India to overtake Japan as third-largest consumer market by 2026
What's the story
UBS Securities, a global brokerage firm, has projected that India will surpass Japan to become the world's third-largest consumer market by 2026.
This forecast is based on India's rapid economic growth and a significant increase in household consumption.
The country's household consumption has seen a twofold increase over the past decade, reaching $2.1 trillion in 2023 at a compounded annual growth rate (CAGR) of 7.2%.
Growth comparison
UBS compares India's growth trajectory with China's past performance
UBS has drawn parallels between India's current economic state and China's situation in the 2000s, to predict future consumption trends.
The firm noted that while India's private consumption was only 30% of China's total in FY23, it is significantly higher than what China experienced at a similar stage of development (measured in per capita GDP).
This observation suggests that if India maintains its consumption and growth, it could potentially match China's present domestic market size before reaching an equivalent GDP.
Income analysis
India's household income as percentage of GDP surpasses China's
UBS further explained that India's household income as a percentage of GDP is significantly higher than China's.
This has resulted in India's current consumption level matching where China was in 2006-07, despite India's per capita GDP only being at China's 2000 level in constant USD terms.
The firm also highlighted that the potential for growth in household income will be driven by labor income, which is dependent on wage growth and employment growth.
Wage growth
India's urban wage growth mirrors China's past increase
India's urban wage growth, as highlighted by the salaries of listed corporates, averaged around 10% annually in the decade leading up to the pandemic (2011-2020) and accelerated to approximately 14% in 2022.
This growth is similar to China's wage increase of 15% around 2006.
In the decade following 2006, China's wage growth averaged 13% annually before slowing in recent years.
Employment structure
UBS analyzes India's employment structure and future potential
UBS also analyzed India's employment structure, which is divided into 43% in the agriculture sector, 24% in secondary sectors (including manufacturing at 11%), and 33% in the services sector.
The firm sees significant potential for India to increase its employment share in secondary and services industries.
This shift from farming labor to more productive non-farming sectors could potentially boost labor productivity and wage growth, further supporting continued consumption growth.