BNP Paribas Report: The Surge of Higher-Income Earners Is Fueling India’s Consumption Boom; But Is This True In Its Entirety Or Are Their Flaws In This Report?

A comprehensive analysis conducted by BNP Paribas using Income Tax Department data reveals that the number of Indians in the income bracket (earning more than 5 lakh per annum) has surged by five times over the past decade, from 3.8 million in FY12 to 18 million in FY21. 

Here are the crucial points of the report:

1) Income has risen for these households over the last decade, complemented by improved credit availability; thus, their propensity to consume and invest has grown.

2) The I-T department data provides insights only till FY21. However, the report suggests that the numbers only grew stronger after that. “While the income tax data is available only till FY21, a pandemic-hit year, we think these numbers should have been even stronger in FY22 and FY23, which were recovery years with strong wage inflation”.

The Growth Drivers

So what has contributed to this surge, according to the report?

1) The rise in higher-income individuals is primarily attributed to the robust growth of the services sector, including IT services, financial services, and others. 

According to the report, while this segment still represents a relatively small proportion of India’s households, its rapid expansion suggests that companies deriving a significant portion of their revenue from these households are well-positioned for growth.

BNP Paribas contends that these affluent households, constituting approximately 10% of India’s population, are poised to drive growth in various industries. 

Based on this premise, the report identifies several select stocks that are likely to benefit from this trend, including Maruti Suzuki, Eicher Motors, ITC, Nestle, United Spirits, Titan, PVR INOX, IndiGo, Indian Hotels, Oberoi, Apollo Hospitals, ICICI Lombard, Bharti Airtel, HDFC AMC, Nykaa, Havells, Voltas, and SBI Life.

Sectoral Advantage

The report further suggests that certain sectors, such as automobiles (specifically four-wheelers), financial services, jewellery, hotels, real estate, cigarettes, multiplexes, and hospitals, have a structural advantage in registering faster revenue growth compared to sectors catering to the mass market, such as FMCG and two-wheelers. This divergence in consumption patterns can be attributed to several factors.

Divergence in Consumption Trends

One of the key factors contributing to the divergence in consumption patterns is the post-Covid-19 pandemic economic landscape. 

For instance, while four-wheeler sales have exhibited steady growth over the past decade, two-wheeler sales have faced challenges.

A Shift in Income Distribution

The analysis reveals a significant shift in income distribution. The number of taxpayers earning between Rs 5-10 lakh, Rs 10-20 lakh, and Rs 20-50 lakh per annum has grown at impressive compound annual growth rates (CAGR) of 17.6%, 20.8%, and 21.6%, respectively, between FY12 and FY21. 

In contrast, the number of taxpayers earning less than Rs 5 lakh per annum has grown at a comparatively slower CAGR of 7%.

Moreover, the percentage of individuals earning below Rs 5 lakh per annum decreased from 86.8% in FY12 to 72.2% in FY21. 

This trend reflects the impact of the COVID-19 pandemic on income distribution, with those earning above Rs 5 lakh per annum continuing to rise while those earning between Rs 1.5-5 lakh faced declines.

Now that we have seen what the BNP Paribas report says let us look at some ITR numbers and supposed consumption patterns.

1) Income Tax data from 2012 to FY21 reveals significant changes in income distribution among taxpayers in India.

2) The analysis shows a substantial increase in individuals earning between Rs 10-20 lakh per year and above Rs 20 lakh per year, while those earning less than Rs 5 lakh per year decreased notably, partly due to the pandemic.

3) Specifically, there was a 25% rise in the number of individuals earning Rs 20 lakh per year, and those with incomes between Rs 10 lakh and 20 lakh per year increased by 24%.

4) Conversely, the number of individuals earning less than Rs 5 lakh per year declined by as much as 20%.

5) This shift has resulted in a higher proportion of Income Tax Return (ITR) filers falling into the higher-income brackets.

6) Between 2012 and 2021, the number of ITR filers earning more than Rs 10 lakh per year increased by 20%, compared to a more modest 4.5% increase among those earning less than Rs 5 lakh.

7) In FY12, 80.7% of ITR filers earned less than Rs 5 lakh annually, which decreased to 54.5% in FY21. The share of filers earning between Rs 5 lakh and Rs 10 lakh increased from 13.8% in FY12 to 33.1% in FY21.

8) The sale of four-wheelers grew by 53% between 2012 and 2023, while two-wheelers saw more moderate growth at 22%.

9) Evidence of faster consumption of premium cellphones and larger apartments compared to cheaper alternatives supports the notion of changing consumption patterns.

11) The attractiveness of the Indian consumer market has led to significant investments by global giants, such as substantial spending on cricket World Cup advertisements, underlining the economic significance of India’s consumption surge.

The Viewpoint

The surge in the number of Indians earning over Rs 5 lakh per annum may have driven India’s consumption surge. 

Understandably, the transformation in income distribution has the potential to reshape various industries and influence consumption patterns. 

However, as with any analysis, it’s essential to scrutinize the data and consider factors like inflation, currency devaluation, etc., to gain a comprehensive understanding of the evolving economic domain in India.

Question 1: Have they taken into account inflation? 

Indian rupee devalued by more than 70% vs. the dollar from 2012: Understanding the role of inflation and currency devaluation in income analysis is essential; more questions in this context:

• Does the report provide information on the methodology used to account for inflation in income calculations?
• Can the report elaborate on how the Indian rupee’s devaluation against the US dollar has affected income trends and purchasing power?
• Is there a distinction made in the report between nominal and real income growth?

Question 2: Evaluating the impact of currency devaluation on purchasing power is critical for, e.g. the depreciation of the Indian rupee and its consequences on everyday expenses?

Question 3: Are there regional variations in India’s income growth and consumption patterns?

Recognizing that India is a vast and diverse country, it’s important to consider whether income growth and consumption patterns vary significantly across regions. 

• Does the report provide insights into how income growth and consumption patterns differ between urban and rural areas?
• Are regional disparities in the types of industries or sectors experiencing the most significant growth?
• How might regional variations impact overall economic trends and policies?

Question 4: What role does government policy play in income distribution and consumption patterns in India?

Government policies, such as taxation and social programs, can have a profound impact on income distribution and consumption, thus:

• Does the report analyze the influence of government policies, such as tax reforms, on income trends?
• Are there policy recommendations in the report that address income inequality or support equitable consumption growth?
• How might changes in government policy affect the trajectory of higher-income earners and their impact on the economy?

The Last Bit, India’s economic landscape is experiencing a notable shift, with a flourishing population of higher-income earners wielding significant influence over consumption patterns and economic growth; as this segment continues to expand, it presents both opportunities and challenges for various industries and policymakers.

While the BNP Paribas analysis sheds light on this transformative phenomenon, it’s essential to critically assess the data and consider the role of inflation and currency devaluation in income calculations, as these factors are pivotal in understanding the real purchasing power and economic impact of rising incomes.

Moreover, this evolving narrative should not overlook regional variations, government policies, and the resilience of income distribution.