India’s Growing Middle Class Impacts Foreign Investment Strategies!


The impact of shifting demographics isn’t limited to US elections and its economy. Changes underway in India and throughout Asia driven by the rise of the middle class are redefining consumer buying patterns, production capabilities —and ultimately foreign direct investment strategies.

FDI patterns, in fact, are changing rapidly in the face of new Indian regulations in recent months that first opened up investment opportunities for single-brand retailers and more recently multi-brand retailers. In the last few months alone, major global brands have rushed to establish stakes in the Indian market to capture a share of the country’s expanding middle class purchasing power. These recent moves underscore something of a de-emphasis of traditional foreign investment strategies that focused on backing the inexpensive production of goods in India that were ultimately destined for other countries.

In October, for example, India’s first Starbucks coffeehouse opened in downtown Mumbai, making the world’s second most-populous state the 61st country to play host to the U.S.-based coffee giant. Within days of the first opening, two more branches popped up, one of them inside the world-famous Taj Mahal Palace Hotel.


While certainly not the first foreign-owned coffee outlet to set up shop in India, Starbucks’ entry into the market signals a landmark demographic, cultural, and socioeconomic shift in Indian society.

The Starbucks invasion was followed within weeks by an announcement from IKEA, the world’s largest furniture retailer, that it was proposing to invest INR 10,500 crore (US$1.9 billion) in India through a 100 percent owned subsidiary and open 25 retail stores across the country.

Other recently approved single-brand retail FDI include British footwear retailer Pavers England, which plans to open fully-owned stores; U.S. clothing designer Brooks Brothers’ move to launch a 51-percent joint venture; and Italian jewelry manufacturer Damiani’s plan to enter the Indian market through a joint venture.

More recently, new regulation have opened the way for FDI in multi-brand retailers of up to 51 percent. These changes are expected to spur significant economic development throughout India via an influx of investment and development that will come from the likes of global retailers like Walmart and Tesco.

The shifts in Indian regulations and the anticipated growth in related investments certainly reflect significant changes in India’s demographics. The country, which has been developing rapidly since the initiation of a string of IMF-encouraged market reforms in 1991, now boasts a 250 million-strong middle class with increasingly significant purchasing capabilities. However, while the hour-long cues at the newly opened coffee outlets are certainly indicators of wage growth, they also point to a newfound brand-lust.

It is not that Starbucks is necessarily of higher quality or even much more expensive than already-established international chains such as the UK’s Costa Coffee and the U.S.-based Coffee Bean & Tea Leaf. Their fatal flaw is simply that they are not Starbucks; the same way Wendy’s is not McDonald’s.

What makes Starbucks’ expansion so significant is that India’s middle class (which has been sizable for years, but known for its financial frugality), is now increasingly willing to pay a premium for premium international brands. Perhaps more importantly, foreign companies appear increasingly likely to gamble on making direct investments to tap into this growing brand desire.

India certainly isn’t alone among Asian countries in seeing the impact of its expanding and consumer-oriented middle class. China, among others, is witnessing similar changes, which some analyst maintain will make this country the world’s leading importer by 2014.

What may be of greater importance is how demographic and regulatory changes in India and the region impact the balance of FDI. In effect, will foreign concerns increasingly shy away from export production investments in favor of supporting internal consumer brand purchases?

This post has been written By Daniel Fleishman of India Briefing (a unit of Dezan Shira & Associates). Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. For further details or to contact the firm, please email [email protected]

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