Consumption-Led Growth: Case For Prudence

India’s economic story has often been told as a tale of youthful energy, expanding consumption, and rapid growth. Yet, beneath this narrative lies a quieter but equally important factor: the country’s savings rate. Once a pillar of India’s economic strength, the savings rate has been steadily eroding over the past decade, raising questions about the sustainability of growth driven mainly by consumption.

In the early 2000s, India’s gross domestic savings touched close to 35–36% of GDP. This was comparable to some of the fastest-growing Asian economies and provided the foundation for strong investment-led growth. Today, that rate hovers closer to 29–30%.

By contrast, China continues to save well above 45%, and several other Asian peers remain ahead of India. Why does this matter? A high savings rate provides a steady pool of domestic capital for investment in infrastructure, technology, manufacturing, and housing.

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Without it, an economy becomes more dependent on volatile foreign capital inflows to meet its investment needs. For a developing country like India, such dependence can create vulnerabilities, from currency fluctuations to external debt risks.

The introduction of GST 2.0 is designed to ease the tax burden on consumers by rationalising rates and simplifying compliance. The government’s hope is straightforward: by leaving a little more money in people’s pockets, demand will rise, spurring consumption and, in turn, economic growth. This strategy aligns with India’s recent growth model, where private consumption contributes nearly 60% of GDP. A short-term consumption boost is indeed valuable—it supports small businesses, sustains service-sector growth, and keeps factories running.

But here lies the dilemma: should all of this newly available income be spent immediately, or should at least a part of it be saved for the future? Encouraging savings does not mean discouraging consumption altogether. Rather, it is about striking the right balance.

There are four compelling reasons to channel at least part of the GST 2.0 gains into savings: 

1. Domestic savings are the cheapest and most reliable source of funds for investment. They reduce dependence on external borrowing and foreign capital, which can be fickle in times of global uncertainty. 
2. Higher savings protect families against shocks such as job loss, inflation, or health emergencies. A society with stronger household balance sheets is more stable and less vulnerable to crises. 
3. Savings translate into bank deposits, insurance funds, pension pools, and equity investments—all of which feed into productive investment. Without adequate savings, India risks a bottleneck in building the infrastructure and industries needed for future growth
4. Economies with higher savings rates generally enjoy more stable currencies, lower interest rate pressures, and less vulnerability to sudden capital outflows.

The real question is how to encourage households to save more without stifling the immediate consumption push that GST 2.0 aims to generate. A balanced approach could involve: 

(i) Expanding exemptions for small savings, pensions, or long-term deposits. 

(ii) Offering higher-yield, inflation-protected savings schemes targeted at middle- and lower-income households. 

(iii) Promoting awareness about the importance of saving, especially among younger earners who are more inclined to spend. 

(iv) Leveraging fintech platforms to make saving automatic and effortless, encouraging micro-savings linked to everyday transactions.

India’s economy cannot afford to tilt too far toward either extreme—pure consumption or pure saving. Excessive thrift risks suppressing demand and growth in the short run, while overindulgence in spending erodes the foundation of long-term investment and stability. GST 2.0 offers a unique opportunity: the additional income in consumers’ hands can both stimulate demand and, with the right policy nudges, strengthen savings. The gains from this reform should not vanish into immediate consumption alone but should also help build the financial base for India’s next stage of growth.

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India’s declining saving rate is a reminder that sustainable growth requires more than just higher spending power. It calls for prudence, foresight, and a culture of financial resilience. GST 2.0 has the potential to lift demand today, but if its benefits are partly channelled into savings, it could also lay the groundwork for tomorrow’s investments. In the end, the choice is not between spending and saving—it is about balance. For households, that balance means security and opportunity. For the nation, it means growth that is not just faster but also sturdier and more sustainable.

(DISCLAIMER: This is an opinion piece. The views expressed are the author’s own and have nothing to do with OTV’s charter or views. OTV does not assume any responsibility or liability for the same.)