Consumption trends and monetary policy

The falling share of food in households’ spending will help, given food inflation also drives inflation expectations

Consumption is the mainstay of India’s aggregate demand, constituting around 60% of its Gross Domestic Product (GDP). Therefore, it is important to understand consumption behaviour at a disaggregated level periodically to gauge any changing patterns. The Household Consumption Expenditure Survey (HCES) for 2022-23 was released recently — the last such exercise was conducted in 2011-12. HCES 2022-23 has undergone some changes as compared to the previous surveys. These, among others, include enlarged coverage of items, changes in the questionnaire, multiple visits as against the single visits in earlier surveys, and changes in the mode of data collection. Owing to these differences, the results of HCES 2022-23 are not strictly comparable with those of the previous surveys. But then, that is generally the case with any two surveys conducted after a long time gap. At times, however, a comparison with the previous data series becomes unavoidable — though we need to be careful while interpreting the results.

Average monthly per capita consumption expenditure (MPCE) was ₹3,773 in rural India and ₹6,459 in urban India in 2022-23 as against ₹1,431 in rural India and ₹2,629 in urban India in 2011-12.(REUTERS PHOTO.)

The survey data suggest some interesting trends. Average monthly per capita consumption expenditure (MPCE) was ₹3,773 in rural India and ₹6,459 in urban India in 2022-23 as against ₹1,431 in rural India and ₹2,629 in urban India in 2011-12. Since the last survey, rural consumption expenditure has grown at a compound annual growth rate (CAGR) of 9.2% and urban consumption expenditure at 8.5%. However, these rates were sharply lower than the 10.3% and 10.8% recorded for rural and urban India, respectively, between 1999-2000 and 2011-12.

At a broad category level, non-food expenditure has grown at a much higher rate (CAGR) than food expenditure, both in rural and urban India. Non-food expenditure in rural India grew at a CAGR of 10.5% as compared with food expenditure CAGR of 7.9%. Non-food expenditure in urban India also grew at a higher rate of 9.1% relative to 7.7% food expenditure. Significantly, both food and non-food expenditure in rural India grew at a higher rate vis-à-vis urban India, though the gap between the two in non-food expenditure was much larger relative to food expenditure.

Currently, the weight of food in the CPI consumption basket is 45.9%, based on 2011-12 data. However, there has been a decline in the share of food in average MPCE, both in rural and urban India—the decline in the share of food in average MPCE in rural India was much sharper (to 46.4% in 2022-23 from 59.4% in 1999-00) compared with urban India (to 39.2% in 2022-23 from 48.1% in 1999-2000). In fact, the decline in the share of food in average MPCE in the last 12 years (2009-10 and 2022-23) of almost 10 percentage points in rural India was twice the decline in urban India. Therefore, if the weights based on the latest round are applied, the weight of food items will decline accordingly. A decline in the relative significance of food expenditure relative to non-food over time is a natural outcome of economic progression and, hence, it is only to be expected.

Large disparities exist between consumption expenditure in rural India vis-à-vis urban India. The ratio of rural and urban consumption expenditure remained in a very narrow range, between 0.52 to 0.58, in the last 23 years. The ratio at 0.58 in 2022-23, though marginally higher than that of 0.54 in the 68th round (2011-12), was not much different from the ratio of 0.56 in the 55th round (1999-2000). Thus, in the last 23 years, there has been no significant change in the overall rural-urban consumption pattern on a per capita basis, with rural India spending little more than half of what urban India spends on consumption.

Disparities in consumption expenditure exist not only between rural and urban India but also within rural and urban India. The ratio of average consumption spend of the top 5% of India’s rural population and the bottom 5% was 7.6 as compared with 10.4 in urban India. Thus, the disparities in urban expenditure were larger than those in rural areas.

From the above analysis, the following four points emerge. First, overall consumption has slowed down between the last two rounds of surveys (2022-23 vis-à-vis 2011-12), compared with the consumption expenditure growth between 1999-00 and 2011-12. Second, the slowdown in consumption expenditure has been more pronounced in urban India than in rural India. Third, the overall rural-urban consumption expenditure pattern has remained broadly unchanged in the last 23 years, with rural consumption expenditure constituting a little more than half of urban consumption expenditure. Therefore, any slowdown in urban consumption would impact overall demand much more severely than a similar slowdown in rural demand. Fourth, the share of food expenditure has declined, while that of non-food has increased, and this trend has been more pronounced in rural India than in urban India.

Of the four trends outlined above, the last trend (the rise in the share of non-food vis-à-vis food) augurs well for monetary policy. Prices of food items are driven by supply-side factors and hence more volatile and are not amenable to monetary policy, which is essentially a tool to contain demand-side pressures. In the recent period and on several occasions in the past, food inflation has been the main factor behind the elevated headline inflation and inflation expectations. If high food inflation persists, there is always a risk of it spilling over to the generalised inflation through the wage-price spiral. Therefore, the lower weight of food in the CPI basket, as and when it is made effective, should provide the RBI greater manoeuvrability in the conduct of monetary policy. Since inflation expectations are also driven largely by food inflation, lower food inflation (due to the lower weight of food) should also have a salutary effect on inflation expectations and actual inflation.

Janak Raj is Senior Fellow at Centre for Social and Economic Progress (CSEP). The views expressed are personal