Decoding India's economic growth: Key contributing sectors and future outlook
India's economic performance has been impressive lately, marked by a solid 7.8% growth in the first quarter and sustained momentum with a strong 7.6% growth in the second quarter of the current fiscal year. But it's not just about the numbers, it's about the fuel behind them—the spending power that drives India's consumption story. Amidst all the talk about India becoming a major economy, increased consumption stands out as a crucial pillar for this growth.
India's consumption story
The Reserve Bank of India's (RBI) decision to maintain the repo rate unchanged means one thing: more purchasing power for the people. When the repo rate remains unchanged, it leads to stable borrowing costs for commercial banks. This stability often translates into steady or lower interest rates for loans to individuals and businesses. That means people can access loans at consistent, affordable rates, giving them more spending power for buying homes, cars, or making business investments.
A shift from spending on needs to indulging in wants
Economists say that when countries go past $2,000 per capita in GDP, a big shift happens in the economy. This is when consumption skyrockets and the middle class shifts to buying luxuries instead of just necessities. India's GDP per capita now exceeds $2,500. While China hit $2,000 per capita income in 2006, we got there in 2019. China's income quadrupled in 10 years after that. While China rode the wave of exports, India's strength lies in domestic consumption.
Top two segments of consumers contribute the bulk of consumption
The affluent 4% have seven times as much income as the other 96%. This rich segment with household incomes of more than Rs. 30 lakh is projected to grow to 26% by 2047, as per a PRICE report. The next 30% of consumers earn between Rs. 5-30 lakh. They are consuming more—something their parents could never do, and it's fueling premiumization for all consumer brands. Then there's the bulk—50%, which dreams of a better lifestyle, thanks to television and smartphones.
PLI schemes helped revive manufacturing sector post-pandemic
Post-pandemic, the manufacturing sector has seen a revival through multiple production-linked incentive (PLI) schemes. These initiatives are not only helping build up critical value chains and industrial clusters but are also expanding the country's export basket. As many as 14 PLI schemes have brought in a new regulatory framework, aiming to tackle technological gaps and enhance output. There are plans to extend these schemes to more sectors, especially labor-intensive ones, for a further boost to the 'Make in India' initiative.
Manufacturing set to drive growth
The manufacturing sector currently contributes about 17% of the GDP, which is expected to grow to 21% in the next 6-7 years. In November 2023, the S&P Global India Manufacturing PMI rebounded to 56.0 from October's eight-month low of 55.5 This marked the 29th consecutive month of expansion in factory activity. The output of eight key infrastructure sectors jumped 12.1% in October 2023 against 0.7% expansion in the year-ago period, led by increased production in coal, steel, cement, and electricity.
Beyond numbers, India's manufacturing scene is getting stronger
India's aspiration to be a global manufacturing hub is gaining momentum as an increasing number of international firms invest in the country. The 'Make in India' campaign seems to be playing out quite well. From Apple to Amazon, some of the top companies have set their sights on India. The 'China plus one' strategy is also prompting global companies to rely more on India in order to reduce their dependence on China.
India's road to becoming world's third largest economy
The Indian economy, according to International Monetary Fund (IMF) estimates, will surpass Japan and Germany to emerge as the world's third-largest economy by 2027. By 2047, India aspires to be a developed economy. The IMF predicts a 6.3% growth for India this fiscal year. Similarly, the World Bank also estimates a 6.3% economic growth for India in the current fiscal year. Moody's, in August, upheld India's BAA3 rating and maintained a 'stable' outlook for the economy.
Economic challenges India faces
However, India has its fair share of economic challenges to deal with. Low-income growth, along with high inflation and unemployment pose a big challenge for India's consumption story. India lacks adequate infrastructure, such as roads, railways, and sanitation, which hampers its economic development. India has witnessed a surge in private debt due to easy credit availability and low-interest rates. This poses a risk of default and financial instability. Widening income and wealth gaps are fueling social and economic instability.
Key sectors that are likely to drive growth in India
Industries like healthcare, fintech, renewable energy, electric vehicles, IT services, real estate, FMCG, tech innovation and artificial intelligence are expected to draw foreign investors to India in the coming years. These sectors have gained momentum as foreign direct investment (FDI) policies have relaxed in recent years, and PLI schemes have promoted industry-wise capacity building.
MSMEs: The engine for India's economy
As per Deloitte, India's micro, small, or medium enterprises (MSMEs) will play a crucial role in generating income, capabilities, capacities, and ecosystems needed for sustained growth in consumption and investment across all sectors. The MSME sector is expected to boost innovation and opportunities economically and drive job creation and entrepreneurship. Essentially, it is expected to assist the country in harnessing its demographic dividend and expanding the middle-income group.
Growth opportunities in IT and real estate sectors
India's IT industry, currently contributing 8% to the GDP, is predicted to generate US$350 billion in revenues by 2030. Moving to the outlook for the realty sector in India, 2024 is anticipated to be positive across the residential, office, and warehousing segments. According to an IBEF report, the realty sector in India is expected to reach $ 1 trillion in market size by 2030, up from $ 200 billion in 2021 and contribute 13% to the country's GDP by 2025.
Rising industries
Emerging industries like battery energy storage, green hydrogen, biotechnology, AVGC (animation, visual effects, gaming, comics), and semiconductor chip manufacturing are set for growth in the coming years. Furthermore, India has intensified its decarbonization initiatives amid shifts toward renewable energy and aims to achieve 500 GW of renewable capacity by 2030.
