Consumption Comparison of India-China | 23 May 2024

Source: TH

Why in News?

In 2023, India became the world's most populous country (with a population of around 1.44 Billion), surpassing China. It has significant consequences on domestic consumption in the two countries.

• This was due to China's declining birth rate (6.4 births per 1,000 people) and total fertility rate (~1%), leading to a negative population growth rate for the first time in six decades. As a result, China is facing a rising dependency ratio.
• In contrast, India's population is expected to continue growing and reach its peak around 2060, despite reaching replacement levels with a total fertility rate of 2.1.

What are the the Consumption Comparison Between Indian and China?

• Consumer Size:
  • Both India and China have a large consumer base. A consumer is anyone who spends more than USD12 a day, as per the Purchasing Power Parity (PPP).

• Addition to Consumer Base:
  • According to the World Data Bank, China's consumer base increased by 31 million in 2024, whereas India saw an addition of 33 million consumers.
  • Projections for 2025 suggest that China will add 32 million consumers, while India is expected to add 34 million.
• Private Final Consumption Expenditure (PFCE): It contributes more than 58% to India’s GDP, while it contributes only 38% to China’s economy.
  • PFCE is a major component of India’s Gross Domestic Product (GDP) and reflects consumer spending, which is a critical driver of economic activity.
  • PFCE is a key economic indicator that measures the total value of all goods and services consumed by households and non-profit institutions serving households (NPISHs) within a country during a specific period.
    • NPISHs are organisations that provide non-commercial services to individuals and families. Examples include religious institutions, charities, and social clubs.
  • Final consumption, including government consumption expenditure, constitutes 68% of India's GDP and 53% of China's GDP.
    • This implies that the government is a much bigger consumer in China than in India.
    • Final Consumption Expenditure (FCE) is obtained by adding Government Expenditure and Private Final Consumption Expenditure (PFCE).
  • The percentage of consumption expenditure is steadily increasing in India, while it has been on a decline in China.

• Differences in Consumption Patterns and Economic Development: India spends a higher proportion of their income on consumption.
  • China's economic size (USD17.8 trillion) is around 5 times that of India's (USD 3.5 trillion) in Nominal terms and PPP terms, China’s GDP is approximately 2.5 times of India’s.
  • In Nominal terms, China’s PFCE (USD 6.6 trillion) is only about 3.5 times higher than India's(USD 2.1 trillion) and in PPP terms, China’s PFCE is approximately 1.5 times that of India.
  • Thus, consumption plays a more significant role in India's GDP compared to China.
  • India will reach the same level of consumption as China at a much lower GDP figure (around USD 10 trillion for India compared to USD 17 trillion for China in nominal terms).
• PFCE Trends between 2018 and 2022:
  • China's consumer spending has grown significantly in the past four years (USD 5.4 trillion in 2018 to USD 6.6 trillion in 2022), despite concerns.
    • On the other hand, India’s figures have steadily increased from USD 1.64 trillion in 2018 to USD 2.10 trillion in 2022.
  • In 2022, China's spending went down slightly, both overall (from USD6.8 trillion to USD6.6 trillion) and per person (from USD 4,809 to USD 4,730). Meanwhile, India's spending inched up in both categories.
  • The difference in the expenditure between the two countries has widened from USD 3.8 trillion in 2018 to more than USD 4.5 trillion in 2022.
• Expenditure by Categories:
  • Indian consumers allocate a larger portion of their spending towards basic needs like food, clothing, footwear, and transportation.
    • This spending pattern reflects a developing economy where households prioritise necessities over discretionary spending.
  • On the contrary, China's consumption basket reflects a market that is relatively advanced.
    • While food and beverages make up the largest portion of China's consumption, their share of total consumption expenditure is decreasing, indicating a market that is becoming more mature.
    • Also, it spends a larger proportion of its budget on housing, white goods, recreation, education, and healthcare compared to India.
    • In advanced economies like the US, Japan, EU, Germany, and the UK, food expenditure is not the highest category.
  • India spends about half as much as China on food, transport, communication, and clothing. Even though India's economy is only one-fifth the size of China's, the total expenditure in these sectors represents a similar percentage of their respective economies.
    • As per Monthly Per Capita Consumption Expenditure (MPCE) report, both in rural and urban areas of India, the share of food in total expenses reduced and that in non-food expenses increased in 2022-23 compared with 2011-12.

What are the Factors Responsible for Difference in Consumption Pattern between India and China?

• Demographic Dividend:
  • According to the World Bank Report, as of 2022, the median age in India is 28.4 years compared to China's 38.4 years.
    • A younger population is likely in its early career stages, with rising income and a greater tendency to spend on establishing a household (housing, durables, transportation).
• Income Levels and Disposable Income:
  • China has a larger and more established middle class with higher disposable incomes, enabling greater spending beyond essentials.
  • In contrast, India's middle class is smaller, with more income directed towards basic necessities like food and transportation, resulting in less discretionary spending.
  • Gross National Income(GNI) per capita in China for the year 2022 was USD 12,8501 and in India USD 2,5473.
• Stage of Economic Development:
  • India is categorised as a Lower-middle-income country and China as an upper-middle-income country according to the World Bank .
  • China's economy has transitioned from agriculture to manufacturing and then to services, driven by rapid industrialization, export-oriented growth, and infrastructure investment.
  • India has moved more directly from agriculture to services, with significant growth in IT, finance, and professional services, while its manufacturing sector is still developing.
• Access to Credit:
  • According to World Bank data, China has a much higher level of credit penetration compared to India.
    • Nearly half of the adult population in China has a credit card, while only around 12% do in India.
  • A significantly larger portion of the Chinese population (over 85%) has access to loans from financial institutions compared to India (around 57%).
• Urbanisation:
  • While urbanisation is increasing in India, it lags behind China. This limits the reach of discretionary products and keeps consumption patterns focused on necessities.
  • In 2020, 63.8% of China's population was urban, compared to 34.5% of India's population, according to the World Bank.