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One of the best pieces I came across earlier today was this- a real primer on the actual state of the consumption and income dynamics of the country. https://twitter.com/frontierindica/status/1349753998593515520
I'm not going to start throwing numbers- the article has enough of those. For those who want a complete picture, the complete set of numbers is available below http://www.ice360.in/
What I am interested in is the narrative that these numbers tell, and also the reason why we've had a slowdown this decade overall. When the economy was opened up in 1991, a new middle class came up, and drive the new barometers of economic performance- car sales, airline travel,
houses, electronics, and consumer goods in general. However, unlike every other developed economy we didn't do it by manufacturing- we did it with services. The problems with this are obvious- services are never going to deliver the broad based growth that manufacturing does.
Therefore, the middle class we had was mostly concentrated in the services sector, and did very well for themselves as long as the economy was opening up. But this was never a large number. The breakup of the economy is roughly 59% services, 27% industry and 14% agriculture
On the face of it, it looks quite like the breakup of the sectors of a developed economy; agriculture is large, but the proportion of services we have is quite similar to that of Germany, which is at 68%. But the labor force distribution is the opposite- services at 32%, industry
at 24% and agriculture at roughly 42% (might have gone up in 2020). In Germany- agriculture at 1.4%, industry at 24.2% and services at 74.3%. And even within services, the largest employer is real estate, which soaks up excess unskilled labor.
What we've been having, then, is that roughly the top 5-10% of all Indian households have been paying most of the income taxes, and also been driving most consumer spending that keeps the economy running. https://twitter.com/IncomeTaxIndia/status/1227890332651675650?s=20
This is hugely problematic for two reasons- one is that the marginal propensity to consume decreases as one climbs up the income ladder- which means that the post 1991 middle class, which is actually upper middle income now, will not consume as much of it's income as it used to
in the 90's and the 2000's. The second is that the basket of goods and services that one consumes also changes- to include more foreign goods and services. For example, in 2015, the amount spent by Indians on education abroad was roughly 4.6 billion. By 2018, this amount had
already touched 9 billion, and will continue to climb higher as affirmative action makes it harder for people to get higher education. Combine this with vacations abroad, online shopping from abroad (stopped in 2020), consumption of foreign entertainment and luxury goods,
the upper middle class- that already perceives the West to be a paragon of high culture- will continue to prioritize the inclusion of foreign goods and services over domestic ones. The solution to this is not to clamp down on foreign consumption- but to build a new middle class-
The next 100-200 million that will drive consumption of local goods and services. And no country has managed that without manufacturing, which India must now get serious about, if it hopes to avoid stagnation, and a middle income trap.
