Rising consumption, infra gains drive rural poverty down: SBI Research

The government's latest Consumption Expenditure Survey reveals a remarkable decline in rural poverty at 4.86% in FY24, down from 7.2% in FY23 and 25.7% in FY12, while urban poverty is estimated at 4.09%, down from 4.6% in FY23 and 13.7% in FY12. The overall poverty levels have declined to 4-4.5%.

The Ministry of Statistics and Program Implementation (MoSPI) released the Household Consumption Expenditure Survey (HCES) report, 2023-24, on December 27, 2024. It offers several clues for the apex economic policymakers in the central government to address the consumption riddle in the Indian economy.

A sharp decline in the rural poverty ratio is on account of higher consumption growth in the lowest 0-5% decile, with significant government support as the change in food prices has a significant impact on not just food expenditures, but overall expenditure in general, according to a report by SBI Research.

"The new weights drove down headline inflation by as much as 50 basis points in Nov’2024. We believe urban poverty could decline even further. At an aggregate level, we believe poverty rates in India could now be in the range of 4%-4.5% with almost minimal existence of extreme poverty."

The Consumption Survey also brings out two reassuring trends at a time when there is a major question mark on the consumption engine of the Indian economy. First, 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 the values of items received free of cost by the households through various social welfare programmes.

Enhanced physical infrastructure is also scripting a new story in rural mobility. This is also "one of the reasons for the increasingly shrinking horizontal income gap between rural and urban and the vertical income gap within rural income classes," writes Soumya Kanti Ghosh, group chief economic adviser, SBI Research.

The difference between rural and urban monthly per capita consumption expenditure (MPCE) is now at 69.7%, a rapid decline from 88.2% in 2009-10. Ghosh attributes the initiatives by the government including DBT transfers, building rural infrastructures, and augmenting farmer’s income, to an improvement in the rural livelihood.

He also observes that food inflation dampens "consumption demand" more in lower-income states as compared to higher-income states, reflecting that rural people are comparatively more risk-averse in low-income states than in high-income states.

The SBI report says the November 2024 inflation because of the new weights would be 5.0% against 5.5%. "Most of the high-income states delineate a savings rate greater than the National Average (31%). Uttar Pradesh and Bihar show low savings rate possibly due to higher outward migration."

Based on 2011-12 MRP consumption, a poverty line estimate of Rs 816 in rural areas and Rs 1,000 in urban areas, the new poverty line was adjusted for decadal inflation and the imputation factor was derived from the NSSO report. "New estimated poverty line is Rs 1,632 in rural area and Rs 1,944 in urban areas in 2023-24," says Ghosh.

The poverty ratio new estimate was arrived at by linear interpolation of the relevant fractile class in which it falls. "Based on 2023-24 fractile distribution, the sample proportion for poverty in rural areas is 4.86% and 4.09% in urban areas ignoring the imputation factor. The decline in rural poverty ratio is on account of higher consumption growth in 0-5% decile leading to a shift in poverty line from 5-10% decile in 2022-23 to 0-5% decile in 2023-24."