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India Versus The West: The Real Costs Of Living

Business, China, Company Strategy, Economics, India
By John Richardson on 30-Jul-2015

By John Richardson

BigMacYumYumMY two recent blog posts on what it really means to be middle class in the developing world – “The Great ‘Middle Class Myth’ Further Exposed” and “Serving The Needs Of The Vulnerable Poor Majority” – have produced this very interesting response from one of my contacts:

I agree that using one yardstick across the globe does not help in understanding the real picture.  Affordability of most of the essentials of everyday life vary between different countries based on income levels.

So a Big Mac in the US  costs $3.99, but will still be affordable for just about everybody since minimum wages there are around $ 6-9 per hour.  

In India, minimum wages are 350 Rupees ($5.50) for a whole day’s work for unskilled workers, and 400 Rupees ($6.30) for semi-skilled workers.

But a Chicken Maharaja Mac, the equivalent of the Big Mac in India, costs around  Rupees 109 ($1.70) and so a burger in India for the vast majority of people is much less affordable than in the US. 

Also, there is no social security for people at the bottom of the pyramid in India.   

My contact then went on to calculate, based on broader measures of affordability, what the average person in the developed world spends as a proportion of her or his income on polymers versus the equivalent person in India. Here are his calculations:

  • On average, per capita consumption of polymers in the developed world is 100 kilograms. So, assuming a price of say $1,500/tonne for polymers in general, the average citizen in the world’s rich countries spends 0.0375% of their annual income of $40,000 on buying all the plastic wrapping, bottles and film etc. that they need.
  • In India, per capita plastics consumption is 10 kilograms. Again assuming a polymer price of $1,500 and with average incomes at only $1,500, this means that the average Indian spends 1% of their annual income on buying plastics.

He therefore concluded the following:

Being middle class in India or China cannot be carved out based on yardsticks used in the Western world. 

Hence, in order to really grow polymers demand in the developing world – and also to estimate future demand growth – you simply must take into account these kind of measures of real affordability. 

Sure, you might want to dispute the numbers I’ve used above and make your own calculations. But I guarantee that if you use other reasonable estimates of average income levels, prices and consumption you will end up drawing these same conclusions.

There is obviously nothing new in this kind of analysis, as the data about the vast gap between average incomes in the West versus the developing world has always been around.

But during the economic Supercycle, many commodity chemicals companies got away with ignoring this kind of approach as a rising tide of favourable demographics in the West and a booming China lifted all boats.

It was good enough to just take, say, the IMF or World Bank forecasts for GDP growth for a country like India and calculate chemicals demand growth as multiples over these estimates.

If you picked a multiple of polyethylene demand growth over GDP of 1.8 in one particular year when it turned out to be only 1.7 this didn’t matter, as the always favourable macroeconomic environment meant that this would not amount to a costly error. Growth would always quickly catch up and so minimise the consequences of your mistake.

But now, because the New Normal has arrived, we are in a world of lower growth GDP and greater volatility in that growth. The result is that the above kind of forecast error could well cost you your job.

Equally, you didn’t have to bother about being the lowest-cost supplier to a market such as India, and you also didn’t have to bother understanding the complexities of markets like India.

The reason again was that there was so much steady and reliable growth around that the pie was big enough to provide nearly every company with a decent-sized slice. This is no longer the case.