Can consumption carry India forward

Not long ago, India’s growth was anchored by hefty public infrastructure spending and a post-COVID export boom. FY25 again marked a sharp turn.

As per the Finance Ministry, private final consumption expenditure grew by 7.2% in FY25 (5.6% in FY24) to reach 56.7%, driven largely by a revival in rural demand.

What are the components of GDP?

To understand the shift in India’s growth story, it helps to know how GDP is measured. India's GDP is calculated using the expenditure method and includes four major components:

How did each component perform in FY25?

Source: Government data

Private consumption - driving growth

India’s 6.5% GDP growth in FY25 was powered not by exports or government spending, but by you, the consumer.

Source: RBI

Private Final Consumption Expenditure (PFCE) rose 7.6%, contributing 56.7% of GDP, its highest share in nearly two decades.

Source: RBI

Where does private demand remain strong, and who benefits?

The sectors standing to benefit the most include FMCG companies (especially those focused on rural markets), automobile makers, consumer durables and non-durables, logistics, transport and trade-related services, and construction material producers.

Rural revival is at the heart of it.

• Tractor and two-wheeler sales have surged, signalling rising farm incomes and mobility.

• Rural FMCG volumes grew 7.3% YoY, outpacing urban demand for the first time in years.

• Real rural wages hit a four-year high, while MGNREGA job demand fell 16%, indicating improved livelihood opportunities.

What about services and logistics? They’re holding strong.

• GST E-way bills, a key indicator of goods movement, jumped from 16.9% in Q3 FY25 to 19.4% in Q4 FY25, reflecting a spike in trade and consumption activity.

• Toll collections soared from 9.8% to 15.1% over the same period, showing higher freight and passenger vehicle traffic on roads.

Construction is a mixed bag. Cement production has picked up, pointing to steady housing and infrastructure activity, even as steel consumption slowed.

Let us take a look at key consumption related high frequency indicators, which drove growth:

Source: RBI

Why is consumption holding up?

This surge in consumption is being fuelled by a powerful mix of enablers. A normal monsoon has led to better farm output, directly supporting rural incomes. On top of that, the 2025 Budget’s generous tax reliefs, like zero tax on income up to ₹12 lakh, have put more disposable income in people’s hands. With improving earnings and less dependence on government welfare schemes, both the ability and the confidence to spend are rising steadily.

But... Is consumption-led growth sustainable?

Experts warn that overreliance on consumption could be risky. Consumption creates demand, but does not build capacity. A sustainable growth model must be underpinned by investment, which can both generate demand and increase the economy’s productive potential.

As Sanjeev Sanyal, Member of the Economic Advisory Council to the PM, put it: “Sustained high GDP growth is always investment-led, not consumption-led. Investment creates capacity to meet demand.”

Consequences of consumption-led growth:

• Rising income inequality: GINI index rose from 50.23 (2004) to 52.31 (2020)

• Urban-rural divide widens as services-led growth benefits elite sectors

• Limited employment generation in low-skill sectors

• Low capital formation restricts future productivity

The investment lag, and why it matters

Investment plays a quieter role in the economy compared to consumption, but its impact runs deeper. It doesn’t just create immediate demand, it builds capacity and productivity over time.

Economists often point to the multiplier effect: a ₹100 investment in infrastructure like a highway doesn’t just pay for materials and labour, it spurs local business activity, improves logistics, and raises incomes. With a multiplier of 1.25, the total impact on GDP could be ₹125. That’s why the current slowdown in investment deserves attention.

In FY25, Gross Fixed Capital Formation (GFCF) grew by just 6.1%, down from 8.8% the year before. Public capital outlay, which had soared by 31.2% up to February 2024, contracted by 2.7% over the same period in FY25. Key indicators like steel consumption, cement production, and capital goods imports have all flattened.

The broader numbers tell the same story: India’s gross capital formation to GDP ratio fell from 32.6% to 31.4%, while net capital inflows from the rest of the world dropped sharply, from 2.0% to just 0.7% of GDP. The message is clear: without stronger investment, the foundations of long-term growth, job creation, productivity, competitiveness remain shaky.

Case study: India vs China — A tale of two growth models

Where did India and China start? Let’s rewind to the early 1990s. Did you know that the average Indian and Chinese citizen earned just 1.5% of what an American earned at that time?

Both countries were poor, agrarian, and just beginning to open up their economies. Their per capita incomes were almost identical. The world saw them as equals, waiting to rise. But what happened next?

By 2023, China’s per capita income had become 5X higher than India’s. Under purchasing power parity (PPP), it was still 2.4 times larger.

Why did one country leap ahead while the other moved steadily, but slowly?

Clearly, something deeper than just time was at play.

So, what did China do differently? While India relied on consumption, China built its economy around investment.

In 1992, China’s investment rate was already 39.1% of GDP, compared to India’s 27.4%. India tried to catch up - in fact, in 2007, investment rose to 35.8% - but it didn’t last.

After the 2008 global financial crisis, the difference in approach became glaring.China pushed through with massive, state-led investments. India slowed down.

Here’s how the trend evolved:

And it's not just about income. China’s strategy created more infrastructure, jobs, and education opportunities across the board.

Final thoughts

India has a strong demographic advantage, growing digital penetration, and improving business sentiment. But it must choose wisely. A pivot to investment-led growth in infrastructure, education, skilling, and rural development can still change the story. Because the game isn't just about growing fast. It’s about growing for everyone.