By Devangshu Dutta (Column from The Financial Express - 27 April 2006)

In my previous column ("Deal Ya No Deal", 9 March, 2006), I raised a point about unrealistic volume expectations on the part of many marketers launching new products and brands in India.

In some part these are due to the marketer believing his or her own hype. However, a more insidious influence on the expectations are the unrealistic assumptions - a big factor being the incorrect assumption about the size of the market.

Back in the early days of economic liberalisation, during 1993-94, I remember figures being thrown about that talked about the 200-300 million middle class. Multinational and Indian consulting firms, in the slick presentations on behalf of Indian clients pitching partnerships to foreign companies, fed the legend. (Hey, let's face it, for a while I, too, was part of that game!)

Well, for the last two to three years, those times have been upon us again. The difference is that, instead of hiring consultants, Indian companies have smartened their act, hired a few (or a few dozen) young MBA's, who are making the exact same pitch to potential international partners again.

As a fall-out in my own small little corner of the world, I have been severely troubled by several international clients and associates whose first question is: "Just how big is India as a market?" and I must say that not many of them like the answers I have given them.

Foreign companies' first attraction to India is the billion-plus population. Brands from countries which have domestic markets of 50-300 million salivate at the prospect of 1.2 billion Indians starving for their particular make of biscuit or coffee or the latest backless cropped blouse. The thinking goes, "If we can capture even 2% of the market to start with…

Let's stop dreaming and tell the truth for a change. And I promise you, the truth is still very palatable - you just need to shift your perspective a bit.

The simple fact is that, if we were to evaluate incomes, spending and consumption the way they are evaluated in the developed markets, even allowing for purchasing power parity, the Indian "Middle Class" is possibly less than 20 million individuals.

"What?! But that's less than 2 per cent of the Indian population," has been the anguished reaction of many international marketers that I have spoken to in the past year or so. Followed by, "Where are you pulling out these figures from?"

The answer to the first question is: "that's correct". And the answer to the second question is: the sample survey carried out by the National Council for Applied Economic Research (NCAER) over the past few years focussed on household income.

Let's consider the figures that NCAER has been coming up with. In its figures for 2001, NCAER estimated that approximately 2.5 million households earned above Rs. 500,000. The reason I see the Rs. 500,000 figure as important is because, in absolute terms in the Indian, context it is a good benchmark - about Rs. 40,000 per month - by which to categorise the middle class. Also, in relative terms, adjusting for PPP (say a factor of 3.5), this is an annual income of about US$ 40,000.

After allowing for mandatory household and other expenses, these (or higher) income levels do leave a good margin for discretionary spending. This population has much greater access to the stimuli and information that international marketers rely on to build a brand presence across borders. Other sources of brand and product influence include overseas travel (or relatives travelling in from overseas).

NCAER has dubbed the class earning between Rs. 500,000 and Rs. 1,000,000 as "the Strivers", and that I believe is the most apt definition of the middle-classes across the world.

Currently, the estimate for this population would be over 3 million households, or about 18-19 million individuals. That then, my friends, is the size of the middle class, to be targeted by international companies and premium Indian brands.

Ouch! that was the sound of thousands of dreams shattering and hundreds of business plans going into waste-bins!

Come, come, let's pick the pieces up and look at them afresh.

Firstly, a population of 19 million is no small market by itself. Many of the international brands' home markets are about the same size - Australia's population is a little over 20 million. Italy's total population is estimated at about 58 million and UK's slightly above 60 million, and so on. The problem is that when you start with a reference point of 1-billion, a figure in the vicinity of 20 million looks very uninteresting. So, the first solution is to shift one's initial perspective on the Indian market.

Secondly, a significant part of this target population in India is concentrated in a few large cities in the country. This makes it easier to target this consumer group, rather than dispersing the budget and management effort across a very large number of locations. The reality is that most national brands can achieve a bulk of their sales from the top 8-12 cities in the country, and there is no reason why the story should be any different for international brands looking to create a new presence in the market.

Third, and very important, I would challenge you to show me another similar population anywhere else in the world (other than China), which is growing at the rate of 11-12% a year i.e. doubling every 6-7 years. This is certainly not because the upper income classes are producing babies at a more prolific rate - it is the rise in real incomes and the wider distribution of wealth through greater business opportunities for businesspeople and increases in salaries for the employed.

So, as an international brand, or as a premium Indian brand, by the end of this decade you're looking at a potential market of 30-40 million consumers.

Now, that number is a respectable market anywhere in the world. What's more, on the back of the growing market, if you launch your products now, you're looking at very healthy business growth rates over the next few years.

"But where is the mythical 200-300 million middle class?" was the third painful question raised by our clients and associates, "Do they really exist and how do we reach them?"

But that, my friends, is the next column.

The author is chief executive of Third Eyesight. ( www.thirdeyesight.in )