Moneycontrol Pro Panorama | Will Lilliput Land show its consumption power again?

Consumption would still account for more than half of the country’s gross domestic product.

Dear Reader,

India’s consumption story is unlike any other: too promising to ignore, but too tricky to deal with. The average Indian consumer has always been on the list of top targets for international businesses. This explains why brands ranging from Apple to Ikea count India as a key market even when private consumption expenditure is expected to be a mere 3 percent in FY24.

Even at its worst, consumption would still account for more than half of the country’s gross domestic product. Without a sustained growth in consumption, there is little motivation for businesses to invest and engage in private capital expenditure. After all, if you are not sure of a rise in demand for bread, you would not attempt to bake more.

This is a point that HSBC analysts make in their report that addresses the current divergence between investment and consumption growth. The impressive gross domestic product (GDP) expected in FY24 (which the Reserve Bank of India hopes to be near 8 percent) is driven by investments, something that delights economists. Investment-led growth is said to reflect confidence in the consumption story. HSBC analysts believe that the third quarter GDP growth understates India’s consumption expansion and perhaps overstates investment growth. Our Chart of the Day captures this divergence and explains HSBC’s points. “Historically, investment has never climbed sustainably as a percentage of GDP while consumption falls. After all, it is the same exuberance that drives both. And in the pecking order of growth, higher consumption typically kicks in first, giving confidence to investors, who, over time, add to capacity by investing,” the HSBC report said.

The HSBC analysts point out that consumer goods imports are higher than pre-pandemic levels, services and personal loans have been rising consistently. All of this points to a stronger consumption growth than what GDP data suggests.

This brings us back to the myriad facets of India’s consumption story, one that is elegantly addressed in Rama Bijapurkar’s new book Lilliput Land. Bijapurkar argues that for decades global businesses have judged the Indian consumer market through the lens of a classical metric of per capita and erroneously concluded that the market has promise, but it is not there yet.

The book makes a case for the Indian market’s uniqueness with Lilliput-like characteristics, where size is small and has stumped big businesses. “It is a story of lots and lots of small consumers earning and spending just a little bit individually that adds up to an enormous amount. They are served by millions of small suppliers, oozing innovation, agility, and customer intimacy that is the envy of large companies. The whole ecosystem is powered by an unparalleled digital infrastructure that seamlessly supports billions of small transactions every day.”

Bijapurkar’s book is a celebration of the small business mom and pop shops that serve the Indian consumer better. At the same time, the consistent growth in per capita income has led to many Indians grabbing global goods and services that better their lifestyle.

What does this mean for consumption growth?

We turn to a less palatable inequality report of the UN that rated India at 134 on the Human Development Index. The report states that the top 1 percent of Indians corner 21.7 percent of national income. Our household consumption expenditure survey, explained lucidly here by Manas Chakravarty, shows the top 20 percent account for nearly half of the increase in urban consumption between 2011-12 and 2022-23 and 45.7 percent of consumption in rural areas.

Who will drive consumption is important for the odds of consumption growth reviving. HSBC points out that consumption is not equitable, but consumption growth has all the possibilities of rising. “Top-of-the[1]pyramid consumption growth is exceeding bottom-of-the-pyramid, even though data over the last two months suggests that incomes at the lower end have improved.”

As we argued here in February, that there is little correlation between private consumption and real rural wages. Simply put, what happens to the bottom-of-the-pyramid has little significance to headline numbers.

That leaves us with everything in between the top and the bottom. Perhaps this is where Lilliput Land lies and would drive the consumption narrative in the years to come.

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