The Post-Pandemic Consumer Demand: A Fast and Uneven Rebound

India’s consumer spending has remained subdued following the pandemic, with a cautious and aspirational recovery.?

The prolonged impact of COVID-19 across various consumer segments, compounded by global uncertainties, has played a significant role in this optimistic rebound.?

A survey by the Reserve Bank of India reveals that consumer confidence is only now approaching pre-pandemic levels, and the improvement has been gradual with the resurgence in economic activity.

Data at a glance:

• Per capita income has surged by 140% since 2014.

• Household spending on traditional items like food and clothing is declining, while spending on travel, entertainment, and luxury products is rising.

• This trend is expected to amplify as India's GDP propels it to become the third-largest consumer market by 2027.

Aspirational Indian Consumers

Despite these challenges, India’s middle-income class is expanding rapidly, ramping up purchasing power and creating a demand for premium and luxury products and services.?

As stated, the per capita income surged 140%, from $1,673.95 in 2014 to $2,341.10 in 2022. This shift aligns with Engel’s law, which states that as income grows, the demand for luxury goods, which are considered non-essential, increases at a faster rate than the demand for necessities like food.

Future of the Indian Consumer Market

The Household Consumer Expenditure Survey conducted between August 2022 and July 2023 highlights a significant shift in consumer behaviour over the past two decades.?

Spending on traditional products like food, beverages, and clothing has decreased, while expenditure on luxury and aspirational products and services, such as travel and entertainment, has risen. This shift is fueled by a young population, urbanisation trends, and changing consumer preferences.

Looking ahead, this trend is expected to intensify. By 2030, nearly half of all Indian households will fall into high- or upper-middle-income categories, with growing disposable incomes that will drive demand for luxury and premium products.

Spotlight on Household Debt

A concerning trend is emerging amid this shift: household liabilities have surged, rising from 3.6% to 5.8% of GDP. Credit deployment across sectors shows an increasing share of household credit in credit cards, consumer durables, and personal loans.?

However, another report by Crisil stated that the rise in bank deposits suggests a growing appetite for saving instruments offering better returns.

Banking on Better Returns:

• Recent data reveals a surge in bank deposits, the primary source of household savings.

• This growth (13.5% in FY24) outpaces both inflation (estimated at around 5%) and GDP growth (9.1%).

• This trend likely reflects consumers taking advantage of rising bank deposit rates following the RBI's repo rate hikes.

The Savings Slump Continues:

• Despite the rise in bank deposits, household savings remain below pre-pandemic levels.

• In FY23, savings reached 18% of GDP, lower than the pre-pandemic average of 20.1%.

• This decline can be attributed to pent-up demand unleashed after the pandemic restrictions eased, leading to increased spending.

Where Does the Money Go?

• A closer look at FY23 data reveals a preference for physical assets.

• Savings in physical assets like real estate or property topped the charts at 12.9% of GDP.

• Net financial assets (including bank deposits) stood at 5.3%, followed by gold and silver at 0.2%.

Despite the rise in financial obligations, India’s household debt remains lower than that of several other developing nations. Moreover, India’s household-debt-service ratio is still lower than that of major economies like the United States, Japan, the United Kingdom, and South Korea.

Final Thoughts

ViTWO prophesses India is witnessing a significant shift in consumer behaviour towards aspirational spending, a natural outcome of growing economic prosperity.?

Between FY21-23, the average annual growth of gross financial savings was 10.3%, while household financial liabilities increased by 30.1%.?

During the same period, gross financial savings as a percentage of GDP remained unchanged while liabilities grew. Since fiscal 2018, there has been a noticeable increase in financial liabilities, coinciding with a significant rise in retail growth.

As we gear up for this transformation, it is crucial to adeptly manage the challenges associated with increasing household debt to protect the macroeconomic landscape and help businesses mitigate its impact on economic downturns and recoveries.