Has India entered the next lap of consumption-driven growth ?

We live at a growth phase and an emerging economy like India wouldn’t like to miss the zeitgeist. With Q3 FY25 growth at 5.4% as depicted below, we clearly seem to be in a bust cycle. This is coupled with recent rupee depreciation driven by foreign investment outflow.

As a counter-cyclical monetary policy, RBI cut its repo rate for the first time in 2 years realizing the proverbial “pivot”.

This was also coupled with a fiscal stimulus. The FY 2026 Budget increased the tax exemption limit to ₹12 lakh for individuals and ₹12.75 lakh for salaried taxpayers (with a standard deduction of ₹ 75k) under the new tax regime, which is expected to fiscally increase the disposable income of the middle class by an additional ₹ 1 lakh crore. The IMF estimates a consumption multiplier of approximately 5x, indicating that each ₹1 spent generates an additional ₹5 in economic activity. Given the economic principle that individuals save 20% and spend 80%, the recent tax cuts of ₹1 lakh crore could stimulate spending of around ₹4 lakh crore, potentially contributing about 2% to GDP growth.

Now India’s GDP growth since the turn of the millennium has been exponential.

In nominal USD terms, applying the CAGR formula:

\[ r = \left( \frac{GDP_{\text{final}}}{GDP_{\text{initial}}} \right)^{\frac{1}{n}} - 1 \]

from 2000-2005 for n=25 yrs, we get a nominal growth rate r ~ 10%. Adjusting for a ballpark estimate of an average annual inflation around 6% in Fischer’s formula…..

\[ r_{\text{real}} = (\frac{1 + r_{\text{inflation}}}{1 + r_{\text{nominal}}} - 1 ) \]

we get a real annual avg. growth rate of ~5%.

These nationwide figures seem great but they’re a function of population and size of a country, besides actual human development. Further there are caveats when considering the middle class which I’ll discuss later. I’ve always believed that in liberal societies, per capita figures make far more sense. Ever since my childhood, I was impressed with the formula for Human Development Index which included GNI per capita. I remember when India hosted G20 in 2023, there was a debate on Reddit that India’s per capita GDP lurked at the bottom among G20 nations.

Infact today at nearly $ 2500 p.a., in nominal terms, it’s placed at 141st rank among all nations of the world. This is when figures claim it’s overall nominal GDP to be 5th largest in the world and 3rd largest in PPP terms. India’s large population seems to masquerade a lot of statistical realities tbh.

But as per a recent article by Upstox, India’s per capita GDP has been linearly climbing over the last 20 years and has crossed a critical threshold which drives the virtuous cycle of discretionary spending leading to greater per capita GDP. Moreover since 2015 it’s showing over 8% per cent CAGR, reflecting an exponential trend.

This, according to many, has ushered an era of consumption boom in India. At $ 2.4 tr, nearly 57% of India’s GDP already coming from Consumption Expenditure (PFCE). By 2030 it’s projected to reach upto $ 4.3 tr or 62% of the then GDP. The many drivers of this boom were highlighted in a recent article by ET.

The Practicals

But the devil lies in the details. So let’s dive in. I’ll analyze if the growth trend in per-capita GDP between the 2005-2020 period is really as impressive as it looks.

Disclaimer: Several ballpark but logical estimates are used in calculations.

First let’s convert USD to ₹.

FY05: $663

FY20: $2,112

Applying prevalent exchange rates,

FY05: $663 × 44 ≈ 29,200 INR

FY20: $2,112 × 74 ≈ 156,300 INR

So in nominal rupee terms, that’s about a 5.3× jump (from ~29k to ~156k rupees).

Further taking a ballpark average annual headline inflation of 6% in this period

\[ (1 + 0.06)^{15} \approx 2.4 \]

After dividing by roughly 2.4× for inflation, we get:

\[ \frac{5.3 \times \text{(nominal growth)}}{2.4 \times \text{(inflation)}} \;\approx\; 2.2 \]

So real (inflation-adjusted) per capita GDP in rupees approximately doubled (2.2×) from 2005 to 2020.

But I’m interested in the per-capita income trend for the middle class in India. That’s because national income is notoriously distributed unequally in our society. For that I refer to the Gini coefficient. I know some might consider it a debatable figure, so I’m willing to heavily discount the numbers. India’s average Gini coefficient between 2005-2020 is estimated to hover around 0.3 which indicates that the lower class earn around 60% less than the upper class. Since I’m interested in the middle class, let’s just discount the per-capita GDP by 20% when applied to the middle class. That would mean :

\[ \text{Middle Class Factor} \approx \frac{1.20}{2.2} \approx 1.83 \]

In other words, the middle class’s real income might have grown by a factor of about 1.83× over the period instead of 2.2×.

Although tough to estimate, suppose that, on average, the effective disposable income for the middle class was eroded by another 10% due to various indirect and direct taxations. Then the effective growth factor would be :

\[ 1.83×0.9≈1.65 \]

That means for the middle class in India, effectively,

\[ \text{Annual Growth} = (1.65)^{\frac{1}{15}} - 1 \approx 3.4\% \text{ per annum} \]

Now compare it with the well-known figures: 6+ % annual GDP growth rate of India and a 5.3 x rise in per-capita incomes over the 2005-2020 period for our study. What you experience as a middle class Indian might be a little different as you can see now.

So I mean, don’t just take statistics on the face value. Research the phenotype, not just the genotype. And find the bumps.