30 years of liberalisation: Per capita income, consumption expenditure have risen but neighbours have done better

Representative image (Source: ShutterStock)

A little under 30 million individuals travelled out of the country in 2019, a significant number of them as tourists on leisure trips overseas. The numbers included thousands of students who gained admissions into universities overseas not just for pursuing post-graduate courses but also for undergraduate studies.

Before 1991, only a small tribe of students would have flown overseas for undergraduate studies and that included many who went to attend relatively inexpensive medical and engineering colleges in what was then known as the Soviet Union. Holidays in foreign destinations was an aspiration for many, but few could afford them.

About 2.78 million passenger vehicles were sold in 2019-20, in what was a slow growth year for the economy and the automobile sector. Sales were at a five-year low but consumers had a wide choice of vehicle models to choose from over a dozen manufacturers. Back in 1991, the choice was limited to a few models from Maruti Suzuki, Hindustan Motors, Premier Auto, Tata Motors and Mahindra and Mahindra and the waiting period for a car and utility vehicle was long.

Over 1.20 billion telephone connections were active as of April 2021, of which 1.18 billion were mobile connections. A little over 88 individuals out of every 100 owned a phone connection. In as many as seven states, the number of telephone connections exceeded the population of the state.

In Delhi, the number of telephone connections per 100 persons was more than 281 – which is to say that on average every individual in Delhi held nearly three telephone connections. When the telecom sector liberalisation started in 1994, allowing private players to provide mobile services, the teledensity was just about 0.8 per 100 persons, with a total of 8 million telephone connections in the country.

Lives of Indians

These are just three instances of how the life of Indians changed after the liberalisation of the Indian economy was set in motion by a government led by PV Narasimha Rao as the prime minister and Manmohan Singh as his finance minister.

As the industry was unshackled from the licence raj and foreign investments welcomed, India entered a new phase of building factories which created more employment in construction, manufacturing, sales and post-sale servicing. Automobile makers were among those that benefited from the reforms in the Indian economy.

As successive governments took the reforms forward, the size of the middle class grew, making India an attractive destination for foreign investors. Income rose and consumerism arrived. Shortages got replaced with a choice of goods and brands. Spending patterns changed as a result.

The per capita income and per capita consumption expenditure climbed, though not as fast as the GDP. Continuously expanding population slowed the rise of per capita incomes and the need to have adequate savings affected the rise of consumption expenditure.

India’s per capita income at current prices rose at a compound annual growth rate (CAGR) of 11.2% from Rs 6,835 to Rs 1,34,186 between 1991-92 and 2019-20. The rise was slower at 10.7% CAGR when the estimates for 2020-21 are considered, as the per capita income that year had contracted to Rs 1,28,829 due to a nationwide lockdown.

The rise and fall in per capita income led to corresponding changes in consumption expenditure, the measure of which is private final consumption expenditure (PFCE). The level and growth of PFCE is an indicator of the standard of living of the people of the country – essentially spending on food, durable and non-durable goods and services.

Changes In The Last Decade

In the first two decades of liberalisation, the rise in per capita PFCE at current prices lagged the rise in per capita income. That trend changed in the last decade when the incentive to save reduced. Overall, the per capita consumption expenditure in current prices rose 10.8% CAGR between 1991-92 and 2019-20 from Rs 5,185 in 1991-92 to Rs 91,790 in 2019-20. In 2020-21 with markets and shopping malls shut and travel restricted, the PFCE contracted with a fall in per capita incomes as opportunities to spend were limited. It fell to Rs 85,348.

Indians spending patterns changed significantly with a rise in per capita income. The share of per capita PFCE on food, beverages and tobacco declined from 49% to 31% between 1991-21 and 2019-20. The spending on transportation grew from 11% to 17%, as mobility rose and people started travelling long distances for work and leisure. The share of PFCE on education, health and medical care, and communication doubled during this period. The sharpest increase was seen in the category classifieds as miscellaneous goods and services, where the share of per capita PFCE climbed from 4% in 1991-92 to 13% in 2019-20. Miscellaneous services include personal care, religious, sanitary, legal, business and insurance services while miscellaneous goods is a reference to jewellery, watches, leather products and toilet goods.

About 50 percent of the per capita PFCE is spent on services, 41 percent on non-durable goods and the balance on durable and semi-durable goods, data published for 2019-20 show.  The share of spending on services has been rising continuously.

India is currently the sixth-largest economy but ranks very low on per capita income. Back in 1991, India and China reported per capita GNI of $350, measured in current US dollars. In 2019, China’s per capita GNI was $10,390 while India rose to just $2,120. Its neighbours in the sub-continent, Bhutan and Sri Lanka reported faster growth between 1991 and 2019. Sri Lanka’s per capita GNI grew CAGR 7.8 percent from $490 to $4,010, while Bhutan’s per capita GNI grew CAGR 6.9 percent from $480 to $3,140. Bangladesh matched India’s growth, with per capita GNI rising from $320 to $1,940.

Clearly, India has a lot of catching up to do. Even on purchasing price parity parameter, India does not do well. Its per capita GNI on PPP basis at $6,930 compares poorly with China’s $16,730 and Sri Lanka’s $13,230.