Context: In 2023, India surpassed China to become the world's most populous country. This shift comes as China experiences a declining birth rate and negative population growth, while India continues to grow steadily. These trends have significant implications for domestic consumption patterns and economic landscapes in both countries.
Population Dynamics and Economic Impact
- China's declining birth rate (6.4 births per 1,000 people) and total fertility rate (~1%) have resulted in a rising dependency ratio, projected to increase over time.
- In contrast, India's total fertility rate has reached replacement levels (2.1), with its population expected to peak around 2060.
- These demographic differences influence the consumption patterns in both countries, as a larger, younger population in India implies a growing consumer base, while China's aging population could lead to decreased consumption over time.
Consumption Expenditure: India vs. China
- India's PFCE: Contributes over 58% to the GDP, highlighting the significant role of consumption in driving economic growth.
- China's PFCE: Accounts for only 38% of the GDP, indicating a lower reliance on consumer spending compared to India.
- Additionally, the Final consumption, which also includes government consumption expenditure, constitutes 68% of the GDP for India and 53% for China. This implies that the government is a much bigger consumer in China than in India.
- Furthermore, while the percentage for India is steadily increasing, the same for China has been on a decline.
- Private Final Consumption Expenditure (PFCE) measures total consumption expenditure by households and non-profit institutions serving households on goods and services, serves as a useful proxy for consumer spending especially as income and consumption are concentrated within the consumer classes. ·
- A consumer is anyone who spends more than $12 a day, as per the Purchasing Power Parity [PPP], 2017.
Aggregate Consumption Data
- Despite China's economy being approximately five times larger than India's, its PFCE is only about 3.5 times that of India's. This indicates that consumption is a more substantial contributor to India's GDP.
- India will equal China’s consumption level at a relatively much lower GDP (~$10 trillion) as against China, which achieved the scale at approximately $17 trillion.
Trends in Consumption Growth
- China: PFCE remained stable during 2020 (pandemic year) but saw a significant uptick in 2021. However, 2022 witnessed a decline in both aggregate and per capita PFCE($6.6 trillion compared to $6.8 trillion) and per-capita ($4,730 compared to $4,809).
- India: Steady increase from $1.64 trillion in 2018 to $2.10 trillion in 2022, with marginal growth in both aggregate and per capita PFCE in 2022.
- The expenditure gap between the two countries widened from $3.8 trillion in 2018 to over $4.5 trillion in 2022.
Ratio Comparison and Per Capita Analysis
- India has been closing the gap with China in PFCE ratio terms, from ~3.3 to ~3.1. Beating China in terms of ratio signifies India’s higher growth rate compared to China.
- However, in per capita PFCE, China slightly widened the gap from ~3.0 times of India in 2018 to ~3.1 in 2022, attributed to China’s negative population growth in 2022.
Importance of PPP Figures
- Comparing nominal PFCE figures alone can be misleading due to discrepancies in the cost of living.
- Note - Consumption is not just about consumed value but also consumed volume. And nominal figures only give an idea of total consumption value — might not give an idea of the volume of goods and services consumed. Thus, to account for consumption by value, a comparison of PPP figures becomes imperative.
- PPP figures provide a better understanding of consumption by value. In PPP terms, the gap between China’s and India’s PFCE narrows down further.
- China’s PFCE (PPP): Approximately 1.5 times that of India’s.
- China’s GDP (PPP): Approximately 2.5 times that of India’s.
- The relative gap widened from ~1.58 in 2018 to ~1.66 in 2020 and 2021, but in 2022, India closed the gap to ~1.55.
Expenditure Patterns in India and China
India and China, two of the world's largest consumer markets, exhibit distinct consumption expenditure patterns. This article compares the spending habits of both countries across various categories, highlighting the differences and similarities in their consumption baskets.
- Spending Categories
- Food, Clothing, and Transport: India’s consumption expenditure is characterized by higher spending on food, clothing, footwear, and transport. This pattern is typical of underdeveloped or developing markets where basic needs constitute a significant portion of household spending.
- India: Spends a substantial portion on food, clothing, footwear, and transport.
- China: While food and beverages still constitute the largest chunk of consumption, this is declining as a percentage of total expenditure, indicating a maturing market.
- In aggregate terms, India spends about half of what China spends on food, transport and communication, and clothing and footwear. Despite being a fifth of the Chinese economy, India’s expenditure in these categories is significant and reflects the country's developing status.
Housing, White Goods, and Recreation: China’s consumption basket reflects a relatively developed market with higher spending on housing, white goods, recreation, education, and healthcare compared to India.
- China: Allocates a higher percentage of expenditure to housing, white goods, recreation, education, and healthcare.
- India: Lower spending on these categories, reflecting its developing market status.
Comparative Analysis
- To put things in context, in advanced economies like the U.S., Japan, EU, Germany, and the U.K., expenditure on food isn’t the highest bracket. In comparison, China’s decreasing percentage of spending on food as its market matures is a sign of progression towards a developed market.
- For India, the real growth rate in individual categories often outperforms the nominal growth rates observed in China. This indicates a robust and growing consumer base with increasing spending power.
Implications for Foreign Businesses
- The growing consumer class in India, with its increased spending, may enhance its appeal to foreign businesses, especially amidst the China+1 narrative.
- This strategy involves companies diversifying their supply chains and consumer markets beyond China to other countries like India.