Page 103 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes Our results show that a significant expansion in consumption is not dependent on an
equally significant decline in savings. There are three major factors driving increased
consumption, by far the most important being rising incomes, which we estimate will
account for 80 percent of total growth over the next two decades. The second driver will be
population growth, which we find will account for a further 16 percent of the overall rise
in consumption.

The third factor will be savings but developments on this front will play a relatively
minor role. We expect India's household savings rate to peak and gradually decline from
its current level of 28 percent of disposable income to 22 percent in 2025 as India's
demographics become more youthful. However, this change will account for just four
percent of future consumption growth. Even if household savings were to remain flat,
consumption would still grow substantially.
The primary driver of India's growth as a consumer economy will thus be increasing
incomes. Our analysis shows that average real household disposable income is set to
grow from 113,744 Indian rupees in 2005 to 318,896 Indian rupees by 2025, a compound
annual growth rate of 5.3 per cent. This is much more rapid than the 3.6 percent annual
growth of the past 20 years and, with the exception of China, much quicker than income
growth in other major markets.
Income growth is, in turn, dependent on sustaining overall economic growth in the years
ahead. We are optimistic on this front because of the substantial scope for Indian businesses
to increase their productivity, the growing openness and competitiveness of the Indian
economy, and favorable demographic trends. Our income estimate assumes real compound
GDP growth of 7.3 percent a year from 2006-2025, acceleration from the 6 percent growth
of the previous two decades, but in line with most estimates of India's long-run sustainable
growth path.
India's economic reforms, and the increased growth that has resulted, have already proved
to be the most successful anti-poverty program in India's history. In 1985, 93 percent of the
population had an annual household income of less than 90,000 Indian rupees-an income
bracket we categorize as deprived. By 2005, this had dropped by about two-fifths to 54
percent of the population. By 2025, we see the deprived segment shrinking even further to
only 22 percent of the total population.
Rising incomes will also create a sizeable and largely urban middle class. We define the
middle class as spanning real annual household disposable incomes of 200,000 Indian
rupees to 1,000,000 Indian rupees. In 2005, the Indian middle class was still relatively small
with 50 million people or some 5 percent of the population. However, if India achieves the
growth we assume, its middle class will swell to 583 million people or 41 percent of the
population. In addition, households with real earnings more than 1,000,000 Indian rupees
a year, which we refer to as global, will comprise nearly 2 percent of the population, but
earn almost a quarter of its income.
Widespread concern that India does not save enough and that investment will suffer if
consumption becomes the driving force of the economy is not warranted, in our view.
Negative comparisons about India's level of savings are usually made against China
whose gross national savings rate has risen from 33.6 percent in 1985 to 50.4 percent in
2005-arguably too high a rate and driven by inefficiencies in China's financial sector.
Against other high-saving countries such as South Korea and Japan, India's savings rate is
actually relatively high.

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