Global brokerage firm UBS Securities predicts that India will surpass Japan to become the world's largest consumer market by 2026, riding on the country's rapid economic growth and spike in household consumption.
India's household consumption doubled over the past decade, touching $2.1 trillion in 2023, at a compounded annual growth rate (CAGR) of 7.2 percent.
The brokerage draws a comparison between India at the current juncture and China of the 2000s to analyse the path that India's consumption may take in the coming years. "While India’s private consumption was only 30 percent of China's total in FY23, it is significantly higher than China’s when the latter was at a similar stage of development (measured in per capita GDP). India’s private consumption size is about the same as China's in 2006-07," UBS highlighted.
Based on these trends, UBS believes that if India's consumption share in GDP remains steady and grows at the same pace as its GDP, the size of its domestic market could reach China's current level long before its GDP does.
"This is due to India's household income as a percentage of GDP being significantly higher than China's. As a result, India's current consumption level matches where China's was in 2006-07, even though India's per capita GDP is only at China's 2000 level in constant USD terms," the brokerage explained.
Meanwhile, UBS also feels that for India, the potential of household income growth will be driven by labour income, which in turn, is a function of wage growth and employment growth. India's urban wage growth, as indicated by the salaries of listed corporates, averaged around 10 percent annually in the decade leading up to the pandemic (2011-2020) and accelerated to approximately 14 percent in 2022. This growth mirrors China's wage increase of 15 percent around 2006. In the decade following 2006, China's wage growth averaged 13 percent annually before slowing in recent years.
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Since the growth in household income is directly linked to labour income, UBS also analysed the employment mix of China in the 2000s and India at the current time. India’s overall employment structure is divided 43 percent into the agriculture sector, 24 percent in secondary sectors (of which manufacturing 11 percent), and 34 percent in the services sector.
In comparison, China’s farming employment declined sharply in the past two plus decades to less than 25 percent as economic growth turned strong. Basis that, UBS sees large potential for India to increase its employment share in secondary and services industries. The firm believes that such a transfer of farming labour to more productive non-farming sectors would likely boost labour productivity and wage growth, supporting continued consumption growth.
Lastly, UBS feels sustenance of India's consumption growth in the medium term will depend heavily on the creation of high-quality jobs. It also believes that the relative slowdown in consumption growth over the past few years likely reflects the impact of the pandemic on lower-income households, the lack of fiscal support for them, a softening in corporate wage growth, and rising food inflation.
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