When untamed, tuberculosis was called “consumption.” The name captured the horror of a disease that seemed to eat away the body, reducing its victims to shadows of themselves. The idea of “consuming” thus acquired a moral taint—wasteful, even sinful—contrasted with the perceived virtue of producing or creating anew.
In economics, however, consumption is no vice. It is the very purpose of production, the final measure of economic success. The United States, still the world’s largest economy, rests squarely on this pillar: household spending accounts for nearly 68% of its GDP. That model reflects the privileges of a mature economy with deep capital markets and global dominance.
China’s growth model as India’s template
China offers a contrasting template. Over four decades of breakneck growth, it built a more balanced structure—consumption below 40% of GDP, investment almost as large, and net exports a steady contributor. It is this alternative that appears to have shaped India’s policy imagination over the past decade.
In its first two terms, the government led by Narendra Modi sought to rebalance India’s growth model away from consumption and towards investment. The implicit goal was to lower final consumption expenditure from its long-run level near 70% of GDP and raise gross fixed capital formation from around 31–32% back towards the pre-global-financial-crisis peak of 35% and beyond.
Public investment was scaled up sharply through the Union Budget, with policymakers hoping it would stabilise capital formation and crowd in private investment. A “virtuous cycle” of investment, productivity and growth was repeatedly invoked, with the expectation that the corporate sector would soon take the baton. Yet fiscal constraints were real: with a low tax-to-GDP ratio, public investment could not sustainably exceed 11–12% of GDP.
To coax private capital, the government announced a deep corporate tax cut in 2019, repeatedly rewrote public-private partnership contracts, and relaxed risk-sharing norms—sometimes to the point of creating moral hazard. New institutions were created to channel global patient capital and domestic savings into infrastructure.
The results were disappointing. Corporate balance sheets improved, profits swelled—but investment did not follow. Firms chose to swim in profits rather than build new capacity or invest meaningfully in R&D. As the investment-led strategy bogged down, policy quietly changed course. By early 2025, sharp personal income tax cuts in Budget FY26 were followed by GST reductions, signalling a pivot back to consumption—not out of ideological conviction, but out of necessity.
Even then, the consumption response proved modest and fleeting. Festival-season GST data showed transaction volumes rising an additional 8% in October– November, with auto sales up a fifth year-on-year. But as the year drew to a close, much of the tax relief appeared to have vanished into household balance sheets—absorbed by debt rather than spent. At best, it may re-emerge later as slightly lower household leverage or a marginal recovery in savings, now languishing near a 30% of GDP trough.
The fiscal mirror tells the same story. Personal income tax collections are growing at less than a third of the budgeted pace for FY26, while GST mop-up fell 10.7% from October to November. Private final consumption expenditure in the first half of FY26 was marginally lower as a share of GDP.
The uncomfortable conclusion is that neither investment-led nor consumption-led stimuli, as currently designed, are sufficient to lift India’s growth potential. Productivity remains constrained, resources are underdeveloped and underutilised, and growth is driven by only a narrow slice of the economy. The household sector and the vast informal economy—is far weaker than headline numbers suggest.
Why India now needs truly inclusive growth
A more inclusive growth strategy is unavoidable. Capital must be deployed more efficiently; household savings need to rise meaningfully; and the productivity of capital must improve. Fiscal resources have to be distributed better, with the third tier of government granted real autonomy. Transfers from richer to poorer states may continue, but with clearer incentives for performance.
India’s labour costs are already among the lowest globally, yet competitiveness suffers because worker productivity is poor. Labour reforms must therefore focus less on suppressing wage growth and more on raising skills and competence. With nearly two-thirds of Indians still below the income threshold that defines the global middle class, latent consumption potential is enormous. But it will remain unrealised if income and profit concentration continues unchecked.
China’s recent attempts to boost consumption through wage increases met with limited success, partly because of a low marginal propensity to consume. That should not deter India. Most Indians are yet to fulfil basic aspirations; dispersing incomes more widely would strengthen, not weaken, aggregate demand. Excessive concentration of wealth and privileged access to resources only stifles growth in such a context.
Consumption, in the end, is no waste. Wasted—and unenriched—resources are. Left unnurtured and inefficiently deployed, they can even shrink, trapping the economy in the middle-income bracket.
