Reuben Abraham points to a commentary by Stephen Roach of Morgan Stanley after his third India visit: "The consumption story — the organic sustenance of sustainable growth and development — casts India in a very different light. Don’t get me wrong — the Indian consumer is hardly a powerful force on today’s global stage. As the accompanying chart shows, India’s per capita income and consumption levels are about half those of China’s. But it is growth at the margin that always drives powerful macro and market trends. And the Indian consumption story is, first and foremost, one of accelerating growth off a low base. The potential comes from the structure of the Indian economy: Private consumption currently accounts for 64% of Indian GDP — higher than shares in Europe (58%), Japan (55%), and especially China (42%). India’s transition to a 7% growth path in recent years is very much an outgrowth of the emerging consumerism of one of the world’s youngest populations. The increased vigor of private consumption provides a powerful leverage to the Indian growth dynamic that is rarely found in the externally-dependent developing world."
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India being a consumption-driven economy is not new. However, the ratio of PFCE (private final consumption expenditure) has not really changed much over time. Certainly, not enough to justify Roach’s “increased vigor of private consumption” statement. CSO data between 1999-2004 shows annual GDP growth of 7.2% and annual PFCE growth at 6.2% (both at constant prices). If at all, other components (i.e. capital formation) have grown faster. Consumption growth is solid, but not spectacular. The more visible higher-income segments are growing at 20+%, thereby demonstrating “increased vigor”. Given the small base (1 million households > Rs. 5 lakh/year), their impact on GDP cant be significant.