Chart: If Modi comes to power, will he be able to revive consumer spending?

When the country is on the cusp of political change, the Indian economy is battling the worst slowdown since the 1980s as GDP growth has almost halved to under 5 percent in the past two years.

With disappointing factory output and high inflation data that came out on Monday, the country’s ailing economy has shown little sign of improvement.

While financial markets are betting on the BJP’s Prime Ministerial candidate Narendra Modi to replicate his pro-business policies in Gujarat on a national level, an economic revival depends on his success in boosting consumer and investment demand.

A Morgan Stanley report notes that India’s consumption-to-GDP ratio is set to see a decline. The consumption-to-GDP ratio has traditionally remained high at an average 72% in the 2000s, declining from 78% in the 1990s.

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But, India’s consumption to GDP is currently at a much lower level at 69.3%. However, the consumption rate is high if compared to 49.5% in China and 54.5% in AXJ ex-India.

So, why has the consumption ration declined over the years? The Morgan Stanley report notes that the declining age-dependency ratio is one of the biggest reason for a fall in the consumption-to-GDP ratio. This means a growing young population in the country is consuming less.

In the 2000s, India’s consumption growth saw an acceleration, especially in the latter part of it, driven by higher per capita income growth. India’s per capita income increased from $231 in 1992 to $1036 in 2012. However, owing to the cyclical slowdown, India’s consumption growth has decelerated to an average of 4.8% in the past two years, as both private and government consumption growth have slowed.

Modi has run a gruelling campaign mainly on promises to create jobs and restore India to a path of high economic growth. But, this is a new challenge before him. Will he able to revive the consumption in India?

The report also notes that the consumption basket of an average Indian are changing because of rising per capita income, rapidly emerging modern retail formats and increased access to financing.

The share of organized sector products is increasing, while that of primary products is declining. An average Indian now allocates about 65% of expenditure to products other than food, beverages, and tobacco, compared with 49.3% in 1990.

The above pie-chart shows India’s consumption basket in the 1980. The miscellaneous goods and services include hotels and restaurants, Furniture, Furnishing, Appliances & Service and Medical Care and Health Services among other things.

The consumption basket of India in 2012 shows how the consumption pattern has changed. The transport and communication have gone up by a considerable percentage. The others in the chart include hotels and restaurants, furniture, furnishing, appliances & service, medical care and health services and clothing and footwear.

The report notes that a reform in the retail distribution network, coupled with rising infrastructure investments, could provide India with the opportunity to participate in the global export market for low-ticket manufactured goods.

“While FDI in multi-brand retail distribution would accelerate retail distribution reform in India, its fate will be contingent on the new government’s decision to allow the same. The new retail format is beginning to drive a change on thesupply side in India. We believe this change in the retail sector could lead to a significant transformation in India’s SMEmanufacturing and farming segments,” notes the report.