Consumption is the largest driver of the economy, but we have had to wait for eleven years to get a sliced and diced view of it. The highlights from the data of the latest NSSO survey 2022-23 on household consumption expenditure are not entirely unexpected – spending went up nearly 2.5 times with rural outpacing urban, disparity between urban and rural spending narrowed, and the share of non-food spending went up significantly.
These are expected as many changes have happened (technological, financial, cultural) and also because economic growth is maturing. The jump in rural non-food consumption, though, may be a bit of a surprise given the narratives around rural distress impacting FMCGs. It was perhaps the effect of higher rural inflation and savings, if not incomes, that drove spending.
This would seem the case especially for the more pronounced fall in the share of food. In fact, if we strip away the effects of inflation, the CAGR for both rural and urban spending falls to a more modest 4 percent during the decade. Interestingly, freebies under social welfare did not seem to have had a significant impact on consumption.
Lens On CPI
The changes in patterns obviously warrant a re-weighting of the CPI index which is now long overdue. The weights assigned in 2011-12 for many of items now look out of sync with data. Food (Rural) is currently weighted at 54 percent while NSSO data show its monthly per capita expenditure (MPCE) share to be 46 percent, a sizeable fall.
Among others urban housing is weighted at 21 percent but its MPCE share has now dropped to around 6 percent. The most important changes have been in non-food spending which increased dramatically, especially for rural (to 54 percent) while the CPI index, on a comparative basis, weights them at 45 percent.
Although index revision may take more than a year, revised weights could see a significant decline in food inflation and some rise in core inflation if commodity prices get volatile. The non-food category is actually a mix of many services and commodities unlike, say, in the USA, where services and housing dominate the category. So much so that it is wage inflation, not commodity prices, that worries the US Fed more as the main driver of retail inflation.
In India, monetary policy could be faced with the new challenge of accosting both commodity and services inflation, instead of food inflation if weights are revised to reflect the new spending patterns. There could be cascading effects on monetary policy, credit policy and even fiscal policy (GST).
The Growth Question
While spending patterns may not impact GDP growth in absolute terms, there has always been a disconnect between personal consumption expenditure data (PFCE) reported in GDP and data from the NSS survey. As per the latest GDP data, expenditure on food accounts for 30 percent of total spending while NSS data puts the figure at 46 percent for rural and 39 percent for urban – significantly different.
The reasons are also well-known (conceptual and methodological differences) but the concern has been that the divergence has ballooned to huge proportions to almost 45% by 2011-12. Hopefully, the PFCE data for 2022-23, when available, could lead to some reduction in the disparity. The dispersion of spending could also have a bearing on growth through demand and production.
The skew in the MPCE fractile class data – the top 5 percent of MPCE fractile class has an average spend that is nearly ten times the bottom 5 percent – suggests that a small section of the economy is doing all the heavy lifting. Likewise, state wide disparities in MPCE would also have a bearing on regional growth and tax collections.
But in an economy where income inequality is high, spending disparities are inevitable. But for India Inc, overall, the data seems to hold out some hope. The surge in non-food spending of rural households, especially under durables, services, travel, transportation and the shift away from cereals to pricier items and processed foods should be encouraging news for industry and manufacturing.
SA Raghu is a columnist who writes on economics, banking and finance. Views are personal, and do not represent the stand of this publication.
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