India’s growth narrative has long centred on consumption, driven by its billion-plus population and youthful demographic inclined towards spending.
However, this story is complex, marked by contrasting narratives and supported by a wealth of data. To gain a comprehensive understanding, it’s essential to zoom out and analyze macro-level consumption trends spanning several decades.
Engel’s Law And Consumption Shifts
Since the economic liberalization in 1991, India has witnessed a notable transformation in consumption patterns, marked by Engel’s Law, which describes the inverse relationship between household income and the proportion of spending allocated to food.
According to data from the National Sample Survey Office (NSSO), in 1991 rural households spent approximately 60% of their income on food, whereas urban households allocated around 50%. By 2011-12, these proportions had decreased significantly, with rural households spending 47% and urban households 40% on food.
This trend continued in subsequent years, with the latest data from the Household Consumption Expenditure Survey indicating that rural households now allocate only 46% of their monthly consumption towards food, while urban households spend 39%. This shift underscores the impact of rising incomes on consumption behaviour, with households able to allocate more towards non-food items as their incomes increase.
Evolving Consumption Patterns
The decline in the share of spending on essentials such as food, clothing, and housing has been accompanied by a corresponding increase in expenditure on discretionary items that enhance quality of life.
According to the NSSO data in 1991, the roti-kapda-makan (food, clothing, housing) troika accounted for approximately 65% of total household expenditure. However, by 2019-20, this share had dropped below 50%, with households increasingly allocating funds towards health, education, transport, communication, and recreation.
For instance, spending on health and education has seen steady growth, with households dedicating a larger portion of their budgets to these sectors over the years. Additionally, the rise in discretionary spending is evident in the increased demand for consumer durables such as televisions, refrigerators, and smartphones. This shift reflects changing consumer preferences and priorities, driven by rising incomes and aspirations for a better quality of life.
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Factors Driving Future Consumption Growth
Looking ahead, India is poised for significant consumption growth fueled by various favourable factors. Firstly, the demographic dividend presents a substantial opportunity, with India’s median age not expected to reach 40 for another three decades.
Data from the United Nations Population Division indicates that India’s working-age population is growing faster than the total population, providing a long runway for economic growth.
Moreover, India’s current macroeconomic stability, characterized by low inflation and stable fiscal policies, boosts consumer confidence and encourages spending. The sheer size of India’s market, with over a billion consumers, compensates for other shortcomings and makes it an attractive destination for investment and business expansion.
Additionally, India’s consistently high score in the monthly IPSOS global consumer confidence index since December 2023 reflects positive domestic consumer sentiment, further bolstering expectations for future consumption growth.
Influence Of Millennials And Gen Z
By 2030, India is projected to have 227 million millennials (born during 1981–1996) and 374 million from Gen Z (born 1997–2010), comprising 40% of the population. Millennials, in their peak spending years (ages 34-49 in 2030), are expected to drive a significant portion of consumption spending.
According to projections, millennials will prioritize spending on experiences, travel, and lifestyle products, contributing to the growth of these sectors. Meanwhile, Gen Z, characterized by their digital nativity, environmental consciousness, and financial acumen, will play a pivotal role in shaping consumption trends.
According to LiveMint, surveys indicate that Gen Z individuals value convenience, sustainability, and customization, favouring products and services that align with their preferences.
This demographic’s reliance on technology and digital platforms for various aspects of life, including shopping, entertainment, and financial transactions, opens up new opportunities for businesses to cater to their needs and preferences.
As such, the convergence of demographic shifts and evolving consumer behaviours is expected to drive significant changes in consumption patterns in the coming years.
Consumption As A Consequence
While consumption plays a vital role in India’s economic landscape, it’s important to recognize that it’s not the sole driver of growth. Historical data and experiences from other economies demonstrate that private consumption typically grows at or below the GDP growth rate during periods of high economic growth.
For instance, during China’s rapid economic expansion, private consumption often lagged behind investment and exports as primary drivers of GDP growth. Similarly, the Asian Tigers saw a decline in the share of private consumption to GDP as their economies matured.
This indicates that sustained economic growth requires diversification across multiple sectors, with consumption acting as a consequence rather than a precondition. Therefore, while consumption is a significant component of India’s GDP, achieving sustainable growth necessitates a balanced approach that encompasses investment, exports, and other economic drivers.
By prioritizing policies that promote long-term economic stability, innovation, and productivity growth, India can lay the foundation for a robust consumption-driven economy while avoiding over-reliance on consumption as the sole engine of growth.
India’s consumption story is multi-faceted, driven by a myriad of factors and influenced by demographic shifts and evolving consumer preferences.
As the nation stands on the precipice of significant consumption growth, understanding the underlying trends and their implications is crucial for policymakers and businesses alike. Sustainable growth and development will be key to harnessing India’s consumption potential and steering the economy towards a prosperous future.
Feature image designed by Saudamini Seth
Sources: Live Mint, The Hindu, Reuters
Find the blogger: Katyayani Joshi
This post is tagged under: consumption, consumption pattern, essential, non-essential, essential vs. non-essential, roti, kapda, makaan, food, clothes, shelter, travel, conveyance, policymaking, business
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