India’s household consumption survey captures predictable changes

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A fact sheet for the Household Consumption Expenditure Survey (HCES) 2022-23 has been released by India’s statistics ministry. The full report with unit-level data is awaited. It covered roughly 100,000 urban and 150,000 rural households, implying that our urban population is two-fifths of the total. This estimate is based on census classification, but the 2021 comprehensive census is delayed by five years. So we may be under-estimating the urban population. If so, it might give a distorted picture of the urban-rural divide. For instance, if better-off consumption numbers are taken as being in rural areas when they should be counted as urban, it would show the rural economy doing better than it actually is. And the census definition of what constitutes ‘urban’ may be too conservative anyway. The point, however, is not to be dismayed by relatively slower growth in rural incomes or consumption, but rather to focus on reducing urban squalor and improving urban infrastructure and governance. Rapid urbanization and a concomitant widening of the rural-urban divide are inevitable consequences of high growth. It is the cities which produce the bulk of jobs and act as a magnet for migrants. But their governance, fiscal capacity and infrastructure fall short of the public resources they need.

The consumption surveys conducted in India are among the largest in the world and known for their rigour and regular frequency. Their data ought to be available every five years or so. But the 2017-18 survey was suppressed by the government on claims of poor quality. Hence, the present one has come after a gap of 11 years. The past decade saw dramatic changes and macroeconomic shocks, including demonetization, the pandemic and war-related disruption. Those shocks could have been disruptive, but consumption spending tends to be less volatile than income and thus more impervious to shocks. If one believes in the life-cycle hypothesis, consumption trends over time smoothen out periodic spells of saving and dis-saving, and the employment status of households.

Some stylized facts for India’s consumption have stood the test of time. Most of the expenditure is still on food (although it has finally dipped below 50% of the total). Over time, the consumption pattern has evolved as follows: from cereals to non-cereals; from carbohydrates to proteins, including milk, eggs, poultry and meat; from home-cooked to packaged food, including restaurants; and from food to non-food. This long-term trend is also manifest in the comparison between the surveys of 2011-12 and 2022-23. For instance, the spending on cereals by rural households dropped from about 11% to 5% over these 11 years. At the macro level, this is due to higher incomes and a greater share going to non-food items such as durables and services. The picture is more complicated when one examines data across households and deciles of consumption spending. One notices differential growth rates, widening (or narrowing) gaps between the rich and poor, and implications for consumption inequality.

In 2012, the Bureau of Labor Statistics in the US published a report, 100 Years of Consumer Spending. This covered the period between 1900 and 2000, spanning an era from a time when electricity, running water or flush toilets were scarce to one that had highways, automobiles and the internet. For the average household, spending on food dropped from 50% to 20%, and spending on housing and services went up sharply. Of course, family sizes became smaller, more women entered the workforce, child labour became non-existent and significant social security was introduced.

In the long term, the fraction of household income spent on food and clothing declines, while that spent on housing, transportation and insurance increases. Healthcare has remained mostly constant. Such a trend is likely to be seen in India over the next several decades. As public spending on social security, healthcare and education rises, household spending on these could show a slowdown or decline.

The HCES of 2022-23 has predictable changes over its counterpart from 11 years ago. The share of spending on food is down. The pace of increase in spending is higher for urban India than rural. This leads to divergence. Regionally speaking, it implies that states with a lower share of urban residents or a lower rate of urbanization will find their per-capita consumption spending growing slower. This could partly explain the north-south divergence. The other trend is an increase in the share of expenditure on rent, conveyance, services and household durable goods. The US data too showed an increase in the spending share of transportation. That was natural for a nation flush with privately-owned automobiles. In India’s context, it reflects both private vehicles and a lack of public transportation.

The survey also shows a slowdown in consumption spending across the three surveys from 2004-05 till 2022-23. Some of this is due to a larger base. After all, our economy has grown to three times its size in the past 20 years. Why is consumption spending not rising at the pace of national income? This is a crucial question. The survey data is important not only to assess the well-being of households, and arrive at poverty measures, but also to assign proper weights to items and update the consumption basket used to compute the Consumer Price Index. The latter is the key indicator guiding monetary policy, which has varied further effects.

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