A Domestic Consumption Story

India’s economy seems to be revving up towards a target beyond 9%.

The trade deficit is rising – we import much more than what we export. Inflation is just under control, but not at friendly levels. Demand is rising for almost all conceivable goods one can think of – cars, apartments, white goods, and what not. Prices are obviously on the rise.

However, the good thing about the Indian Economy is that it is a domestic consumption-driven economy, not one built on an export-led model like the Tiger Economies of South East Asia or China.

Is that a distinct advantage in the medium- to long-term ?

You bet.

While the eighties and nineties were favourable to the export-led economies, the tide has changed now. A long-term sustainable economic model cannot be built just on exports, in some cases, the model is constructed on re-exports. If there is no domestic hinterland consuming the goods produced in a country at least to an extent of some 70 to 80%, the vagaries of the consuming countries would determine the fate of the economies largely dependent on their exports. Apart from this factor, the rapidly changing patterns of consumer behaviour in developed, consuming countries would determine the level and quality of their imports. Consumer behaviour changes drastically in a declining economy – when jobs are no longer easy to come by, everyone wants to save for the rainy day. Of course one can argue, the population would then swing even wilder towards lower cost imports. But, I am talking about a sheer drop in consumption levels of the developed economies which are facing almost a deflation.

Not being an economist, it is difficult for me to understand and grasp the dynamics of the various factors interacting to determine consumer behaviour, but I can clearly see why a rising GDP growth rate and a young, consuming population are good for Indian Economy. Contrary to the perception of the world (especially the developed world) that India is grabbing a significantly high share of the world IT services market, and exporting services and jobs, the reality is that at USD 60B, the share of IT services in India’s Economy of USD 1,400B is less than 5%. Yes, we export services, which is more than 25% of all our exports, but it is not a huge determinant of our overall economic well-being.

Well, the conclusion is that while our exports are growing, inching towards USD 200B this year potentially, our overall economy is not impacted in a huge manner by export performance – it is rather determined by our consuming public, whose economic status is slowly, but surely growing. Not a lot, as on a GDP per Capita, we are only around USD 1,100. However, sections of the society which are growing faster than the rest, are driving up consumption rates.

So, folks, it is a good story. We are not hugely dependent on our importers. Of course, whole industries would be affected if exports drop – like what has happened to the hosiery/textiles business. But Indian Economy is resilient and will re-adjust itself towards different markets and make different products. For the next 20 years, we are looking at between 6 and 10% annual growth rate, and even that kind of performance won’t take us to the current economic size of the United States ! But, that would be fine, as growth is good any day and will keep India moving ahead.


Vijay Srinivasan
11th December 2010


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