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India surprised markets this year, ending its fiscal year 2023/24 (April 1, 2023, to March 31, 2024) with 8.15% year-over-year (YoY) growth, higher than the consensus expected. The country’s economic growth averaged 8.3% over the past three years despite global uncertainties. Strong domestic demand is one driver of the economy, as private consumption accounts for more than 60% of GDP. Hence, India’s consumption story offers investors great potential.
According to global brokerage firm UBS Securities, India’s household consumption has doubled over the past decade, touching $2.1 tn in 2023. By 2026, India is expected to become the world’s third-largest consumer market.
The consumption story in India has multiple drivers. For starters, the population dynamic is one factor. India’s almost 1.5 bn people population is both young and still expanding. “By the end of this decade, India’s population pyramid will have a significant bulge in the 25-45 age group, the key consuming demographic, which has historically coincided with consumption booms in other economies with similar demographic profiles, while China faces significant longer-term demographic challenges,” said Ewan Thompson, fund manager at British investment manager Liontrust.
Furthermore, other structural factors such as premiumisation, digitalisation and urbanisation drive India’s consumption story.
„The new Indian consumer is different from the consumers of the past,” noted Eastspring Investments in an insight. “They tend to seek more quality, variety, and convenience in their purchases and are also open to more experiential offerings. They are also more aware of social and environmental issues that align with their values. As a result, brands are offering higher-end products and services to consumers, a trend known as premiumisation,” the asset manager added.
The rise in premium goods sales can be attributed to the increase in affluent Indian households. These are expected to grow to about 80 mn by 2030, about a quarter of all Indian households.
Spending gap needs to be addressed
Deloitte also sees a prominent shift toward higher spending on luxury and premium goods and services. However, there is a significant gap in spending between urban households and their rural counterparts over the past decade, with the former spending more.
„Rural spending preferences have immense potential to create demand for discretionary goods and services, especially durables and conveyance. Therefore, the revival of rural demand is key to sustainable growth in this segment,” a recent Deloitte report notes.
The accounting firm notes that the Indian government must address this gap in several states for broad-based growth. “Rising income must also be associated with a reduced disparity in consumption spending between urban and rural consumers.”
Meanwhile, the latest data indicates that overall consumer spending is declining. Consumer sentiment fell for the second month in a row in July. Spending in rural areas remains subdued and has not yet reached pre-Covid levels, according to a Citigroup index.
