India's economic landscape is undergoing significant shifts, driven by technological advancements and deepening economic disparities. As a services-driven economy, it faces vulnerabilities due to workforce displacement, particularly in low-value-added sectors. The country's consuming class is deepening rather than widening, raising concerns about long-term economic sustainability.
A notable trend is the increasing concentration of wealth among the top 10% of Indians, who now command 57.7% of the national income, up from 34% in 1990. This accumulation has come at the expense of the bottom half of the population, whose share of national income has declined from 22.2% to 15% over the same period. Post-pandemic recovery has taken on a K-shaped trajectory, enriching the wealthy while diminishing the purchasing power of the lower-income segments.
Around one billion Indians lack sufficient funds for discretionary spending, highlighting the severity of economic inequality. The stagnation of wages over the past decade has further squeezed India's middle class. The middle 50% of tax-paying citizens have seen their incomes remain static in absolute terms, effectively halving their real incomes when adjusted for inflation.
"The middle 50% of India's tax-paying population has seen its income stagnate in absolute terms over the past decade. This implies a halving of income in real (adjusted for inflation) terms."
The manufacturing sector has not been immune to these challenges either. The number of supervisors employed in manufacturing units has significantly decreased.
"The number of supervisors employed in manufacturing units (as a percentage of all employed) in India has gone down significantly."
Additionally, net financial savings of Indian households are nearing a 50-year low. The Reserve Bank of India (RBI) has repeatedly emphasized this financial strain on households.
"This financial hammering has decimated the middle class's savings – the RBI [Reserve Bank of India] has repeatedly highlighted that net financial savings of Indian households are approaching a 50-year low. This pounding suggests that products and services associated with middle-class household spending are likely to face a rough time in the years ahead."
The real estate market reflects these economic pressures, with affordable homes now constituting only 18% of India's housing market, a steep decline from 40% five years ago. The dwindling availability of affordable housing adds to the financial woes of the average Indian consumer.
Despite these challenges, there are some positive developments on the horizon. A record harvest and a recent $12 billion tax give-away are anticipated to bolster rural demand and spending. However, India's GDP remains heavily reliant on consumption, meaning that any downturn in consumer spending could have serious macroeconomic implications.
"India is also a consumption-based economy, thus the fall in consumption that can result from the displacement of its workforce is bound to have macroeconomic implications. If the worst-case projections materialize, this could have the potential to set the country's economic growth trajectory off course."
Moreover, India's "experience economy" is thriving, with high-priced tickets for concerts and events selling robustly. This surge in demand for premium experiences indicates a shift towards higher-end consumption patterns.
"Those who are too focused at the mass end or have a product mix that doesn't have exposure to the premium end have lost market share."
However, this shift may not benefit all sectors equally. Much of the consumption by the emerging or aspirant class has been fueled by borrowings, which could lead to reduced spending if credit becomes less accessible.
"Much of the consumption spending of the 'emerging' or 'aspirant' class of Indians was led by such borrowings and 'turning off that tap will definitely have some impact on consumption.'"