

India, referred to in the report as Indus Valley, has emerged as the third largest unicorn hub on the globe, boasting 117 unicorns. This growth seems positive for the Indian startup ecosystem, but there is considerable skepticism regarding the valuation as the report mentions that only 91 of those seem to actually surpass the 1 billion mark. 

Reports also suggest that there is a developing pattern of ‘reverse-flipping’, in which corporations originally founded in foreign countries relocate to India for taxation and IPO purposes. As during the pandemic, a lot of venture capital funding poured into India, even as late stage deals have come to a standstill, making investors more skeptical, and does seem like a reversal to India’s proactive approach.

With the introduction of Aadhaar, UPI, and DBT’s the governments Digital Public Infrastructure has significantly accelerated financial inclusivity. These mentioned systems have improved the processing of digital transactions so much so that 83% of them are done via UPI, drastically improving the effectiveness of welfare distribution.

The stock market boom and investor risks

As per the report, retail investors engaging in high risk options trading have single-handedly turned India into the largest market for derivatives globally. It raised red flags as well stating that 91 percent of retail investors in derivatives are losing money. The report went on to state that the Securities and Exchange Board of India (Sebi) has raised the level of monitoring and supervision. However, at the same time, the market was gripped with fear as last year household financial losses through derivatives trading soared to Rs. 410 billion (near $5 billion) fueling fears of a possible correction in the market.