Warning for policymakers: India’s consumption decline signals economic risk

By Prof. Hementkumar Shah*  

Nearly 100 crore people in India need greater consumption, not more savings.

The renowned 20th-century British economist John Maynard Keynes argued that while saving is a personal virtue, it can become a public problem when practiced collectively by society. According to Keynes, if individuals save for their future needs, it is considered prudent behavior. However, if everyone in society simultaneously increases savings, the overall economy can suffer because aggregate consumption declines. Reduced consumption weakens demand for goods and services, leading to unemployment and economic slowdown.

Keynes described this phenomenon as the “paradox of thrift.” He argued that if all people try to save more, total consumption in the economy falls, national income or GDP declines, and overall savings may not increase significantly because savings ultimately depend on income. In a consumption-driven economy, excessive emphasis on savings can reduce GDP growth.

Keynes also maintained that savings are dependent on income levels. When incomes rise, savings may rise as well. But the crucial question is: whose income is increasing? If the income of ordinary people rises marginally, their savings usually do not increase substantially; instead, their consumption rises because their earlier consumption levels were already below basic needs. For example, if a household earning Rs. 15,000 per month receives an additional Rs. 2,000, it is unlikely to save much of that increase. The family is more likely to spend it on necessities and improve living standards. Thus, additional income for lower-income groups tends to stimulate consumption more than savings.

The Savings Paradox 

India’s gross savings rate stood at around 30.4 percent of GDP in 2024-25. Around 70 percent of household savings in India are held in the form of gold, housing, land, and other fixed assets. India’s savings rate had reached a historic peak of nearly 38 percent in 2008, compared to only 6 percent in 1960, after which it steadily increased over the decades. According to the World Bank, India’s savings rate was 31.4 percent of GDP in 2014 but declined to around 28.6 percent in 2024. This suggests that consumption increased during the last decade while savings declined, possibly due to rising inflation.

But who actually saves in India? Out of India’s population of 146 crore, nearly 31 percent — around 43 crore people — belong to households with annual incomes between Rs. 15 lakh and Rs. 30 lakh. Their monthly incomes range roughly from Rs. 1.25 lakh to Rs. 2.5 lakh, enabling them to save. These are also the primary income-tax payers and major investors in the stock market. Their savings form a significant source of capital investment.

In contrast, nearly 80 crore people who receive free monthly food grains under government welfare schemes have household incomes ranging between Rs. 10,000 and Rs. 20,000 per month. There is little possibility of meaningful savings among such households. In many cases, they remain burdened by debt. What this vast section of the population requires is not more saving, but higher consumption so they can achieve a dignified standard of living. Their consumption can rise only if their incomes rise or if direct income support is provided. In reality, the entire debate around savings does not meaningfully apply to more than half the country’s population.

Savings are important because they finance investment and production. However, not all savings automatically translate into productive investment. Investment occurs only when businesses expect profits and when there is a favorable gap between interest rates and expected returns. In India, Gross Fixed Capital Formation (GFCF) stood at around 30 percent of GDP in 2025. Such investments include infrastructure, land, buildings, and other productive assets. GFCF increased from around Rs. 42 lakh crore in 2014 to nearly Rs. 109 lakh crore in 2025 — an increase of about two-and-a-half times over eleven years.

Economic Slowdown 

The key question, however, is how much this investment has contributed to GDP growth. Higher investment generally raises production and economic growth. But if the resulting production is not consumed because people reduce spending and increase savings, economic slowdown becomes inevitable. Therefore, efforts should focus on increasing consumption among those whose living standards remain below reasonable levels, while moderating excessive consumption among the affluent sections of society.

The reality is that India’s average GDP growth rate during 2014-25 was around 6.8 percent, lower than the average growth rate of 7.5 percent recorded during 2004-14. If even the sections currently driving consumption begin to save more, while the consumption levels of the 80 crore economically weaker people remain stagnant, India’s GDP growth rate is bound to slow further.

If India wishes to sustain or accelerate economic growth, the government must ensure that consumption rises among the vast population with low purchasing power. This also raises the question of taxation on the wealthy. Many economists argue that higher taxes on affluent sections are necessary to reduce inequality. Higher taxation effectively transfers part of the savings of the rich to the government, or reduces their consumption. Such redistribution is often essential in reducing economic inequality within any society.

In India, however, taxes on the wealthy remain relatively low despite widespread perceptions to the contrary. Voluntary reduction in consumption by the rich is rare because consumption patterns are closely tied to social status and lifestyle. Therefore, any meaningful restraint on excessive accumulation or consumption can only come through government taxation policies. The question is whether the Indian government is willing to take such a step.