India-China consumption comparison

A side by side comparison of the consumption patterns of India and China as explained by The Hindu

In 2023, India surpassed China to become the world’s most populous country. The development came against the backdrop of a declining birth rate (6.4 births per 1,000 people) and total fertility rate (~1%) in China. China also recorded a negative population growth rate for the first time in six decades. This means a rising dependency ratio, which is projected to increase over time. In contrast, India’s population, despite reaching replacement levels (total fertility rate of 2.1), is expected to grow and peak around 2060.

These developments have significant consequences on domestic consumption in the two countries. Consequently, it becomes imperative to compare their consumption figures and strengths/weaknesses. A cross-comparison also assumes significance owing to the contrasting experiences of the two countries in their respective geopolitical landscapes.

Both India and China have a large consumer base. A consumer is anyone who spends more than $12 a day, as per the Purchasing Power Parity [PPP], 2017.

Private Final Consumption Expenditure (PFCE), which measures total consumption expenditure by households and non-profit institutions serving households on goods and services, serves as a useful proxy for consumer spending especially as income and consumption are concentrated within the consumer classes. The data reveals that as a percentage of GDP, India spends significantly more on consumption than China. While PFCE contributes more than 58% to India’s GDP currently, it contributes only 38% to China’s economy. Additionally, the final consumption, which also includes government consumption expenditure, constitutes 68% of the GDP for India and 53% for China. This implies that the government is a much bigger consumer in China than in India. Furthermore, while the percentage for India is steadily increasing, the same for China has been on a decline.

The aggregate data on PFCE reveals that despite China’s economy being approximately five times bigger than that of India’s, its PFCE amounts to relatively a lot less, only about 3.5 times that of India’s. This not only means that consumption is a much larger contributor to India’s GDP, but that India will equal China’s consumption level at a relatively much lower GDP (~$10 trillion) as against China, which achieved the scale at approximately $17 trillion.

Secondly, despite the gloomy narrative around China’s consumption, its PFCE has registered a significant increase in the past four years. Its PFCE remained rather constant in 2020 (pandemic year) before registering a huge uptick in 2021. On the other hand, India’s figures have steadily increased from $1.64 trillion in 2018 to $2.10 trillion in 2022. Thirdly, in 2022, while China recorded a decline in its numbers — both aggregate ($6.6 trillion compared to $6.8 trillion) and per-capita ($4,730 compared to $4,809) — India witnessed marginal growth in both categories. Nevertheless, the difference in the expenditure between the two countries has widened from $3.8 trillion in 2018 to more than $4.5 trillion in 2022.

Finally, in terms of ratio, India’s PFCE has closed the gap with China from ~3.3 to ~3.1. The significance of India closing the gap in terms of ratio here needs to be underlined. Usually, with a country like China that is operating on a huge base, even a marginal growth rate could inflate the aggregate numbers manifold. This would be true even if India, on the other hand, were adding expenditure at a relatively higher growth rate than China. But to beat China in terms of ratio would have required India to grow at a significantly higher rate than China, which it did.