India’s household financial net wealth hit an estimated 116% of GDP in the first quarter of FY2025. Not only was this a new record, but it was also markedly higher than the estimated 105% of GDP booked in the first quarter of the previous financial year.
The rapid and meaningful rise comes down primarily to the way Indian households distribute their assets – specifically, their significant allocation to property, gold, and equities.
These three asset classes have sustained long stretches of particularly strong performance with no signs of slowing. As a result, we now expect a triple threat wealth effect to emerge in India over the coming quarters with the power to supercharge domestic consumption.
A wealthier middle class
The wealth effect centres on the idea consumption increases with affluence. It argues that, even if our income and fixed costs remain the same, we spend more when the value of our assets increases because we feel more financially secure.
When it comes to the wealth effect much of India’s assets are concentrated in the top two income brackets, according to Morgan Stanley.
There’s no doubt these 75 million households with a GDP per capita of more than $10,000 feel richer right now.
According to a recent industry report, on average, they allocate 51.3% of their wealth to property, where national home prices rose 4.3% last year and, according to a recent survey of property market experts, are expected to rise 7.75% further in 2024. They allocate 15% to gold – in total holding an amount even greater than the World Bank’s reserves according to a recent report – where prices in US dollars have risen c.40% over the past year. And they also allocate 5% to equities, where the Indian stock market is set up for the longest bull market in its history.
The question instead is around when rapidly increasing wealth will translate into significantly greater spending.
Indian consumption had been somewhat soft over the last two quarters due to factors such as reduced government spending during the recent election period, a lack of economic momentum during the general election and an uneven monsoon season. Now these issues have largely passed, though, we expect to see the wealth effect emerge in full.
Given the sheer scale of India’s middle class – estimated at some 300 million individuals – the impact of increased spending on the Indian economy could be very meaningful.
What’s more, property prices are expected to continue rising, gold is showing no signs of slowing, and Indian equities are primed to resume their long-term rally after October’s correction. Spending among these increasingly affluent individuals therefore stands to continue increasing for at least several quarters and perhaps even further beyond.
There’s no reason, for example, for India not to emerge as the world’s third largest consumer market by 2026 per industry forecasts.
Greater spending and consumption stand to benefit the Indian economy as a whole. Rising demand for goods typically leads businesses to produce more, hire more workers, and invest in expansion, with the activity leading to a higher gross domestic product.
In this sense, then, the middle-class wealth effect should support India on its journey to becoming the world’s third-largest economy by 2031 – as predicted by Morgan Stanley.
More specifically, we expect to see certain sectors particularly benefit.
Increased middle class spending is likely to have its biggest impact on discretionary spending. These are the areas where individuals might not spend as much if they weren’t feeling affluent.
Sectors such as travel, tourism, luxury retail and cosmetics will likely post particularly strong results over the coming quarters and perhaps beyond. Buying quality names in these areas now, as the wealth effect begins to emerge, could offer an excellent opportunity.
Outlook
With Indian household wealth at an all-time high, we believe it is only a matter of time before greater affluence translates into greater consumption. This wealth effect would position India’s already outperforming economy and equity market for further growth well into the future.
Andy Draycott is co-manager of the Chikara Indian Subcontinent fund. The views expressed above should not be taken as investment advice.