Demand Curve- The Complete Series - Part 1

Demand Curve Glimpses into the Indian Economy and Consumers Indicus Analytics

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

Source: Market Skyline of India

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.

Unlike in urban markets where demand is highly concentrated, rural markets tend to be spread out. This increases the sales efforts and costs

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. Crossborder 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 agriculturedominated, 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.

Source: Market Skyline of India

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.

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 Source: Market Skyline of India

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.

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

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 BangaloreHosur 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.

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

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. 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.

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 Source: Market Skyline of India

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.

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 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.

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

Source: Market Skyline of India

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.

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 Source: City Skyline of India

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

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 Source: Housing Skyline of India

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

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

Source: Housing Skyline of India

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

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

Per household expenditure on durables (Rs. per annum) Mumbai (Suburban) Wayanad Mumbai Kinnaur Nainital Udupi Kolkata Solan Ludhiana

Source: Market Skyline of India

North Goa 0 5000 10000 15000 Source: Market Skyline, Indicus Analytics

20000

25000

30000

35000

40000

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.

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 Source: City Skyline of India

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.

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 Source: City Skyline of India

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.

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 Source: City Skyline of India – Neighborhood Series

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.

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.

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.

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. Source: Housing Skyline of India

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 lowcost 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.

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. Source: City Skyline of India

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.

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. 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 inmigration, 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.

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. Noninstitutional 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.