The curious case of India’s high consumption
India seems to be consuming its way to growth, or so it seems. Our latest national income data available for the half year 2022–23 (April-September) reveals that 61.4% of our national income (Gross Domestic product, in technical parlance) comes from consumption of households like yours and mine. This is up from 57.6% in April-September 2021–22. More importantly, the rate at which consumption is growing has increased dramatically. Thus, from growing at a trot at 15.3% in 2013–14, India’s consumption spending dropped to a 10% growth in 2017–18, fell further to 9.3% and (-)0.3% in 2019–20 and 2020–21 respectively, before it broke into a full gallop at 18.3% in 2021–22 and on to a 29% growth rate in the first half of 2022–23.
Technically, consumption spending includes all that we spend on buying new durable goods like refrigerators, TVs, etc., non-durable goods such as food items, paan and tobacco, and also on services such as that of barbers and parlours, education, entertainment, health, etc. Interestingly, any spends on second-hand goods are not included in such consumption. However, the consumption juggernaut was led by certain goods and services in the pre-pandemic period.
Spends on “Roti, Kapda and Makaan” actually grew at lower rates over the period 2012–13 to 2019–20. On the other hand, spends on alcoholic beverages, tobacco and narcotics grew rapidly, and so did spends on transportation, recreation and culture, and restaurants and hotels. It seems Indians spent more and more on discretionary spends, preferring “Entertainment, Entertainment, Entertainment”. In terms of durability, Indians spent increasingly more on non-durable goods and services, while the spends on durable and semi-durable goods actually reduced in the pre-Covid period.
Post-Covid, Indians seem to be spending with a vengeance on clothing and footwear, household goods and services, transportation, recreation and culture, and restaurants and hotels. Spends on education and health have also shot up. Personal spends on durable and semi-durable goods have also gone up.
The biggest driver of the growth in consumption spending has been the persistent high inflation. The inflation data for the period April to September 2022–23 reveals that retail inflation remained high, above 7% for most months, with the average inflation during the period at 7.16%. This aggregate picture, however, masks the granular details of how Indians have had to spend greater amounts on their basic consumption items. Retail inflation in India has been dominated by the volatile items—food and fuel and light. The average inflation of these two components has been at 7.70% and 10.61% respectively over the same period.
However, Indians have also had to contend with high inflation in other core items such as clothing and footwear (9.7% inflation) and miscellaneous items, especially household goods and services (7.5% inflation) within the latter. The growing spends on these items is simply on account of higher inflation within these categories.
Another factor driving consumption has also been the reduction in households’ propensity to save and a corresponding higher increase in the propensity to consume. The propensity to save (or consume) refers respectively to the proportion of income we tend to save or consume. While all economic entities in India—including the private corporate sector, general government and households—are saving less, such reduction in savings by households is even more stark. Household savings, and especially financial savings, have reduced dramatically—by almost 15% in 2021–22 compared to the previous year.
Correspondingly, Indians seem to be borrowing more in order to spend more, especially on consumer durables, vehicles, education and housing—in that order. This is reflected in data on personal loans available from the Reserve Bank of India, which shows that personal loans registered a growth of 20.6% (y-o-y) in March 2023 as compared with 12.6% a year ago. A more disturbing trend is how such loans are being borrowed. A majority of loans are being borrowed as advances against fixed deposits and also through credit card borrowings.
Consumption has been rising, even as India’s GDP growth rate rose to 9.1% in 2021–22. Is such rising consumption a boon or a bane for growing GDP? Well, the answer is not so clear-cut. As India’s population grows and the trends towards consumerism grow, consumption spending will go higher and higher. However, the impact on GDP will also depend on how such consumption spends are distributed across different income groups.
The Gini Coefficient for India—a measure of income inequality—stands at 82.3, while the share of wealth held by the top 1% of India was at 40.6% in 2021, attesting to high income inequalities.
As income differentials expand, we can expect the higher spending on discretionary goods to be reinforced. With resources diverted into the production of discretionary goods, inflationary trends will persist across the rest of the economy. Alternately, such spends may be on products from outside the country, leading to problems in our current account deficit. Equally worrisome is the rising levels of debt of Indian households and the tendency to borrow against credit.
As India marches towards the status of “fastest growing economy of the world”, it is time to ponder over whether such a status should be driven by consumption. Growing consumption could well turn out to be our Achilles Heel. Microtrends towards purchasing “pre-loved clothes”, minimalism, and sustainable and responsible consumption could bring down India’s consumption spends and could in fact augur well for the nation in the long run.
(Views are personal)
Tulsi Jayakumar
Professor, Finance & Economics, and Executive Director, Centre for Family Business & Entrepreneurship at Bhavan’s SPJIMR