Rising Per Capita Income: Unlocking a New Era of Consumption in India?

India, the largest country by population and one of the youngest in the world, is expected to move from US$2,268 of GDP per capita to US$5,140 by 2031. From 26% households (i.e. 76mn households) earning more than US$5,000 (real terms) per annum, India is expected to have 54% households in 2031, i.e. 191 mn households (see chart 1). This shift is expected to drive an inflection point in India’s consumption. Countries such as China, Indonesia, and Thailand have also seen spurts in consumption growth post moving past the US$2,000 per capita income mark.

Chart 1: Sharp increase expected in rich and middle-income group households

Source: Morgan Stanley Research; Household income is on real basis at 2021 prices

Rising incomes – the base pillar! 

India is experiencing rising per capita incomes with the overall economy growing faster than the population. As India moves into Amritkaal, some of the key drivers of economic growth include a favourable macro-economic environment, resurgence of manufacturing, pick up in private capex (see bit.ly/CapexMay23 for a detailed note), thrust on infrastructure capex, and significant potential for increasing consumption.

Rising incomes and its impact on consumption

While much has been written in the media and academic papers, the central idea is that, when an individual / household moves from a low income to a middle-income category, the % rise in disposable income is significantly higher than the rise in total income. For example, if household A has its income goes up from US$5,000 to US$10,000 (2 times increase), its basic / necessary expenses may increase at a slower rate, from say US$4,000 to US$6,500. The disposable income in this case, has gone up from US$1,000 to US$3,500 – a rise of 3.5 times! This leads to a disproportionate rise in demand for premium and discretionary categories. Rise in consumption can be expected largely on 3 counts: consuming more of the same, consuming premium products of the same category, or consuming new categories fulfilling similar purposes. According to a report by the World Economic Forum, consumption spends are estimated to increase by US$4 trillion over 2018 to 2030, a very sharp jump from about US$1.5 trillion of consumption spend in 2018. Their estimates for this additional spending could be broken down to the below:

Chart 2: Breakup of estimated incremental consumption between 2018-30 in key categories

Source: Bain & Company / World Economic Forum Analysis. Note: Does not include all consumption categories.

Conclusion

Visibility of rising consumption bodes well for the economy, as it encourages organized players to invest in manufacturing capacities, and creates jobs in the economy, creating a virtuous loop. A confident Indian consumer is likely to shape in the decades to come, and will be an interesting sight. This evolution could also bode well for Indian consumption companies, which could enjoy high growth in business fundamentals on the same account. With relatively lower impact from macro-economic challenges from both global and domestic economy, an investment case can be built for these companies on account of consumption growth and lower volatility and risks in business fundamentals.

Sources: Morgan Stanley, World Economic Forum, PIB, and other publicly available information.

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