The Consumption Conundrum

Can India’s economy grow at an average annual rate of eight per cent? Most global financial institutions forecast India’s long-term GDP growth at between 6.5 and 6.8 per cent. They could be mistaken.

Several factors are beginning to coalesce which indicate an eight per cent annual growth rate is within reach, given the right policies and absence of new Black Swan events. Consider three key factors that can accelerate India’s economic output over the next decade. 

The first asset, of course, is demography. But India has to avoid the oft-cited trap of allowing its demographic dividend to dissipate into what cynics call a demographic disaster. A young workforce obviously does not guarantee higher economic output unless it has requisite skills. A significant number of Indian graduates are unemployable. Even amongst engineers, quality varies. The government recognises the problem and has made skill development a core agenda. 

The National Skill Development Mission (NSDM), which works under the Ministry of Skill Development and Entrepreneurship, has a clear mission statement: “To rapidly scale up skill development efforts in India, by creating an end-to-end, outcome-focused implementation framework, which aligns demands of the employers for a well-trained skilled workforce with aspirations of Indian citizens for sustainable livelihoods.” 

NSDM concedes: “India currently faces a severe shortage of well-trained, skilled workers. It is estimated that only 2.3 per cent of the workforce in India has undergone formal skill training as compared to 68 per cent in the UK, 75 per cent in Germany, 52 per cent in the US, 80 per cent in Japan and 96 per cent in South Korea. Large sections of the educated workforce have little or no job skills, making them largely unemployable. Therefore, India must focus on scaling up skill training efforts to meet the demands of employers and drive economic growth.”

While ensuring that India’s demographic advantage is not frittered away, the second factor that will drive India’s annual growth rate to eight per cent is a booming services sector. Services contribute 60 per cent to India’s economic output. Industry and manufacturing account for 26 per cent and agriculture for 14 per cent. 

Services are growing at well over 10 per cent a year. Since the services sector accounts for 60 per cent of India’s GDP, it forms a strong base for annual growth of six per cent (10 per cent of 60 per cent) even if growth in industry or agriculture falters. 

Agriculture has been growing at an average rate of four per cent a year and industry and manufacturing at around 5.5 per cent. Taking into account their proportionate weightages in India’s GDP pie, their median annual average growth rate is around five per cent. 

Since industry and agriculture together contribute 40 per cent to economic output (industry: 26 per cent; agriculture: 14 per cent), an average annual growth rate of five per cent across the two sectors could contribute another 2 per cent (five per cent of 40 per cent) to the GDP growth baseline of six per cent. The total: eight per cent. 

The third factor that could turbocharge economic growth over the next few years is massive investment in infrastructure. Both government and private investment is set to surge in renewable power, green hydrogen, highways, metros, airports, seaports and housing. 

Additionally, the establishment of a chip-making ecosystem, ranging from fabrication units (fabs) to assembly and design centres, will have a spin-off effect on ancillary industries. Investment in electronics manufacturing, automotive, artificial intelligence, space technology and data centres is reaching critical mass.

What are the likely impediments? Jobless growth is a concern. Skill development takes time to acquire momentum. Meanwhile, millions of poorly trained graduates flood the jobs market. Many have to be satisfied with low-skill and low-paid jobs in the gig industry, from logistics to retail sales. 

A key component of economic growth is consumption. This is beginning to have a significant impact. India’s consuming class can be broken up into three categories. According to the 2023 Indus Valley research report from Blume Ventures, the top slice of India’s consuming class comprises around 120 million people with an average per capita income of $12,000 (Rs 10 lakh a year). This, broadly speaking, is the upper middle class with a smaller sub-set of 25 million Indians with, according to Blume Ventures, an average per capita income of $35,000 (Rs 29 lakh a year) – the wealthy. 

The second slice comprises another 100 million Indians with an average per capita income of $3,000 (Rs 2.5 lakh a year). This is the middle class. 

The third slice is the real India, consisting of 1.20 billion people with an average per capita income of $1,500 (Rs 1.20 lakh).

The Blume Ventures report takes per capita income at market dollar-rupee exchange rates. It needs to be corrected for purchasing power parity (PPP) for a more accurate picture of spending power. A consumer in the slice of 120 million upper middle class Indians with a per capita income of Rs 10 lakh a year can buy far more in India than a consumer with a similar income ($12,000) can buy in the United States. 

The PPP per capita income multiple for India, according to the International Monetary Fund (IMF), is 2.8. When that multiple is applied, the consumption power of the top two slices in Blume Venture’s research report, comprising 220 million Indians, becomes apparent. 

More pertinently, the third slice of 1.20 billion low-income Indians out of a total population of 1.42 billion, reflects the country’s vast untapped potential as they move into the middle bracket. When they do, and consumption soars along with other economic indicators, even eight per cent annual GDP growth rate will begin to appear modest.