In today's talk, we're breaking down India's consumption-driven growth, its hidden flaws, and why investment—not just spending—is the real game-changer.
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The Talk
For years, India’s growth story has been built on one dominant theme—consumption. The idea that a rising middle class, higher incomes, and increasing spending power would propel the country toward economic dominance has become almost gospel. And on the surface, the numbers seem to support this narrative. Private Final Consumption Expenditure (PFCE) makes up a massive 56% of India’s GDP, and consumption has been growing at 7.2% annually. But here’s the catch—it’s not translating into meaningful growth in absolute terms. The Indian consumption story might not be as strong as it appears, and the cracks are beginning to show.
The recently released Indus Valley Annual Report 2025 sheds light on some uncomfortable truths beneath India’s growth narrative. At the core of the problem is how unevenly this consumption is distributed. The top 10% of the population, India’s Tier 1, controls two-thirds of all discretionary spending. The next 23%, Tier 2, accounts for only a third. Meanwhile, the bottom two-thirds, Tier 3, are barely participating in discretionary spending and often have to dip into their savings to manage even basic expenses. This creates a fragile growth model where the economy is heavily dependent on the spending power of a small elite while the majority struggles to keep up.
The gap becomes even more obvious when you look at global rankings. On a per capita basis, India ranks 140th among 195 countries. But if you isolate just the Tier 1 population, India’s ranking jumps to 63rd—higher than Russia and China. This paints a stark picture. India’s growth isn’t being shared equally; it’s concentrated at the top. If India is to sustain long-term growth, it’s not enough to just grow the economy—it needs to widen the base of prosperity and bring more people from Tier 3 into Tier 2, and from Tier 2 into Tier 1.
Agriculture, once the backbone of the Indian economy, has been stagnant for the last decade. Its contribution to GDP has shrunk to 16%, signaling that India is no longer an agriculture-driven economy. But the transition to an industrial and service-based economy hasn’t been smooth either. Services now account for 54% of GDP, while industry contributes 30%. The problem is that income growth hasn’t kept pace with this structural shift. Over the past 30 to 40 years, while the wealth of the top 10% has skyrocketed, the middle class has seen their income stagnate or even decline. This imbalance is at the heart of India’s economic problem.
The missing piece is investment. Consumption-driven growth alone isn’t sustainable—it needs to be supported by higher investment in infrastructure and industry. Gross Fixed Capital Formation (GFCF), which measures long-term investment, currently stands at 33% of GDP. But this number could be higher if not for India’s shrinking savings rate. Household savings have been steadily declining, leaving banks with a smaller pool of capital to lend. That drives up borrowing costs, discourages business investment, and slows down economic growth.
It creates a dangerous feedback loop: low savings → smaller loan pools → higher borrowing costs → low investment → slow growth → lower incomes → even lower savings. The reverse scenario—a high savings environment—would create the opposite effect: larger loan pools, lower borrowing costs, increased investment, higher productivity, rising incomes, and increased savings. India is currently caught in the wrong cycle.
Adding to this instability is the surge in debt-fueled consumption. Over the last 8 to 10 years, consumer loans have exploded, while industry loans have declined. Smaller-ticket loans (under ₹1 lakh) have increased 48 times between 2017 and 2024. That’s a clear sign that people aren’t spending more because their incomes have increased—they’re borrowing just to keep up. That’s not growth—it’s survival.
So how does India get out of this trap? The answer lies in increasing GFCF—more investment in infrastructure and industry will create jobs, improve productivity, and drive income growth, particularly for Tier 2 and Tier 3 populations. A stronger export base will reduce reliance on imports and boost GDP. Government spending can provide short-term relief, but real, long-term growth will only come from strengthening the investment cycle. The goal should be to expand the base of prosperity, making growth more balanced and less dependent on the top 10%.
India’s problem isn’t that it lacks growth—it’s that the growth is concentrated at the top. The future depends on fixing that imbalance. The Indus Valley Annual Report 2025 lays the foundation for understanding this economic shift—and this is just the beginning of the story. In the next and final part of this analysis, we’ll uncover the specific strategies that can unlock India’s true growth potential and lay the foundation for a more balanced, sustainable future. Trust me, you won’t want to miss it.
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Indian Economy