Business News/ Economy / India is all set for a consumption boom—with a caveat
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With its billion-plus population, and a young demographic inclined towards spending, the India growth story typically centres on consumption. Recent growth optimism has fostered the belief that the country is on the cusp of a consumption boom. Yet, like everything else about India, the consumption story is complex and layered, with multiple contrasting narratives. And there is enough data to support all the conflicting stories. To avoid getting caught up in short-term trends, it may be useful to zoom out several decades to identify macro-level trends in consumption spending.
With its billion-plus population, and a young demographic inclined towards spending, the India growth story typically centres on consumption. Recent growth optimism has fostered the belief that the country is on the cusp of a consumption boom. Yet, like everything else about India, the consumption story is complex and layered, with multiple contrasting narratives. And there is enough data to support all the conflicting stories. To avoid getting caught up in short-term trends, it may be useful to zoom out several decades to identify macro-level trends in consumption spending.
Post-1991, the first major consumption shift occurred when the share of non-food spending exceeded the share of food expenditure in total household expenditure. This behaviour—known as Engel’s Law—is quite intuitive: a poor household spends almost its entire income on food; money is available for other expenses only at higher levels of income. Extending this idea to a macroeconomic level, it is natural that the share of household spending on food starts shrinking with a rise in household income. Given the income difference between urban and rural areas, it is not surprising that rural households took two decades longer than their urban counterparts to make this shift.
Post-1991, the first major consumption shift occurred when the share of non-food spending exceeded the share of food expenditure in total household expenditure. This behaviour—known as Engel’s Law—is quite intuitive: a poor household spends almost its entire income on food; money is available for other expenses only at higher levels of income. Extending this idea to a macroeconomic level, it is natural that the share of household spending on food starts shrinking with a rise in household income. Given the income difference between urban and rural areas, it is not surprising that rural households took two decades longer than their urban counterparts to make this shift.
The second significant transformation in household consumption patterns is intricately connected to the first. With rising income levels, households could afford to spend more on non-essential goods and services. Thus the share of the roti-kapda-makan (food, clothes, housing) troika dropped to below 50% in 2019-20, making way for other items that improve the quality of life—notably health, education, transport, communication, and recreation.
Timing the next shift
A fortunate confluence of factors has the potential to seed rapid consumption growth in the coming two to three decades. First, the much-touted demographic dividend puts India at an advantage over East Asian rivals such as China and Thailand. India has 30-odd years before its median age reaches 40, the point when the labour force starts ageing. It is now in a sweet spot where the working-age population is growing faster than the total population. This gives it a long runway to grow and take off.
Second, its current macroeconomic stability boosts consumer confidence. Third, its sheer market size makes up for other shortcomings. For example, Indonesia has a higher per capita income and about the same median age, but India has five times as many people in the 15-64 years age group. Finally, domestic consumer sentiment is buoyant: India has held the highest national score in the monthly IPSOS global consumer confidence index since December 2023.
Millennials and Gen Z
By 2030, it is estimated that India will have 227 million millennials (those born during 1981–1996) and 374 million from Gen Z (born 1997–2010). Together, they will account for 40% of the population. Millennials are likely to form the bulk of consumption spending as they will be in their peak spending years (34-49 years in 2030). But it is Gen Z that has the potential to be a trend-shaper. Surveys show that Gen Z values experiences, loves travel, is ecologically conscious, seeks work-life balance, and is financially savvy. They are true digital natives, who reach for their phones for everything from ordering food, to finding love, seeking financial advice, shopping, investing, or starting a side-hustle.
This combination of tech-savvy, digital curiosity, and spending capacity opens up immense possibilities. The next major trend—when it occurs—will be towards products that offer convenience, sustainability, value-for-money; with AI-driven features and app-based options to customize the experience. It will be a Gen Z transformative shift.
Consequence, not pre-condition
Lastly, a word of caution. India is not a consumption-led economy, even though domestic consumption is the largest expenditure component of its GDP. Private consumption usually grows at or below the GDP growth rate during high-growth periods, though it may outpace GDP during a slowdown. The experience of China and the Asian Tigers during their high-growth years shows that the share of private consumption to GDP tends to decline and then plateau out as economies get richer. This doesn’t mean household spending on goods and services declined—rather, it shows that GDP growth was led by drivers other than consumption (e.g. investment for China, exports for Singapore). For India, too, consumption alone cannot drive the 6–7% annual growth that is widely expected of it. Putting the country on a sustainable growth path will be a prerequisite to a consumption boom.
The author is an independent writer in economics and finance.
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