As India's economy grows rapidly, consumer spending is on the rise. A new generation of young spenders are changing the way middle-class India lives - and fueling even more economic growth.
For generations, Indians lived by the mantra "Save first, spend later." That is being overturned across the country as middle-class consumers buy everything from cars to clothing at a faster rate than ever before. They also are spending more money in restaurants, coffee shops and new multiplex theaters. Economists say this surge in spending is helping drive economic growth even higher.
Vatsala Mishra at consulting firm KSA Technopak has been tracking consumer spending over the past four years. "Savings as part of the total income was as high as 12 per cent when we started the survey in 1999," she says. "That has come down to five percent. That's a huge, huge drop."
The expanding middle class is fueling the boom in consumer spending. This includes young university graduates who have landed good-paying jobs in businesses that did not exist a few years ago, such as call centers, information technology companies, and retail chains.
These young professionals are eager spenders, and are willing to borrow money to enjoy better lifestyles. India's financial institutions are eager to tap this market.
Bidisha Ganguly, a senior economist at the Confederation of Indian Industries, says more Indians are living on their future earnings than ever before, as banks offer to finance all sorts of consumer goods. "Earlier India never had an active consumer finance segment. This has happened for the first time, banks are actively lending to consumers," she says. "So people are using finance to buy everything starting from housing to consumer durables."
For decades, high interest rates prevented Indians from borrowing money, and the very word "loan" was taboo in middle-class families. But in the past five years, interest rates have been nearly halved, making credit more affordable.
At the same time, cable television has exposed people to Western lifestyles, which often seem to involve more consumer goods. A liberalized economy has brought a range of imported products into India - new car models and international brand names such as Nike, Reebok and Benetton.
Sachin Khandelwal is in charge of vehicle loans at ICICI Bank - one of the largest Indian banks. He says credit is being snapped up as fast as it is offered. "Six years ago if somebody took a loan his grandmom would howl at him, his parents would howl at him, "Why do you take a loan?" That attitude has changed," says Mr. Khandelwal. "That entire change has come because the younger generation is more aspirational, it has much more exposure and there are all those brands available… And they want the deluxe version of everything."
With 70 percent of India's population of one billion under the age of 35, that is a huge market to tap. It includes people like Ranjana and Ashrujeet Bhattacharjee - a couple in their early thirties with a two-year-old son.
In the past three years, they have taken out three loans to finance two cars and make an advance payment on a new home. Ranjana says their jobs as television producers gave them the confidence to borrow nearly $40,000. "Even if I feel tomorrow I won't be able to keep this job, I think it is something to do with the boom factor in the economy, that maybe one feels I will be able to do something else, I will be able to sell something and manage to pay back the loan," she says.
The rise in consumer spending is not just a big city phenomenon. In smaller towns, people want to buy televisions, refrigerators and two-wheeled vehicles, and banks are opening retail outlets across the country. Consumer financing is now available in four hundred Indian cities and towns, compared with less than a hundred a few years ago.
Retail bankers say lending to consumers grew by approximately 20 percent last year - and is expected to continue growing at the same rate for at least two years. So far, banks are not worried about being stuck with unpaid consumer loans, because they say it appears India can expect steady economic growth for the next several years.
The increased consumer spending has attracted the attention of multinational and Indian companies. Fast food chains such as McDonald's, auto giants such as Hyundai, or mobile phone companies like Motorola are making deeper inroads into the country to tap India's huge market. As they establish manufacturing facilities or retail outlets, they create more jobs, giving further momentum to growth.
In fact, economists say consumer spending, which is expanding at 12 percent a year, is one of the factors driving India's overall economic growth.