It is like a story. A few centuries ago India was the world's wealthiest nation. There was no poverty, plenty to eat, trade was booming... riches abounded. Fittingly, it was called the "golden bird" by the rest of the world.

And then the rest of the world came calling: first the Mughals and then the Europeans, including the British. Between them, they plucked bare the bird of gold. By the time India became independent, it was a hollow shell riddled with poverty, illiteracy and crippling debt -- this was a fairy tale minus the happy ending.

Now, experts say the golden bird will fly again. A report on the Indian consumer market, prepared by the McKinsey Global Institute, points to explosive growth in consumer spending in the next two decades, taking the market to a jaw-dropping Rs 69.5 lakh crore ($1.5 trillion), four times the present size of Rs 16.9 lakh crore.

There's lots more good news in the 'The Bird of Gold: The Rise of India's Consumer Market,' released earlier this month by the consulting firm.

The report predicts that given sustained economic growth at 7.3 per cent (a conservative estimate, given current GDP growth is over 9 per cent), India will become the fifth-largest consumer market in the world by 2025. Incomes will triple over the same period and the middle class will balloon, leaving less than 18 per cent in the lowest income category.

Meanwhile, the country's wealthiest citizens will swell their ranks, adding more than two million people every year, even as their incomes and consumption levels increase 12-fold by 2025.

As consumption soars, incomes rise and the market explodes, the implications for business are immense. The strategist takes a closer look at the report's findings and what it means for Indian and multinational companies.

What it says
The predictions in "The Bird of Gold" are based on a proprietary econometric model designed by MGI based on a year-long study of the Indian consumer market.

Based on this analysis, MGI forecasts that over the next two decades, India will climb up from its present 12th position and overtake Germany to become the fifth-largest consumer market, behind the US, Japan, China and the UK.

What will trigger this boom in the consumer market? Essentially, says the report, it will be a combination of 'more income per person, more people and moderating savings.'

In the next 20 years, MGI predicts that average annual household incomes will grow from Rs 113,744 at a compound annual rate of 5.3 per cent to Rs 318,896. This will be 'inclusive' growth, affecting all income categories positively. The poorest will find their ranks halved as 291 million people move into higher income groups even as population increases by 322 million people.

'If this does occur, India's climb out of poverty will rank alongside China's as one of the great achievements in economic history,' the report continues.

Defining the middle-class as those earning between Rs 2 lakh and Rs 5 lakh annually, the report forecasts a dramatic change in the size of this group: from 50 million people (5 per cent of population), the middle class will swell to an impossible-to-ignore 583 million (41 per cent) by 2025. 

It is not about size alone: this group will control Rs 51.5 lakh crore by that time, an 11-fold increase; that's 58 per cent of total income in the country. A number of these people will be 'new-to-bracket' consumers, which means they will probably be aspirational and willing to try new products.

Meanwhile, the rich will continue growing, and growing richer. At present, they control just 8 per cent of total income in the country. By 2025, when their numbers would have multiplied eight times, that income will have grown 11 times to account for 24 per cent of total income.

A note about the rich: research, not just by MGI but also other organisations, points that the rich anywhere tend to have similar spending habits: they want branded apparel, overseas trips, cars and the latest gizmos and toys. Then, wealthier households tend to be smaller than the national average (which itself will drop from 5.4 to 5.1), which means their per capita spending is higher.

If those are not reasons enough to bring out the bubbly, here's the clincher for companies focusing on top-end customers: India's highest income brackets tend to be geographically concentrated.

You will find about 60 per cent in the top eight cities, and that won't change even 20 years from now, 'making them a relatively more visible and easily targeted segment than other income bands.'

More money in the hands of people is, of course, the most compelling reason for them to spend more (80 per cent of consumption growth will come from rising income, says the report). But overall consumption in the country will also remain a function of population growth.

Between 2005 and 2025, India's population will rise from 1.1 billion to 1.4 billion, a growth rate of 1.3 per cent a year. Since ours is a young country, most of this increase will mean expansions in the labour force, which, in turn, means more income and more consumers.

Location, location
Where can companies find these new consumers? No surprises here: urban India will continue to account for the lion's share of spending, more than two-thirds of the projected increase in consumption over the next 20 years, to be precise.

