Indian retail market: here’s what’s driving consumption

India’s retail market has huge growth potential and is expected to grow by around 10% every year over the next decade. The Indian retail industry will then be worth US$2 trillion by 2032. In this article, we offer an overview of the key growth drivers and key growth segments of retail in India.

The pandemic has halted India’s steady consumption growth. The last decade has seen consecutive years of growth in the retail market, but the arrival of Covid-19 and the subsequent introduction of virus-induced restrictions have had widespread ramifications for consumer habits. Now, according to a new report from the Boston Consulting Group (BCG), India’s retail sector is back on track and will be worth a staggering US$2 trillion by 2032.

Titled “Running to India’s Next Wave of Retail” and published in late April, BCG said it expects India’s retail industry to grow by 9-10% every year over the next decade. The group said pandemic-induced disruptions were responsible for the 1-2 year delay in the historic valuation of US$2 trillion. “India’s economy continues to be consumer-driven and we are seeing consumption growth return to positive territory after the two-year Covid break,” said BCG Managing Director and Senior Partner Abheek. Singhi, commenting on the report.

Indian consumption, which was growing by around 10-12% in the decade to 2019, moved into negative territory during the pandemic. The sector has recovered in 2021, expanding by around 15-17% according to BCG. The retail sector, although not fully formalized, is a major driver of economic growth in India, accounting for over 10% of the country’s gross domestic product (GDP) and around 8% of employment . The figures, provided by the India Brand Equity Foundation (IBEF), suggest that India has the fifth largest retail sector in the world.

Factors Driving Consumption Growth in India

The steady growth in consumption over the past decade has been driven by socio-economic developments and an enabling environment, characterized in part by the growth of e-commerce platforms.

One of the factors driving consumption, as noted by BCG, is India’s growing wealth and population. Household income is expected to increase by 40% by 2030, with the average household income reaching INR 732,000 per year, or about USD 9,500. This is also a near doubling from 2010, when household income stood at INR 387,000, or just over USD 5,000 at the current exchange rate. Moreover, the number of households in India will continue to grow, reaching 354 million by 2030 from 289 million in 2020.

BCG also notes that accessibility is a factor favoring the growth of consumption. He points out that Indian households have increasing access to consumption avenues like shopping malls, shopping complexes and multiplexes while being more exposed to information and advertising via television and the internet. In fact, in 2020, Indian media reported that 100 new malls would be completed by the end of 2022. The growth of these malls has been tremendous, from three in 2000 to over 600 only two decades later.

While India’s retail market has been largely unorganized, the organized retail market grew by 50% between 2012 and 2020, according to government-backed investment facilitation agency Invest India. In 2020, the Indian organized retail market was valued at 12% of the total retail market. As such, there is clearly plenty of room for formalized retailers to grow. According to Invest India, the top retail categories by retail penetration are apparel and accessories (18%), consumer electronics (6%) and home and living (6%). These sectors will likely result in further formalization In the years to come.

Another factor driving the growth of the Indian retail market is increased internet penetration. Invest India notes that the country will become the third largest online retail market by 2030, with an estimated annual gross value of goods of US$350 billion. E-commerce grew steadily in the country, but exploded in the first half of 2021, likely supported by the unique circumstances brought about by Covid-19. Over the six months, e-commerce accounted for nearly a third of sales across multiple electronics categories, nearly half of smartphones sold and about a fifth of all apparel sales.

The next decade will see organized retailers focus on expanding their footprint, across all formats – offline and online – to fuel future growth. – BCG Managing Director, Singhi

E-commerce is expected to continue to grow in India as internet and television access improves. About 80% of households are expected to have internet access by 2026, while about a quarter of Indian households currently lack access to television, leaving plenty of room for growth.

BCG predicts that e-commerce sales will reach $130 billion by 2026, a huge increase from 2019, when online sales were just $29 billion. The Group points out that the share of online sales has increased two to four times between 2019 and 2021, as the pandemic has apparently accelerated the movement towards online retail. The IBEF says online retail penetration is expected to reach 10.7% by 2024, up from 4.7% in 2019.

BCG also points to improving consumer confidence as a driving factor for the retail sector. However, it should be noted that consumer confidence has not yet returned to pre-pandemic levels, according to the Consumer Confidence Index (CCI).

Growth areas and trends over the next decade

• As mentioned, the growth of e-commerce is expected to continue in India, like everywhere else in the world. This trend is likely to benefit established or international brands, who are already familiar with the online retail space. However, the Open Network for Digital Commerce (ONDC) – a government-backed platform-independent network (now in pilot mode) that will serve as an alternative to platform aggregators like Amazon and Walmart-owned Flipkart – may soon offer expanded opportunities for retailers smaller and local.
• McKinsey & Company recently Underline online grocery as an area that will see particularly rapid growth and where the entry of Reliance and Tata will boost competition.
• Online pharmacy is another growing market online. The development of this sector has been strongly linked to the pandemic, and online pharmaceutical retailing is expected to continue to grow as shopping habits change.
• India’s online fashion industry grew by 51% in 2021, according to a report by Unicommerce. The growth may also have been pandemic-driven, but it will likely represent a long-term shift towards online retail, mirroring moves we’ve seen elsewhere in the world.
• social commerce is also on the way to becoming another important growth market. With a high level of internet access and a relatively young population, India is expected to see growth in e-commerce through social networking sites like Instagram. The social media giant has invested heavily in advancing the retail options available on its platform.
• Consolidation of the market shares of the main distribution players. The BCG points out that the five main players in the sector hold only 5 to 7% market share in India. By comparison, that same statistic is around 30-35% in the US and 35-40% in the UK. Thus, there is considerable potential for market players to consolidate their position, especially as the Indian market becomes more and more organized or formalized.

Although we have identified the growth areas above, BCG expects the Indian retail market to grow on all fronts, in traditional physical and digital spaces.