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India to surpass Germany, Japan to be 3rd largest consumer market by 2026: UBS

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Over the past decade, India's consumption has almost doubled, rising from $1.2 trillion in 2013 to $2.1 trillion in 2023. However, when adjusted for inflation, the real household consumption growth is projected to be below the trend, falling in the range of 4-5% in FY25/26.





According to UBS, India appears to be on track to become the world's third-largest consumer market by 2026, surpassing Germany and Japan.

 

Over the past decade, India's consumption has almost doubled, growing from $1.2 trillion in 2013 to $2.1 trillion in 2023. During this period, the country has recorded an average compound growth rate of 7.2%, outpacing major economies like China, the United States, and Germany.




According to the international brokerage, a primary reason for India's sustained growth is the country's sizeable domestic market, which has the capacity to absorb the output of its manufacturing sector.

 

 In essence, there is sufficient demand in India to match the supply, which provides the country with a key advantage over its Asian and emerging market counterparts. This factor also allows India to benefit from the 'China+1' supply chain diversification, in addition to the impact of policy initiatives and structural reforms.





According to UBS, to sustain India's consumption growth in the medium-term, high-quality job creation will be crucial. However, as consumption continues to grow, it has lagged behind investment and overall economic growth during the post-pandemic phase.

 

While the Indian economy has witnessed a strong recovery since the mid-2022s, investments and GDP growth have outpaced the recovery in consumption. UBS notes that this divergence is significant, as household consumption accounts for nearly 60% of India's nominal GDP.

 

UBS identifies three factors contributing to the dichotomy between GDP and consumption recovery:


1. Divergence in discretionary and services spending versus consumer staples.

2. The rural-urban divide.

3. The difference in demand between affluent and broader household segments.

 

The report states that the number of people in the affluent category in India will more than double over the next five years, reaching around 40 million as of 2023.


Although the rural economy in India has recovered from the pandemic-induced lows and is experiencing a resurgence, the urban economy has continued to outperform. This is attributed to the income continuity observed at the top of India's income pyramid during the pandemic period, in contrast to the more muted growth in rural wages.

 

"At the same time, limited fiscal support for vulnerable sections of society during the pandemic (income support and/or direct cash transfers) amplified the gap," said UBS.

 

Here is a rephrased version of the given information:

 

The divergence between GDP growth and consumption recovery has led to lower household savings, which can be attributed to several factors:

 

1. Weaker household incomes

2. A higher propensity to consume due to changing consumer preferences

3. Rising debt service obligations, with household debt reaching a 15-year high

 

Accounting for inflation, the real household consumption growth is projected to be below the trend, around 4-5% in FY25-26. This figure is lower compared to the average on-year growth of 6.5-7% observed during the FY11-20 period.





Although urban mass-market demand is expected to remain modest due to softer wage growth and the flattening of personal loan expansion as a result of monetary tightening, the affluent segment in India is poised to continue outperforming in terms of consumption growth.


"Rural consumption could recover on hopes of normal monsoons, the likely removal of export bans for agricultural commodities as inflation eases, and the much anticipated capex recovery with construction being the largest generator of jobs outside of agriculture," UBS added.

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