A Consumption Surprise
New consumption numbers suggest an aspirational economy is taking root in India with household spending pivoting from food to durables. EPISODE #166
Dear Reader,
A very happy Monday to you.
Little over a week ago, the union government released the findings of the Monthly Per Capita Expenditure (MPCE) for 2022-23. The data packed a surprise.
Contrary to what the listed FMCG companies are claiming on earnings calls, rural consumption is healthy and growing—held up in part by the massive welfare programmes unleashed by the union and state governments.
Further, there is a distinct pivot in dietary preferences—away from cereals to proteins—a growing convergence between urban and rural consumption preferences, and increased purchase of consumer durables commensurate with the growth in disposable incomes.
So this week I try and unpack these fascinating trends from the consumption expenditure survey. Do read and share your feedback.
The cover picture of a classic thali, balancing cereals and proteins, is taken by Sushmita Bose.
A big shoutout to Surendra, Balesh, Premasundaran, Gautam, and Ranjini for your informed responses, kind appreciation and amplification of last week’s column. Once again, grateful for the conversation initiated by all you readers. Gratitude also to all those who responded on Twitter and Linkedin.
Unfortunately, Twitter has disabled amplification of Substack links—perils of social media monopolies operating in a walled garden framework. I would be grateful therefore if you could spread the word. Nothing to beat the word of mouth.
Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.
Tracking Aspirations
Little over a week ago the National Sample Survey Office (NSSO) released the first tranche of its latest survey on consumption expenditures.
The latest Monthly Per Capita Expenditure (MPCE) comes after a gap of a decade—normally it supposed to be released every five years—and provides a very revealing snapshot of India’s rapidly transforming consumption behaviour.
Broadly, the survey tell us:
Materially, India has traded up;
Disposable incomes have grown across all income classes. Some more than others;
Consumption expenditure has nearly trebled in absolute terms;
Signalling an increase in disposable incomes, people are spending less on food and more on non-food items like durables;
Convergence in rural and urban spending habits is growing;
Pull all these strands together it is clear that aspirational consumers are finally finding their feet. It is not that they just discovered their aspirations. Instead, it is now that they are finding the means—disposable income—to fulfil their aspirations.
We saw the first signs of India materially trading up in the 2011 Census numbers. At that time, the Mint newspaper, where I used to work, had done a special data series based on these numbers arguing how aspirations were taking root. In case you do wish to eyeball the series I am sharing a sample.
The latest MPCE data signals an acceleration in this makeover. Information gleaned from other data sets reinforce this larger narrative.
Last week the government released Q3 numbers for gross domestic product (GDP), which revealed a much larger than expected growth at 8.4%—accordingly the growth target for 2023-24 has been raised to 7.6%. While there are concerns that the numbers may have overstated the growth, there is no denying the underlying momentum to the Indian economy.
This would mean that for three years in a row—since the covid-19 pandemic struck the world—the Indian economy has grown above 7%. Besides being impressive, especially when compared to the rest of the world, the new data confirms that the Indian economy is gathering unprecedented momentum and settling down to a new trend rate of growth of 7%..
Similarly, the rapid decline in absolute poverty is another validation of the hypothesis that the gains from economic growth are beginning to be shared in a greater proportion than before. It is a no-brainer that this kind of inclusiveness ensures sustainability of growth.
The consumption numbers suggest that this growth is now percolating to all segments of the economy. Definitely not in the desired proportion.
Yet, we are seeing that people are beginning to gradually realise their aspirations; something that augurs very well for the future expansion of India’s consumer economy.
Trends in Consumption
In absolute terms, between the surveys of 2001-12 and 2022-23, there has been a near trebling of MPCE in rural and urban India (see graphic above). The growth in MPCE for rural India is marginally higher. Remember this data is in nominal terms and not adjusted for inflation.
Regardless there is a clear break in spending trends over the last decade. Or at least the beginnings of a makeover.
Keep in mind that the devastation caused by the covid-19 pandemic is still playing out in the Indian economy; the impact peaked around 2020-21. Part of the reason the spending held up is because of the mitigation efforts carried out by the government—provision of free food grains, direct cash transfers and so on.
Further, the proportion of food in monthly household budgets is gradually shrinking as their disposable incomes grow. It is faster in urban areas.
The percentage share of food in average MPCE declined from a peak of 56.98% in 2009-10 to 46.38% in 2022-23 in rural areas. Similarly, over the same period, food spends in urban areas declined from 44.39% to 39.17%. Check out the graphic below.
Interestingly, the share of cereals within the food basket too is declining and rather sharply at that. For rural India it has dropped from 17.45% in 2004-05 to 4.91% in 2022-23. Over the same period the decline was 9.63% to 3.64% for urban India.
