Booming Economy, Uneven Recovery: Decoding India’s Consumption Story
Exploring India’s consumption trends post-pandemic, highlighting disparities and opportunities in the dynamic consumer market.
India’s economic landscape paints a contrasting picture. While the nation surges ahead as one of the world’s fastest-growing economies, poised to become the third-largest consumer market by 2026, household consumption growth exhibits a K-shaped recovery, marked by significant disparities across various segments. This article delves into the data to analyse the underlying factors.
India’s Rising Consumption Powerhouse Status
India’s household consumption has witnessed a remarkable trajectory, nearly doubling over the past decade to reach USD 2.1 trillion in 2023. This translates to a robust annual compound growth rate (CAGR) of 7.2%, surpassing economic powerhouses like China, the US, and Germany. This highlights the nation’s immense potential as a consumer market.
However, a closer look reveals a trend that necessitates deeper analysis. Broad household consumption growth has witnessed a subdued performance over the past two years. This underscores the presence of a significant driver behind the surge in consumption – the rise of the affluent consumer segment in India.
The Affluent Consumer
The affluent segment in India, defined as individuals with an annual income exceeding USD 10,000, is experiencing a significant expansion. As of 2023, this category accounts for approximately 40 million individuals, representing a promising 4% of the population aged 15 years and above. Projections indicate a more than doubling of this segment within the next five years, translating into a substantial rise in purchasing power. This affluent segment’s consumption patterns are driving growth in areas like premium goods, luxury housing, and high-end electronics.
This robust domestic market positions India favourably to absorb its manufacturing output, distinguishing it from its Asian counterparts and enabling it to capitalise on the ‘China+1’ supply chain shifts. However, to ensure sustainable consumption growth in the medium term, focus on high-quality job creation is paramount.
Understanding the Consumption Divide
The apparent disparity between household consumption and real GDP growth underscores the importance of understanding the nuances of India’s economic landscape. While the economy rebounded strongly post-pandemic, investments and GDP growth have outpaced consumption since mid-2022. Household consumption, a critical driver of economic activity, contributes nearly 60% to nominal GDP.
The post-pandemic consumption recovery in India exhibits an uneven pattern across various segments. Discretionary and services spending, urban-rural disparities, and the divide between affluent and broad-based household demand highlight this divergence. While demand for premium SUVs, luxury housing, and high-end smartphones remains robust, the uptake of entry-level and mass-market products has been subdued.
Several factors contribute to this consumption divide. Income continuity disparities play a significant role. Corporate wages, a proxy for urban wages, witnessed robust growth during the pandemic, while rural wage growth remained muted. Limited fiscal support targeted at vulnerable sections further amplified this income gap.
Increased access to consumer credit, excluding mortgages, has also fuelled consumption. Bank credit and non-banking financial company (NBFC) credit witnessed significant growth, with retail and personal loans experiencing a substantial rise. This surge in household leverage explains a significant portion of private consumption growth over the past three years.
Declining household savings, partly due to weaker incomes and changing consumer preferences, have further widened the consumption divide. Despite a surge in precautionary savings during the pandemic, household savings have remained below historical levels. Rising debt service obligations, with household debt at a 15-year high, have also contributed to reduced savings.
The Road Ahead
The consumption growth trajectory is expected to recover in coming years but remain below trend levels at around 4-5% YoY. Urban mass-market demand may experience moderation due to softening corporate wage growth and tighter risk weights on personal loans. In contrast, the premium/affluent segment is poised to continue its upward trend. Rural consumption, however, could rebound on the back of anticipated factors such as normal monsoons, easing inflation, and potential capex recovery.
India’s consumption story remains promising, with the country on track to becoming the world’s third-largest consumer market. The resilient economy, coupled with the expanding affluent segment, positions the nation for sustained growth. However, addressing the consumption divide and promoting inclusive economic development will be crucial for long-term sustainability and equitable growth.
Bridging the income gap, ensuring responsible credit access, and encouraging healthy savings habits are essential steps in this direction. By fostering inclusive growth, India can unlock the full potential of its domestic market and ensure a more
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