Accelerating India’s Economic Growth: How Consumption Holds The Key

As India nears its 100th anniversary of independence, its vision of becoming a global economic powerhouse remains strong.

Although optimistic forecasts from the International Monetary Fund (IMF) and World Bank suggest gross domestic product (GDP) growth of around 7 per cent for 2024-25, sustainable growth requires a balance between demand and supply.

Fuelling India’s growth sustainably depends on boosting consumption to drive investment and production. A focus on consumer demand and private investment is essential to realising India’s economic potential.

Enhancing Consumption to Boost Investment and Production

Consumption accounts for roughly 60 per cent of India’s GDP, yet household spending has been hindered by inflation, low disposable incomes, and limited credit access.

Targeted fiscal policies that increase consumer spending can create a more dynamic economy. Lowering the goods and services tax (GST) on essential goods, for example, would reduce household expenses and make goods more accessible to a broader population, driving demand across sectors. This increase in consumer demand would incentivise private businesses to expand production.

Historically, countries like Brazil, Malaysia, Chile, and South Korea have harnessed consumer demand to strengthen their manufacturing sectors. Brazil promoted household income growth through social policies, fostering demand for locally produced goods. Malaysia focussed on expanding its middle class, increasing domestic consumption, and strengthening the retail industry. Chile encouraged investment that boosted consumption in key sectors, while South Korea aligned productivity growth with wage increases, ensuring stable domestic demand.

These examples show that sustainable domestic consumption can support production growth and attract investment. India’s approach must similarly focus on steady demand growth, fostering a self-sustaining cycle of consumption and investment.

Building a Robust Manufacturing and Technological Ecosystem

India’s recent push for self-sufficiency under “Aatmanirbhar Bharat” aims to reduce import dependency and build a strong manufacturing base. For this sector to thrive, substantial investments in technology, workforce skills, and infrastructure are essential. Specialised industrial clusters could enhance India’s manufacturing capabilities, serving both domestic and international markets.

However, without robust domestic demand, production gains may go underutilised. India must ensure a steady demand pipeline to support production and create globally competitive industrial ecosystems.

The government has improved the business landscape through digitalisation and regulatory reforms like GST and the Insolvency and Bankruptcy Code (IBC). While these changes have encouraged entrepreneurship and a more investment-friendly climate, consumption trends remain uncertain, deterring some investors.

A recalibrated government spending approach is needed, focusing on sectors that stimulate consumer demand. Relying solely on government-led infrastructure projects risks overextending public finances without adequately boosting demand.

A balanced strategy would include more private investment driven by market demand rather than government spending alone.

Expanding into High-Value Export Markets

India’s strengths in information technology (IT) and pharmaceuticals have secured a global foothold, but diversifying into high-value sectors like electronics, defence, and green technologies could enhance economic resilience. Developing these sectors would generate foreign exchange and strengthen domestic industries.

Reducing export barriers and establishing strategic trade agreements are critical. However, a sustainable export strategy needs a strong domestic consumption base to counterbalance global market fluctuations. India’s growth should not rely solely on exports; a balanced approach that strengthens both domestic consumption and export capabilities will be more effective.

Towards Sustainable Growth Through a Two-Pronged Strategy

India has often attempted to stimulate consumption through short-term fiscal measures, but these have yielded only temporary growth. Now the focus must shift to achieving secular consumption growth that can sustain production and investment long-term.

While India’s GST revenues are high, emphasising collection over demand growth misses the larger objective. A consumption-driven economy, measured by a strong Consumption Index rather than just tax collections, aligns better with sustainable growth.

Policies that enhance consumer spending can lead to a self-sustaining cycle of production and investment. Lessons from Chile and South Korea show that consumption-focused growth fosters economic resilience, where private investment and innovation thrive.

India’s economic ambitions depend on finding the right balance — boosting domestic consumption to support production, creating a supportive business environment, and tapping into high-value exports. By prioritising a consumption-led growth model, India can build a stable, inclusive, and sustainable economy poised for global leadership.