Mind the Gap: India 1-2-3

The Indus Valley Report 2024 recently came out. This report’s release has become a bit of an annual event for the Indian Startup Ecosystem. Great macro-economic research centred around the Indian Startup Ecosystem, dubbed as the new-age Indus Valley, think silicon valley ++ India. This is its 3rd edition, by a leading Indian VC firm, Blume Ventures. The most cited section of the report has been the classification of Indian consumers into three sub-sets - India 1, India 2 & India 3, which is now a standard ppt slide across strategy presentations about the Indian Market.

It was Kishore Biyani who came up with the India 1-2-3 framework in his book “This Happened in India” back in 2006. Hardly surprising, considering his legacy with Big Bazaar. I was given this book by a professor at SIMB Pune after a business quiz in 2011 but I never actually got to reading it and after over a decade on my bookshelf, it only came out after Nikhil Kamath’s WTF podcast on Indian Big Retail/e-commerce in India with Sudeep Kumar of Udaan, Vidit Atrey of Meesho alongside Biyani. His wisdom & deep understanding about Indian customers, aged over multiple pre-big-data decades was apparent and felt rather fresh on a podcast.

My theory is that India is divided into three parts, according to levels of consumption – India 1, India 2 and India 3. India 1 is the consuming class, anybody who has domestic help is for me the consuming class. By consumption, I mean not simple consumption but some value-added consumption. India 2 is the serving class that makes our lives better, for example, the helpers, the peons, the watchmen. And for every one India 1 there is 3-3.5 India 2. And unfortunately India 1 does not give enough money to India 2 to help them consume discretionary products. Then there is India 3 that includes farm labourers, factory workers.

India 1 is about 11-13% of our population, the top 30 million households in India, equivalent to Mexico. India 2 is about 80 Million households, equivalent to Indonesia (Population) + Nigeria (Income) about 20-22% of of our population and India 3 is equivalent to Sub-Saharan Africa, both in terms of population & income which is fighting for survival on a daily basis.

The India 1-2-3 framework while being a smart method for macro-analysing Indian consumption is also the a reflection of the widening wealth-gap within the country. India 1 while being equivalent to a Mexico also holds a subset of a Singapore within itself, the 1%.

As Biyani says, “Whatever you want to show, you can show, India is that kind of a country”, a bunch of countries within one country from Singapore to sub-Sahara Africa. Some entrepreneurs, especially in the early VC days were able to project the Indian market as the next China and convince hyper-inflated valuations (eg. PayTM, Byju’s and some). There is finally a consensus that the monetisable TAM, SAM & SOM is much smaller. Post-covid the valuations of Indian startups and sadly ambitions of many young Indian entrepreneurs have both gone through a reality-check.

Our GDP is heavily dependant on domestic consumption, contributing almost 60% towards the GDP. While the Indian 1% (also, known as the Octopus Class) is still a major consumption-driver with a pretty huge appetite, early signs of growth-stagnation within the overall India 1 is now starting to become apparent. Making India 2 & India 3 reliable consumers would actually be a more robust strategy towards scripting that still-elusive India growth story. The government & privately-invested players would need a more long-term play especially towards India 2 & India 3. The need for grass-root level welfare and creating a level playing field towards basic human necessities will help in creating a flywheel for a more resilient growth model. The need of a helping hand from the government & private players is much higher now to really wake this sleeping giant up.