India to surpass Germany, Japan to be 3rd largest consumer market by 2026: UBS
India seems to be on course to be the world’s third-largest consumer market by 2026, outpacing Germany and Japan, said UBS.
Over the past decade, India’s consumption has almost doubled to $2.1 trillion in 2023, up from $1.2 trillion in 2013. Over the past decade, the country has clocked an average compound growth rate of 7.2 percent, outsmarting China, the US and Germany.
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A primary reason for India’s continued growth is that the country’s sizeable domestic market has the ability to absorb manufacturing output, said the international brokerage.
Simply put, there is enough demand to match supply, which gives India a key advantage over its Asian and emerging market peers. This factor also allows India to benefit from the ‘China+1’ supply chain shifts, besides
policy initiatives and structural reforms.
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To sustain the consumption growth in the medium-term, UBS noted that there needs to be high-quality job creation. However, as consumption continues to grow, it lags investment and economic growth during the post-pandemic phase.
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Divergence between household consumption and real GDP
While the Indian economy has seen a strong recovery after the pandemic since the mid-2022s, investments and GDP have grown faster than consumption. “This divergence matters for the Indian economy as household consumption accounts for nearly 60 percent of nominal GDP,” said UBS.
There are three factors leading to the dichotomy between the GDP and consumption recovery. Consumption recovery is divergent in discretionary and services spending versus consumer staples; the rural-urban divide; and affluent versus broad-based household demand.
The number of members in the affluent category will more than double over the next five years in India. As of 2023, there are around 40 million people in the category.
Even though the rural economy has recovered from the lows of the pandemic period and has seen a resurgence, the urban economy continued to outperform.
The factors driving the difference is the income continuity at the top of India’s income pyramid during the pandemic versus the bottom. During the pandemic, income levels for the top of India’s income pyramid were largely supported, while the growth in rural wages was largely muted.
“At the same time, limited fiscal support for vulnerable sections of society during the pandemic (income support and/or direct cash transfers) amplified the gap,” said UBS.
This has led to lower household savings, partly due to weaker incomes, a higher tendency to consume due to changing preferences, and rising debt service obligations with household debt at a 15-year high.
Consumption growth to recover in FY25-26
Adjusted for inflation, the real household consumption growth will be below the trend, around 4-5 percent in FY25-26. This compares with 6.5-7 percent on-year average growth during FY11-20.
India household consumption to see
While urban mass-market demand should remain modest as wage growth softens, personal loan growth flattens as monetary tightening weighs, the affluent segment is poised to continue outperforming.
“Rural consumption could recover on hopes of normal monsoons, the likely removal of export bans for agricultural commodities as inflation eases, and the much anticipated capex recovery with construction being the largest generator of jobs outside of agriculture,” UBS added.
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