In a compelling discussion organized by the Madras Management Association and Policy Matters Chennai, three distinguished economists explore India’s puzzling economic phenomenon: simultaneous growth in consumption, asset prices, and inequality.
Where the Money Flows
Dr. S. Narayan
Former Economic Advisor to PM
Consumption spending in 2023 was $2.15 trillion compared to $1.7 trillion in 2019. That’s a massive 25-30% increase over just four years. This spending boom isn’t theory—it’s observable reality. I see it in temple donations reaching record levels, restaurants packed in tier-two cities, five-star hotels filled with ordinary people spending freely.
Household debt has surged from 26% to nearly 49% of GDP, with 55% being non-housing retail loans. People are borrowing aggressively for credit cards, travel, and consumption, banking on future earnings growth. Simultaneously, government spending has expanded dramatically. Revenue receipts have grown from 19.62 lakh crores in 2019-20 to 34 lakh crores today. Total expenditure jumped from 27.86 to 50 lakh crores—a 60-70% increase in nominal terms. This means real rupees flowing into the economy.
Real estate emerged as another wealth multiplier. In central Chennai where I live, I’ve witnessed land prices doubling over five to six years,” Narayan explained. “This urban expansion converts agricultural land into cash. Much of these transactions involve unrecorded money that flows into gold, jewelry, and additional real estate. Land monetization immediately gives rise to substantial increases in the cash economy.
Agricultural surplus provided yet another source. The last three years have seen excellent harvests, creating significant surpluses. We’re growing 340 million tons of food grains annually. At even ₹2,000 per kilogram, that’s enormous cash generation from the ground every four to five months. This is all untaxed cash—our constitution exempts agricultural income from federal taxation. Combined with government freebies like free food, bus rides, and school meals, this surplus has freed up cash for other expenditures.
Systematic Investment Plans now collect approximately ₹29,529 crores monthly, with 9.88 crore accounts participating. The mutual fund industry’s assets under management have reached ₹80 lakh crores—the highest in history. This domestic liquidity has cushioned markets despite sustained foreign institutional investor selling. People who never thought of venturing into the stock market are now ready to invest and see returns.
Our per capita income has grown from $371 in 1990 to $2,700 in 2024. Yes, some states pull us down, but look at Tamil Nadu—it’s substantially higher at ₹3,000-4,000 per capita income. That’s meaningful progress.
Structural Fissures Beneath the Numbers
Professor Dr. Arun Kumar
JNU
We need to shift our conversation entirely. We should be talking about incomes, not money. Money is just one component of a portfolio of assets.
The critical issue is India’s stark division between organized and unorganized sectors. Ninety-four percent of our workers are in the unorganized sector, earning very little. The substantial spenders—maybe 3% of the population—have significant black incomes to spend. Roughly 3% are free spenders, perhaps 5% constitute a middle class not that free in spending, and the remaining 93-94% barely spend in the economy. Even this 3% translates to 4.5 crore people—like a good-sized European economy—but it’s significant precisely because it’s concentrated.
India’s per capita income is $2,800, whereas the US has $88,000 and Germany has $55,000. India’s market size appears large only because of population, not purchasing power. We rank 140th globally in per capita terms. That’s the reality we’re dealing with.
Between 2016 and 2024, the economy experienced four major shocks—demonetization, GST implementation, the NBFC crisis, and the pandemic. These hit the unorganized sector hard, yet our GDP proxies unorganized sector performance using organized sector data. This creates systematic overestimation. The economy has actually been growing at around 2% since 2016, not 7%. Consider demonetization: it officially showed 8% growth despite visible economic contraction. Markets were shut, vegetables couldn’t reach mandis, yet official statistics claimed robust expansion. How does that make sense?
According to my estimates for 2012-13, black income generation was 60% of GDP. On a ₹350 lakh crore economy, that’s ₹200 lakh crores of black income. In 1996-97, if you include only the white economy, the income ratio between rich and poor was 1:12. Include the black economy, and it becomes 1:57. This concentration in the hands of 3% suppresses demand, reduces productivity, and destabilizes growth.
When demand slackens due to inequality, capacity utilization goes down. RBI’s data shows for the organized sector it’s hovering between 70-75%. You don’t invest more at these levels; you invest when capacity reaches 85%. This is why private investment hasn’t been buoyant. When private investment slows, even the organized sector begins to decelerate. And now, artificial intelligence is displacing mental labor—not just physical labor. The savers are white-collar workers. If they get displaced, their savings decline, creating serious problems ahead.
Why the Market Will Weather the Storms
Mr. Shyam Sekhar
iThought Financial Consulting
I understand the concerns, but I see structural changes supporting the economy. Money is coming primarily from structural taxation changes. We had corporate tax cuts, followed by personal income tax cuts, followed by GST reductions. These three things are definitely helping the economy significantly.
While urban consumption has been under stress, rural consumption has definitely supported the economy. If you see tractor sales, SUVs, two-wheelers—management commentaries across companies confirm rural money is flowing. The rural economy has become the big support to various consumption industries after a long time. This rural demand is substantial and real.
Gold prices are at all-time highs. Real estate prices are near peaks across different parts of the country. People are liquidating properties and putting money to better use. Despite 14 months of incessant FII selling, the market remains within 300 points of its all-time high from September 2024. The domestic investor has enough liquidity and confidence to sustain this.
The AUM of the Indian mutual fund industry has gone to nearly ₹80 lakh crores—the highest in history. If you look at the SIP book, money put by the middle class every month into the stock market is now at ₹29,529 crores and has been steadily rising from COVID lows. We’ve had nearly 5 years of SIP book building. The number of accounts contributing is 9.88 crores. That’s a very big number, and it’s continuously growing. Domestic flows clearly show that government measures have put more money in people’s hands through various welfare schemes, subsidies, and state programs.
When industries get organized, they create scale. Activities continue being performed by more efficient entities, leading to other economic opportunities including employment. The gig economy, though not permanent, is developing financial histories for workers, giving them credit access. People seem comfortable with rising indebtedness as long as they can manage it.
The liquidity the market receives may be inadequate for corporate capital-raising appetites. When the market runs out of liquidity while issuers remain hungry, corrections become likely. This is something the market seems underprepared for. But corrections are part of every market cycle, and they’re actually healthy. When they happen, prepared investors will capitalize while others panic.
