In a 2007 study titled The Bird of Gold, McKinsey Global Institute predicted that total private domestic consumption in India - the key catalyst for economic growth - would quadruple by 2025, making the rising Asian giant the world's fifth-largest consumer market.
Propelled by its middle class - a 300 million-strong earn-and-burn generation that is fast shedding the spartan lifestyle of previous generations - India is firmly on a high-growth trajectory.
Several consumer surveys seconded the McKinsey hypothesis, using it to defend the once-popular economic theory of "decoupling": with healthy domestic consumption, emerging markets such as India remained largely insulated from the shocks of recession that plagued many developed economies since 2008.
But in recent months, consumer analysts have indicated a hole in that hypothesis: it does not factor in the fluctuations in consumption patterns caused by inflation.
Inflation - which Credit Suisse calls "India's horror show" - has remained stubbornly high for the past two years, driven by rising prices of food, energy and manufactured goods. It was 9.06 per cent in May compared with 8.66 per cent in April and is the highest rate among the world's leading emerging markets. With the recent hike in the price of diesel, liquefied petroleum gas and kerosene, analysts warn that inflation could soon breach the double-digit mark.
Last year, overall consumer prices rose 13.2 per cent in India, the highest rate in Asia, according to the IMF.
With rising prices, India's economy - projected until just a few months ago to be on the cusp of double-digit growth - now risks losing its momentum. GDP expanded at an annual rate of 7.8 per cent in the January-March quarter of this year, the slowest pace in five quarters.
Last month, in a bid to quell inflation, the Reserve Bank of India (RBI) raised key interest rates for the 10th time since March last year, despite warnings by policy analysts that high interest rates could dent domestic consumption and investments.
Analysts predict that the RBI will announce the 11th rate hike in its policy review meeting on July 26.
"The economic slowdown has been due to a near collapse in the investment cycle," says Rohini Malkani, an economist with the investment bank Citi India. "Consumption has held up relatively well due to rising incomes as well as gold now being used as a productive asset. However, higher rates could take a toll on both investments and consumption."
For ordinary Indians, inflation - decried as a tax on poor people that erodes savings and cuts discretionary spending - has become a way of life. The vexing issue has sparked angry street protests several times this year, and in the past it has led to several governments being voted out of power.
Middle-class Indians are calibrating their lives to adjust to high prices of food and durables. Analysts note that they are not so much cutting back on spending as they are changing the way they spend. The middle-class culture of "conspicuous consumption" is rapidly changing to "conscious consumption". Inflation has made consumers more price-sensitive - they now increasingly try to maximise what they get for their spending.
Indian families typically spend between 30 per cent and 60 per cent of their monthly earnings on food alone. Rising food prices are therefore having a hard impact on hundreds of millions of households. But not every grocery aisle in India is prone to inflation.
A study conducted in December by the Boston Consulting Group (BCG) in four Indian cities found that large retail stores offer consumers at least 6 per cent more monthly savings on groceries compared with the millions of small neighbourhood stores that dominate the retail sector.
"These [savings] can be used to pay one month's electricity bill or a premium for a systematic investment plan to secure one child's future," BCG said in its study.
Modern supermarket chains - such as Reliance Retail, led by the tycoon Mukesh Ambani; Spencer's Retail, owned by the Mumbai-based RPG Group; and More Retail, controlled by the Aditya Birla Group - offer refrigerated cases and a large variety of products including fresh produce and meats that are neatly packaged, accurately weighed and economically priced. This helps to curb waste and reduce prices.
A 2007 study by the credit ratings agency Crisil reported that about 1 trillion rupees (Dh81 billion) worth of food was lost annually because of poor warehousing and other deficiencies in the supply chain. The Confederation of Indian Industry, a lobby group, says organised, large-scale retail could lead to cumulative national savings of between US$25 billion (Dh91.82bn) and $30bn - almost half a per cent of GDP - by 2020.
Many of the new supermarkets, which are emerging as the preferred shopping destinations for the rich and middle class alike, offer various discount schemes. For example, 10kg of sugar, 5 litres of cooking oil and 10kg of flour may be bundled and sold at a discount.
As inflation has risen, many of the new supermarkets have recorded near 10 per cent increases in grocery sales in recent months.
But industry experts accuse the government of choking the growth of this $28bn sector. Retail remains heavily regulated, with strict limits on investment from overseas. Foreign investors are allowed to own up to 51 per cent of stores that sell one brand of products only.
A retailer such as Walmart, which sells more than one brand of products, is allowed to operate in India only through franchise tie-ups with local partners. Such businesses have lobbied the government for years to allow 51 per cent foreign ownership of multi-brand retailers. That would remove the need for franchise partners and enable the retailers to woo India's vast consuming class directly.
BCG estimates that retail sector that includes stores such as Walmart has the potential to grow to $260bn by 2020, but there is a pressing need for investment of $60bn over the next decade to achieve that. That level of investment can be realised only if India relaxes its restrictions on foreign investment.
"This is a very capital-intensive business," Rajan Bharti Mittal, the managing director of the retail giant Bharti Enterprises, said last year. "We should allow investors to come in and create a viable ecosystem for the retail business."
The government, which is currently considering a proposal to deregulate the sector, says it fears modern retailers can decimate the small, traditional family stores, which employ 40 million people across the country.
