India’s consuming class: Deepening but not widening

Boosting the income of people at the bottom of the pyramid is crucial to accelerate overall economic growth momentum

In the early 2000s, the then Tata Group chairman Ratan Tata envisioned providing a safe and affordable personal transport solution to the country's growing middle class. This led to the launch of Tata Nano in 2009. Hailed as the “people’s car”, it was initially priced at Rs One lakh and pitched as a safe alternative to two-wheelers. The basic premise was that people will transition from two-wheelers to cars as their income increases.

Multiple reasons are given for the project’s failure: From unrest at its manufacturing plant in Singur, West Bengal, to marketing blunders. However, one key aspect is related to the income levels of the population segment that the project targeted.

In a recent report, Venture capital firm Blume Ventures noted that around 90% Indians lack discretionary spending power. The income gap has only increased over time.

The sharp economic expansion in the country has largely benefitted the higher economic strata in society. According to a 2023 Oxfam report, the richest 1% in India owned over 40% of the country’s total wealth in 2021. More than 40% of the wealth created in the country between 2012 and 2021 went to just 1% of the population while the share of the bottom 50% population was just 3%.

Clearly, people who are at the bottom of the pyramid are not moving up the ladder. Consuming class is not widening as much as it is deepening. This means those who were able to afford a car priced at say Rs 5 lakh in 2010 are now able to spend Rs 15-20 lakh for a vehicle. People in higher economic strata have achieved upward mobility even faster.

But the transition from bicycle to motorcycle and from two-wheelers to four-wheelers has not happened at the pace as it was projected in the early 2000s when Ratan Tata envisioned the Nano car.

This is reflected in the sales pattern of cars, two-wheelers and other discretionary products. Hatchback variants like Maruti Suzuki’s Alto and WagonR, Hyundai’s i10 and i20, used to dominate the Indian car markets until 2019, accounting for nearly half of the total sales. However, there has been a significant change in the past five years. Sports Utility Vehicles (SUVs) accounted for half of the total car sales in the country in 2024. The share of hatchbacks declined from 47% in FY19 to 28% in FY24. During this period the share of SUVs jumped from 23% to 50%.

This indicates that a substantial number of car users have transitioned from entry-level hatchbacks to more aspiring and expensive SUVs. However, the pace of transition from two-wheelers to four-wheelers has remained subdued.

“Whatever consumption growth we are seeing right now is driven by the people at the upper end of society,” said Devendra Kumar Pant, Chief Economist and Head of Public Finance at India Ratings and Research (Ind-Ra).

Driven by consumption

Over 60% of India’s gross domestic product (GDP) is driven by consumption, similar to the United States. In China, the share is around 40%.

The country’s economic growth over the years has moved largely in tandem with the trend in consumption expenditure. The decline in private final consumption expenditure (PFCE) due to the Covid pandemic led to a 5.7% contraction in the country’s GDP in 2020-21. In 2021-22, PFCE surged by 11.6% leading to a 9.8% expansion in the GDP.

However, in 2023-24 the GDP grew at a robust pace of 9.2% despite a sluggish expansion in PFCE. The growth was lifted by heavy government spending.

The GDP growth improved to 6.2% in the quarter ended December 2024 from a seven-quarter low of 5.6% in the previous quarter, lifted by consumption demand. Consumption growth accelerated to 6.9% year-on-year in the October-December quarter from 5.9% in the previous three-month period, as per the latest data released by the National Statistics Office.

Pant said high inflation in recent years has hit the economically disadvantaged section of society harder. “Whenever you have inflation originating from the food inflation, people at the bottom end face a higher inflation. Their real income or real wages may not keep pace with the inflation,” he said.

As per the Economic Survey 2024-25, the average real monthly wages (at constant 2011-12 price) in 2023-24 were lower than the wages in 2017-18. The average real monthly wages of men declined from Rs 12,665 in 2017-18 to Rs 11,858 in 2023-24. For female workers, it fell from Rs 10,116 in 2017-18 to Rs 8,855 in 2023-24.

Nominal wages during this period increased from Rs 17,299 to Rs 22,092 for men and from Rs 13,817 to Rs 16,498 for women.

This difference between real and nominal wages is because of inflation. The trend in real wages gives a better idea of people’s spending capacity. This official data shows that common people’s spending capacity has actually gone down. People from economically disadvantaged sections have been impacted harder by a decline in real wages.

Profits surge, wages lag

Corporate profits soared to 15 years high in 2023-24. Big companies significantly outperformed their smaller peers in profitability. “While profits surged, wages lagged. A striking disparity has emerged in corporate India: profits climbed 22.3% in FY24, but employment grew by a mere 1.5%,” the Economic Survey 2024-25 noted.

One of the key highlights of the recent Union Budget was tax relief for the middle class. In her budget speech, Finance Minister Nirmala Sitharaman noted that the tax relief will leave more money in the hands of the middle class and boost consumption.

However, the tax relief is unlikely to have any impact on the spending capacity of over 90% of the population. “The tax relief is going to cater to only the upper 5% of the population,” said Pant.

“If you put Rs 1,000 crore in the hands of the rich and Rs 1,000 crore in the hands of the poor, the money in the hands of the poor will have a higher multiplier impact on consumption,” said Nagesh Kumar, director and chief executive of the Institute for Studies in Industrial Development, a policy think tank.

Kumar, who is also an external member of the Reserve Bank of India’s Monetary Policy Committee, said boosting the income of people at the bottom of the pyramid is crucial to accelerate consumption and the overall economic growth momentum.