INDIA-CHINA CONSUMPTION COMPARISON 

In 2023, India surpassed China to become the world's most populous country. This shift is due to China's declining birth rate (6.4 births per 1,000 people) and total fertility rate (around 1%), leading to its first negative population growth rate in six decades. This translates to a rising dependency ratio in China, which is projected to increase further. In contrast, India's population is still growing and is expected to peak around 2060, despite reaching replacement fertility levels (total fertility rate of 2.1).

2. Comparing Consumption in India and China

Both India and China have a substantial consumer base. According to the Purchasing Power Parity (PPP) in 2017, a consumer is defined as anyone spending more than $12 a day.

Private Final Consumption Expenditure (PFCE)

Private Final Consumption Expenditure (PFCE) measures total household and non-profit consumption of goods and services. It serves as a useful proxy for consumer spending, especially within consumer classes where income and consumption are concentrated.

PFCE as a Percentage of GDP

India spends significantly more on consumption relative to its GDP than China. PFCE contributes more than 58% to India’s GDP, compared to only 38% for China. Including government consumption, the total consumption constitutes 68% of GDP for India and 53% for China, indicating that the Chinese government is a much larger consumer than its Indian counterpart.

Comparative Consumption Levels

Despite China's economy being approximately five times larger than India’s, its PFCE is only about 3.5 times that of India’s. This indicates that consumption is a much larger contributor to India’s GDP. India is expected to reach China's consumption level at a GDP of around $10 trillion, compared to China's $17 trillion.

Trends in Consumption Growth

China’s PFCE has increased significantly over the past four years, remaining steady during the pandemic year of 2020 and then increasing in 2021. India’s PFCE has grown steadily from $1.64 trillion in 2018 to $2.10 trillion in 2022. While China experienced a decline in 2022 in both aggregate ($6.6 trillion compared to $6.8 trillion) and per capita PFCE ($4,730 compared to $4,809), India saw marginal growth in both categories. The gap in expenditure between the two countries widened from $3.8 trillion in 2018 to more than $4.5 trillion in 2022.

PFCE Ratio and Per Capita Comparison

India has closed the PFCE ratio gap with China from approximately 3.3 to 3.1. Achieving this ratio indicates India’s higher growth rate in PFCE than China. Regarding per capita PFCE, China increased its lead from around 3.0 times India’s level in 2018 to approximately 3.1 times in 2022, partly due to China’s negative population growth in 2022.

Nominal Versus PPP Figures

Nominal PFCE numbers can be misleading as they do not account for cost-of-living differences, only giving an idea of total consumption value rather than volume. Therefore, comparing PPP figures is crucial for a more accurate representation of consumption.

PPP Comparison

In PPP terms, China’s PFCE is approximately 1.5 times that of India. China’s GDP (PPP) is roughly 2.5 times India’s. While the relative consumption gap widened from 1.58 in 2018 to 1.66 in 2020 and 2021, India closed the gap to 1.55 in 2022. China saw a marginal PFCE increase of $0.7 trillion due to an improved yuan-dollar PPP exchange rate, whereas India added a trillion dollars to its PPP consumption expenditure in 2022 despite a worsening exchange rate.

India’s Consumption Expenditure

India’s consumption expenditure is characterised by higher spending on food, clothing, footwear, and transport. Conversely, spending on education, culture, recreation, and healthcare is relatively low, which is typical of an underdeveloped or developing market.

China’s Consumption Basket

China’s consumption basket reflects a more developed market. While food and beverages constitute the largest portion of China’s consumption, this share is declining as a percentage of total consumption expenditure, signalling a maturing market. China spends a substantially higher percentage on housing, white goods, recreation, education, and healthcare compared to India. In advanced economies such as the U.S., Japan, EU, Germany, and the U.K., food expenditure is not the largest category.

Comparative Spending on Key Sectors

In aggregate terms, India spends about half of what China spends on food, transport and communication, and clothing and footwear. Given that India’s economy is one-fifth the size of China’s and spends a similar percentage of its total expenditure on these sectors, the fact that its total expenditure in these categories is around half of China’s is significant. Specifically, India spends a little over 50% of what China spends on transport and communication.

Growth Rates in Consumption Categories

Real growth rates in individual consumption categories in India often outperform the nominal growth rates observed in China. This trend adds optimism regarding India’s economic trajectory and consumer market development.

Implications for Foreign Investment

Whether India’s growing consumer class and increased spending will enhance its appeal to foreign businesses as a preferred destination over its competitors amidst the China+1 narrative remains to be seen.