Large Denominator Effect

India has been termed as one of the leading growth engines by many an economist. Rightly so, over the last decade India has witnessed strong economic growth. Fast growing economies attract business and capital seeking higher returns.  An unexpected benefit of this growth has been economic research done on the country. The spotlight has brought a whole host of economists, financial analysts, business leaders and politicians writing/talking about India. I find this very fascinating as it is always interesting to read about different view. You can always compare and contrast views between Indian authors and foreigners, between the optimists and pessimists, between the story tellers and the number crunching analyst.

A lot of these economic publications and analysts talk about low penetration of products thus implying even a slight increase in penetration would lead to explosive growth in the sector. Some of the charts below are rather interesting.

 

 

 

Let’s revisit the basic tenets of division. If the denominator is larger than the numerator, the resultant number is less than one (tiny is an accurate word to describe it in the context of India’s population being the denominator).

As the graphs above prove, on every parameter involving population, India will always have a low per capita number. And the reason is purely because of the large denominator effect.

To look at this number and then say that India has a large way to catch up with other countries, thus concluding that demand for the underlying product / service is bound to grow exponential is fool hardy. Yes, demand for products and services will rise as consumption and demand rises due to the growth in the economy. But the rate of growth for each product will follow a hierarchy of needs of the consumer.

To examine the potential for growth for each of these products we need to understand the income and expenditure pattern of Indians. The table below provides an indicative spending habit of an employed individual in an Indian metro city

Breakup of Expenses:

Total Income	100
Savings	30
Rent (Metro)	25
Food and Living expenses	30
Miscellaneous	5
Free Income	10

I have started with Savings first, because that’s the first thing an Indian thinks of. Over the past decade the savings rate has been between 30-40%. Save for a rainy day, is the clear mantra.

I have broadly tried to account for other elements of cost of living, resulting in a free income of around 10%. I tend to believe, that any reduction in other heads, usual creeps into savings.  

Let’s assume the above percentages are accurate, we are now talking of about a 10% figure. What this essentially means, is that all these products which do not fall under the necessary requirements of an individual are competing for a share of this 10% of the individual’s income.

Trust me there are a huge number of products competing for a share of that wallet. If an ice cream manufacturer is under the impression that he is competing with other ice cream manufacturer or even broadens his ‘competition’ horizon to desserts as a segment, he is mistaken. The positive though is that there is still a large denominator.

P.S: Just because you can use excel, doesn’t mean you pass of numbers as analysis