The duo launched a wide-ranging set of reforms that would liberalize the Indian economy. The reforms embodied several key elements:
Dismantling the License Raj—promoting competition in more than seven hundred industries previously protected and reserved for small and medium-sized enterprises. This helped many manufacturing companies achieve efficiencies and become competitive, because they were no longer subscale.
Supporting international trade by reducing the costs of import licenses.
Removing protectionist measures that stifled foreign direct investment and actively courting foreign multinational companies to invest in India. This has resulted in the opening up of most sectors for foreign direct investment.
Launching a program of privatization, with full or partial sales of the government’s stake in state-owned enterprises.
The economic miracles of China and India, spurred by fundamental reforms begun two decades ago, have now driven a boom of productivity gains that will remain strong and even strengthen in the future. By 2029, if not sooner, China will have surpassed the United States as the world’s largest economy (figure 1-3). By 2028, India will likely have surged past Germany and Japan, establishing itself as the world’s third-largest economy.
China’s productivity growth rate is forecast to be particularly strong in the current decade as its workforce gains experience, and growth tapers only moderately after 2020. India’s productivity growth has been more sluggish and starts from a lower base, but it is predicted to grow strongly in the next three decades, as education and infrastructure improve, urbanization accelerates, and an abundance of young and energetic citizens enters the workforce.
Productivity is important because it strongly correlates with the growth of personal incomes—which, in turn, will fuel the consumer revolution. The increased consumption that results is proportional—we have coined it the $10 trillion prize.
We calculate that between 2010 and 2020, the people of China and India will consume goods and services worth a total of $64 trillion. Chinese consumers will spend $41.5 trillion over this period, with annual expenditures rising from $2.0 trillion to $6.2 trillion, an increase of 203 percent. Indians will spend $22.5 trillion, with their annual expenditures rising from $991 billion to $3.6 trillion, an astonishing 261 percent increase (figure 1-4).
In other words, Chinese and Indian consumers will be spending nearly $10 trillion a year by 2020—more than three times the amount they are spending today. Their combined share of the global market will grow from 8.2 percent to 15.7 percent.1 In appendix A, we describe the mosaic of cultures in these two vast and heterogeneous countries and explain how a local market understanding is required for success.
Of course, there is uncertainty in any forecast of the future—forecasts presume stability, and in the real world, they can be knocked off course by economic downturns, natural disaster, political instability, and corruption. In appendix B, we issue a word of warning, highlight what we call the hit-the-wall scenario, and explain why the road to the $10 trillion prize could potentially be a rocky one.
FIGURE 1-3
GDP levels for the five largest economies, 1960–2030
Nevertheless, for Chinese children born in 2009, continued economic progress will probably mean that over the course of their lives, they can expect to consume thirty-eight times more material goods than their grandparents (figure 1-5). Life expectancy has grown from forty-seven years for a Chinese baby born in 1960 to seventy-three years for one born in 2009. An Indian baby born in 2009 can expect to live to the age of sixty-four—twenty-two years longer than its grandparents—and consume thirteen times more material goods than its grandparents, too (figure 1-6). In comparison, a child born in the United States in 2009, although likely to enjoy the world’s highest standard of living, might consume only twice as much as his or her grandparents and live only nine years longer.
FIGURE 1-4
Consumer spending in China and India: the $10 trillion prize
The big reason for this growth in the standard of living in China and India, which will put enormous pressure on global supply, is rising incomes. From 2010 to 2020, annual per-capita incomes will increase, on average, from about $4,400 to $12,300 in China and from $1,500 to $4,400 in India (figure 1-7). As a result, China’s upper class will grow from 24 million to 91 million households, the middle class will grow from 109 million to 202 million households, and the lower class will shrink from 260 million down to 138 million households (figure 1-8). The number of people living on less than $1.25 a day—the international poverty line—will fall from 208 million to 150 million. India’s upper class will rise from 9 million to 32 million households, the middle class will jump from 63 million to 117 million households, and the lower class will decline from 152 million to 110 million households. The number of people below the poverty line will fall from 455 million to under 200 million.
FIGURE 1-5
Lifetime consumption patterns in China
Average incomes in the United States will grow more slowly, but they are still likely to be considerably higher than those in China and India—$68,800 per year in 2020. But it is the tripling of incomes in the world’s most populous nations that will really drive global growth and patterns of consumer spending.2 According to our research, one of the paradoxes of the modern world is that those who have little feel rich, while those who have much feel poor and threatened. And over the next forty years, those who have little will grow ever richer. In a recent report, the investment banking division of HSBC goes far beyond our forecast time frame, arguing that between 2010 and 2050, per-capita income will increase by 800 percent in China and 600 percent in India.3
FIGURE 1-6
Lifetime consumption patterns in India
Another reason for the growth is that the newly affluent consumers will eventually dip into their extensive savings and tap into consumer credit. In China, consumers, companies, and the government save a staggering 53.6 percent of gross domestic product (GDP), while in India, the figure is 33.6 percent. In the United States, just 9.8 percent of GDP is saved for future use.4 The savings from all sources fund a significant share of capital reinvestment. If even just a small proportion of these savings were diverted to pay for goods and services, it would amount to a massive, incremental “wall of money.” This represents an upside case to the $10 trillion prize—taking the size of the prize to $13 trillion.
FIGURE 1-7
Per capita income in China and India, 1960–2020
Chinese consumers continue to save at a prodigious rate, particularly in the face of declining GDP growth. They remain concerned about the lack of a social security net, the rising cost of education for their children, and the need to provide funds to their male children to buy a first apartment. According to our 2012 surveys, attitudes among young consumers, especially those under the age of twenty-five, reflect a similarly conservative outlook and an interest in maintaining high savings rates—young people are now more willing to park