Household spending survey offers key lessons to address India’s consumption riddle

The ministry of statistics and program implementation released the Household Consumption Expenditure Survey (HCES) report, 2023-24 on Friday. The survey report offers several clues for the apex economic policy makers in the central government to address the consumption riddle in the Indian economy.

Policy tweaks in the context of the key findings of the survey like the rising non-food expenditure by the households, sustained consumption momentum in the rural areas, declining consumption inequality may lead to better inflation management. It will also help facilitate a well-calibrated monetary policy action by the Reserve Bank of India. Both may eventually lead to enhanced consumption in the economy.

Inflation Management

The recent survey, like the previous one done in 2022-23, reveals that the households are spending more on non-food items. Beverages, refreshments, and processed food form a major component of the expenditure being undertaken by the households.

“Non-food items remain the major contributor to the household’s average monthly expenditure in 2023-24 with about 53% and 60% share in Monthly Per Capita Consumption Expenditure (MPCE) in rural and urban areas respectively,” said a release from the ministry on the report.

“Beverages, refreshments and processed food continue to have the major expenditure share in 2023-24 in the food items basket of the rural and urban households,” it added.

The report said conveyance, clothing, bedding and footwear, miscellaneous goods and entertainment and durable goods have major expenditure share in non-food expenditure of the households in both rural and urban areas.

According to the finding of the report, rent consisting of house rent, garage rent and hotel accommodation charges with about 7% share is another major constituent of the urban households’ non-food expenditure.

It is evidently clear that the households are spending more on items other than food. This calls for a rejig of the weightage given to the food basket in the consumer price inflation (CPI) index. 

According to the Survey, rural households are spending 53% on non-food items and urban are spending 60% on non-food items. It may be noted that the weight of foods and beverages in the CPI index is 45.86. It is evidently clear that the spending pattern on food is not being adequately reflected in the basket. With higher weight in CPI but lower actual spending by the households, it is only leading to ballooning of the headline inflation numbers, which play a vital role in monetary policy committee decisions. In essence, the benchmark lending rates are being decided by the prices of the items, whose consumption has dipped, but weight remains constant in the index.

This needs to be immediately addressed, otherwise the policy lending rates will remain elevated just because of the prices of a handful of commodities whose consumption is anyway dipping. In fact, last month commerce minister Piyush Goyal was not wrong when he called linking prices of selective food items to rate decisions as “flawed logic”. Sound bytes were pouring in from all quarters when inflation had hit 6.2% in October. Finance Minister Nirmala Sitharaman, too, said a developing country like India needs lower interest rates and the chief economic adviser V Anantha Nageswaran too said handful commodities like potato, tomato and onion and gold are stoking inflation.

But rather than knee jerk reactions, the need of the hour is correcting the anomaly to ensure that the CPI basket is well aligned with the emerging consumption patterns. The government needs to expedite the base year change exercise currently underway to capture structural changes in the economy more accurately.

Rural India needs spending thrust

The report brings out two reassuring trends at a time when there is a major question mark on the consumption engine of the Indian economy. First, the consumption inequality, both in rural and urban areas, has declined from the level of 2022-23. Secondly, the average MPCE in rural and urban India in 2023-24 has been estimated to be Rs 4,122 and Rs 6,996, respectively without considering of the values of items received free of cost by the households through various social welfare programmes.

“The urban-rural gap in MPCE has declined to 71% in 2022-23 from 84% in 2011-12. It has further come down to 70% in 2023-24 that confirms sustained momentum of consumption growth in rural areas,” the report adds.

“Average MPCE in 2023-24 has increased the most (22%) from the level of 2022-23 for the bottom 5% of India’s rural population when ranked by MPCE and for the corresponding segment of urban population the growth has been about 19% during the same period,” the report adds.

At a time when the rural economy and the lower income group in the urban sector is showing resilience, it is imperative that the government provides a lending hand to the lower economic strata. With the budget around the corner, this finding could not have come at a more opportune time for the government. The government must consider a tax breather for the lower income groups, and higher liquidity for the micro, small and medium enterprises. In a move that may come as a fillip to the rural segment, the government should consider providing subsidized loans for enterprises, based on land holding. This move will come as a support for non-agricultural enterprises in the hinterland and help boost consumption.

Look East

Average MPCE in the rural areas in the eastern states – West Bengal, UP, Odisha, Jharkhand, Chhattisgarh, Bihar and Assam – is lower than the national average of Rs 4122. The average urban MPCE too follows a similar trend. This means that the government needs to build upon the interim budget 2024-25 announcement on development of the east. “Our government will pay utmost attention to make the eastern region and its people a powerful driver of India’s growth,” finance minister Nirmala Sitharaman had said in her speech. Perhaps it is time to revisit the announcement and chart out a holistic growth plan for the eastern states which are lagging.

The household survey provides ample policy cues and could not have come at a more opportune time ahead of the budget.