But even as urban consumption zips ahead at 9.4 per cent growth, rural India would not be too far behind with 5.1 per cent growth. The advantages for more companies? For one, their customers will become more accessible.

'The fact that India's fastest growth is occurring in more easily reached urban areas means that the percentage of the Indian market that is truly addressable will grow quickly over time,' agrees the report.

Then there's also the spillover effect. As urban India becomes home for 37 per cent of the country's population (up from 29 per cent), it will be boom time not just in the metros and top eight cities, but also in tier II and III towns and satellite townships.

'With higher per-capita spending, niche cities provide opportunities for many companies, and are becoming increasingly important in the national market,' the report sums up.

Who buys what
As people's wallets become fatter, their spending habits will change. Discretionary spending will increase from 52 per cent to 70 per cent of all spending by 2025, predicts MGI.

Perhaps the biggest change will be in the food, beverages and tobacco category, the share of which will drop from 42 per cent of average consumption budget to 25 per cent.

Still, the category will continue to grow in absolute terms (the change may perhaps be in the nature of spending -- from necessities to choice-driven purchases of food items, increased eating out and so on).

The fastest growth will be in communications, which will increase its share-of-wallet from 2 to 6 per cent, growing at 13.4 per cent annually. Spending on healthcare will nearly double, from 7 to 13 per cent, a growth of 10.8 per cent, while education and recreation's share-of-wallet will increase at 11 per cent a year, from 5 to 9 per cent.

The report predicts spending on personal products, too, will grow at a remarkable 9.2 per cent. But there's a caveat here: personal products includes jewellery and traditionally Indians 'invest' in gold, they do not 'spend' on it.

Similarly, there's an explanation for why household products will see their share of wallet increase only 6.9 per cent -- the easy availability of domestic help and infrastructure constraints (poor electrification and water supply).

Clearly, going by the report, Indian consumers' newfound wealth will not change them too dramatically. Their reputation for being cautious and demanding value for money will remain justified: most of the increased spending is in 'economically enabling' categories that will help consumers improve their productivity or better their chances in the workforce.

What it means
As the basic nature of the market changes, it will have strong implications for companies interested in selling products and services to consumers in India. There are a number of factors at play here. There is a large market, but it comprises mainly people not used to having large sums of discretionary income.

There is, at the same time, a significant increase in the number of consumers used to and willing to spend for the best.

What, then, is the best gameplan? How will companies emerge first in the field -- with volumes or value play? It is a question we have considered earlier, too, in the strategist and there is no correct answer. Consider the pros and cons of either strategy.

Value players will primarily target the middle and upper classes. They can offer premium quality products at prices comparable with those prevailing in other markets, focusing on customers in the top end. Yes, this will mean that the target group will be considerably limited and brand-owners will have to wait for the segment to sustain itself.

Companies playing the volume game have their own unique challenges. They can choose to drive price points down, accepting the resultant pressure on margins as the price they must pay. But that's not nearly enough. As the target group spills outward to tier II and III towns, these brand-owners will need to follow, suitably armed with distribution and service networks and seamless logistics support.

Moreover, companies that have been banking on low labour costs to keep prices down will find that won't work anymore -- as competition increases, wages will rise concurrently and companies will now have to focus on increasing productivity and improving quality.

For existing players in the Indian consumer market, the emerging challenges will be considerably different. They need to choose between catering to a growing customer base in the existing market, or following their upwardly mobile customers (and competing with new rivals who will try and lure them away).

The report predicts that the battle for new customers will be most hard-fought in the lower middle class, where taste will become more aspirational even as spending power increases.

This income bracket will probably see the most significant increases in choice-driven purchases and the challenge for companies is clearly spelt out: educate customers, create brand awareness and customise services and support functions to the segment's needs. Of course, the opportunity is equally unmistakeable: brand loyalties will not be yet established.

Is the sheen of the golden bird blinding you yet? Here's a reality check, also from the MGI report. 'On a per-capita basis, India will still be a developing nation, even in 2025. It would take over a century of growth at more than 7 per cent per year for India's per capita consumption levels to catch up with the United States (if the US market continued to grow at 2.5 per cent per year).'