Implicitly this trend is telling us that disposable incomes of households are growing. Since food consumption is inelastic—does not go up or down with price—it is apparent that as incomes grow the household is acquiring the fiscal wherewithal to make discretionary purchases—like personal transport (scooters, motorcycles, cars) and durable consumer goods like refrigerators, coolers and so on.
In short, they are now pursuing aspirational spending.
Aspirational India
As I pointed out earlier, the trend in material trading up of Indians kicked off from the turn of the new Millennium. The difference is that over the last decade this trend has visibly accelerated with the growth in disposable incomes.
From the above graphic you can see that discretionary spending for rural as well as urban households has gradually moved up from a fifth of a household’s average monthly expenditure to under a third in the last 15 years.
However, if we listen to earnings calls of listed FMCG companies you hear the refrain that consumption spending is stagnant, especially in rural India. I believe both claims hold true. It is just that the FMCG companies are missing out on this perceptible increase in discretionary spending.
In a country like India it could be because of price sensitivity to branded products. Instead, households may be opting for affordable non-branded products that help them realise their aspirations. Innovations like washing soap sachets can also overcome the price barrier. Either way the ball is in the court of FMCG companies.
Further, the nature of India has changed in the last two decades. The binaries between rural and urban India have ceased to exist. This is because of the growth of census towns—rural areas that mimic urban consumer behaviour—that are acting as a bridge. As a result of this growing demographic fuzziness, we are also witness to a gradual convergence in consumer spending habits.
An attendant fallout of this growing trend in disposable income is the impact on poverty. Abject poverty has been on the decline for some time now. I have done several pieces on this. The latest numbers only confirm these findings—wherein India lifted 415 million out of poverty in the 15 years ended 2021.
Every reason to believe that more people would now be out out of abject poverty. As India graduates to a middle income country the nature and measure of poverty will change as new aspirations take hold.
Measuring Inflation
One fallout of the declining proportion of food in household expenditure will be on the computation of the consumer price index (CPI)—food is the largest item. The weights will be reorganised and a revised CPI will be rolled out. This won’t happen immediately though. The process requires the setting up of a committee which will then vet the data and take a final call.
Eventually, when the weight of food is reduced there will be two fallouts: One, the overall inflation, especially food inflation, will see some moderation. Second, more importantly, the volatility we have witnessed due to abrupt spike in prices of vegetables, fruits and so on will decrease.
In the final analysis it is clear that the story of the Indian consumer economy is evolving. Further it is extremely complex and has many layers. As they say in Hindi: Abhi story baaki hai.
Recommended Viewing/Reading
Sharing the latest post of Capital Calculus on StratNews Global.
Also wanted to let you know—especially if you watch it live—the show has a new telecast time and day now.
Instead of every Thursday (7 pm) it will be telecast every Saturday (11 am). Happy watching. Sharing the promo below.
Last week I put the spotlight on the growing primacy of the Arabian Sea and India’s renewed diplomatic spotlight on the region. I take up from Prime Minister Narendra Modi’s seventh visit to the UAE in nine years. Prior to his fist visit in 2015, the only Indian PM to visit the country was Indira Gandhi in 1981.
This diplomatic neglect for 34 years is baffling. Not only is the region key to India’s energy security it is also home to millions of Indian expats. The obvious question is whether PM Modi has been able to make up for lost time.
To unpack this I spoke to Sunjay Sudhir, India’s Ambassador in the UAE and someone who is a key member of the team that is enabling this rather dramatic makeover in the relationship between the two countries.
Sharing the link below. Do watch and share your thoughts.
Till we meet again next week, stay safe.
Dear Anil
Since childhood we have been listening to the slogan of Garibi Hatao. It was considered inevitable that the poor will become poorer while the rich will become richer. However, the changes in the past decade have shown that it needn't be so. All the schemes to improve the lives of rural India is finally bearing fruit. Once the struggle for survival has been overcome, we can now see the consumption going up. It is only after the basic needs are met that one can think of spending on durables. Like you had mentioned in a previous newsletter, most of the rural youth has access to mobile phones. That was unimaginable earlier.
It's interesting that the food trends are also changing. Earlier it used to be the staple cereals since there was no choice. Of course the ultimate irony would be if the traditional thali is replaced by fast food as is happening in most urban households. The culture of ordering food online is something which has really caught on in major cities. Won't be surprised if this is seen in rural India in the next decade or so.
Till a few years back there was no concept of disposable income. It's a luxury the people in rural India is experiencing for the first time. That's why it's possible to pay attention to personal comforts and start investing in things which will improve the quality of their lives. One can be optimistic that these changes are here to stay and the rural- urban divide will be further reduced.