The Indian Economy Conundrum

With a Gross Domestic Product of approximately 3.7 Trillion dollars, India’s projected GDP Growth rate for the financial year ’24-25 is 6% which is the highest amongst all the major economies like China and USA which have projections of 4.7% and 1.4% respectively. With this consistent growth rate for the last 4 decades it is clear that India has outperformed the Old Hindu Growth Rate of 4%.

However putting things to perspective we do realize that while India is being lauded for becoming the 5th largest economy in the world which is calculated on the basis of GDP, the per capita income of India has barely crossed the $2000 ballpark and is ranked 140th in the list with Bangladesh ranked just above it at $2621 and USA ranked 1st in the list with a per capita income of a whopping $80,412 clearly indicating that there is still a great deal to be done in this path to achieve the expected growth in comparison to the major economies.

It is interesting to note that China and many other countries started experiencing huge spikes in the consumption spends post crossing the $2000 threshold of per capita income. With a population of 140 Crores and a demographic fairly young that is most likely inclined towards spending, India is slated to become the third largest consumer market by 2026 as per a study report by UBS.

This strong growth and demographic dominance has resulted in increasing per capita income for the last decade which is expected to accelerate in the future with greater amounts of discretionary spending.

The image below draws a comparison of the spending patterns between the early 90s and FY'22 Trends :

The patterns distinctly bring out the major shift in the perception of spending that people undertake by giving significance to non-essential expenditure signalling a wave of consumption driven economy.

India is a consumption driven economy with a contribution of 60% of private consumption to the GDP. Increase in population has been a very vital component of the emerging market consumption with a forecast of an increase in the percentage of the middle income or the middle class group by 2031 who will also be responsible for driving? 53% of the consumption in its entirety.

As the economy and the markets grow, the purchasing power of an average person increases thereby resulting in driving the demand for domestic consumption. As per recent reports of the Reserve Bank of India – India’s Household Net Financial Savings for the Fiscal Year of 2023 was at 5.3% which is the lowest in about 5 decades, while the net financial savings in the decade before that i.e., (FY 12- FY 22) hovered around the mark of 7%. Nonetheless access to credit across the country has however surged and has seen a mammoth 54% YOY growth in 2023 considering it to be the fastest growth recorded in the past decade.

As households move to a higher income level, the propensity to spend out of an extra rupee earned in its income declines. In simpler words, an affluent household may choose to spend only Rs 50 out of an increase of Rs 500 in its income while an impoverished household will have a greater tendency to spend Rs 250 out of an increase of Rs 500 in its income. On a macro basis when an economy gets richer its proclivity to spend or consume dwindles downward.

As a community if households start consuming a smaller proportion of the income, in all probability there is a strong likelihood that they may start generating a higher share in savings which if channelized appropriately through the credit markets become the forefront driving force of economic growth.

This rise in savings has made India more resilient to the upheaval caused in the stock ?markets due to the exit of various Foreign Institutional Investors (FII) and has even made Domestic Institutional Investors (DII) match and even surpass the cash flows from the FII in the recent times.

India’s economy has been traditionally driven by consumption constituting a minimum of 50% to 60% of the Gross Domestic Product. However to achieve a balanced and a sustained growth, India as an economy should lay key emphasis to both the pillars contributing to the economy being consumption and investment respectively, thereby making it pivotal to augment long term economic growth.

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