India In All Its Spender

Rajesh Shukla    March 2, 2023

OPINION | The Times of India

For a consumer demand-driven economy such as India, understanding consumption patterns is key to predicting economic growth. Consumption and infrastructure investments are starting to show a broad-based recovery as the consumer economy bounces back from two years of the Covid-19 pandemic, the first Advance Estimates of gross domestic product (GDP) for the current fiscal year FY23.  The estimates of private final consumption expenditure (PFCE) which is a proxy for household consumption, is expected to rise in absolute terms to Rs 164 trillion in FY23 from Rs 143 trillion in FY22 and Rs 121 trillion in FY21.

Although PFCE is expected to grow 7.7 per cent in FY23, it is on the expected lines. The current consumption demand is highly skewed in favour of goods and services consumed largely by the middle class and rich households, the top one-third of Indian households mostly located in urban centers and developed rural. Results from PRICE’s ICE 360 Surveys (2016, 2021 and 2023) showed that the trickledown of growth is already happening – for instance the share of bottom 20 population in total household disposable income was about 6.5% in pre-Covid, down to 3% during Covid-19 and again up to 4.5% now. The larger story emerged here that majority of bottom 40% households still on the recovery of purchasing power since they are currently managing their consumption and also paying the consumption related debt which took during the pandemic.  Therefore, the current recovery is a short of a broad-based recovery and it will still take some more time to bring the consumption growth on the developmental path which will be more inclusive and sustainable.

Looking at the more objectivity, the current rate of growth for the Indian economy remains relatively robust, particularly when compared to other emerging economies. Our analysis shows that the future looks better in view of a long-term fundamentals, with a 6-7% growing GDP of which around 60% is domestic private consumption, insulating it to a degree. There is also a conservative household savings rate, at around 21% of household disposable income in 2021-22, and a large working age population, with a median age of about 30 years.

The continued growth of the economy is set to create a relative boon for the country’s middle class (those with annual household disposable incomes of Rs. 5-30 lakh in 2020-21), whose number are said to around 165 million households (715 million consumers) by 2030. The middle class will see its share of total consumption increase from currently 48% to 70% by end of the decade, making it an extremely integral part of the India growth story, while around 115 million people will be rise out of destitution, the share of destitute population will decrease from 14% to 5%.

In recent years, the linkages between moderate economic growth, high inflation and consumer demand have been more than evident. Findings of our report “The Rise of India’s Middle Class” reveals that expenditure on food including dining out is still accounts for a significant share (51%) of the total expenditure basket, it is showing a downward trend. This is compensated by an increase in expenditure allocated towards housing & household services (12%), health & fitness (8%), education (8%), and tours & travel (6%). In rural areas, the bottom 10% households spend a little higher than half (56%) of their total out-of-pocket expenditure on food items, whereas the top 10% rural households spend around one-third (32%). Similarly, in urban India, bottom 10% households spend almost half of their total expenditure on food, unlike top 10% which spend only 21%.

Consumption patterns reflect the changes taking place in the economic status of households. For lower income households, the emphasis is on essentials such as food items. But as their disposable income grows, spending on durables, health, education and investment-related products comes into play. The analysis presented in the report sheds light on not only the purchasing power of the middle class, but also reveals the disparity in purchasing power across the distribution. There do exist huge gap between the middle class and even aspirers, who are aspiring to join middle class club, on the level of expenditure (All India expenditure of indexed to 100) items, such as Apparel, Footwear & Accessories (200 vs. 44), Entertainment & Recreation (189 vs. 44), Consumer durables (188 vs. 43), Fruits & vegetables (188 vs. 46) and Education (183 vs. 83).

What has given rise to such enormous structural changes in India’s food habits? Using ICE 360 Surveys data, we have estimated the income elasticity of food to be 0.47, which is relatively lower than other consumption items such as education (0.79 rural and 0.67 urban) and conveyance (1.08 rural and 0.97 urban). This implies if household income increases by 1%, then expenditure is likely to increase by 0.47%. Keeping this in mind, we looked at how economic status of households has contributed to changing trends.

The historical pattern in India is similar to the one observed in other developing economies. Growth leads to a decrease in the share allocated to basic necessities and an increase in discretionary spending. As growth percolates to those at the bottom of end of the distribution, it is quite conceivable that a similar shift in their consumption basket will be observed, although the magnitude of such a shift will vary. As India continues its upward trajectory, the aggregate purchasing power, higher, steady and dispersed urbanisation, digital innovations & connectivity and evolving consumer aspirations will lead to the creation of better and more dynamic consumer economy to shape the country’s positive consumption future.