What’s driving rural spending?

Consumption surveys have become critical today for several reasons. They show whether people are better-off in the present context relative to the past after buffering in the inflation factor. Also, they throw light on the rural-urban divide as well as consumption patterns across different income groups. Further inter-State differences can be gauged, which are useful for any policy formulation. And, if one wants to stretch such limited sampling to the national level, economists can argue for change in inflation indices with weights being taken from these Surveys. Finally, corporates find these useful as they can customise their products for various markets.

The recent Monthly Per Capita Consumption Expenditure (MPCE) Survey of the NSSO highlights the fact that the rural-urban divide (difference between urban and rural MPCE as a percentage of the latter) has come down from 84 per cent to 75 per cent in the 11-year period ending 2022-23 in real terms. This shows progress in the rural economy which is contrary to the normally held view that urban is well ahead of rural India. In fact, it rebuts the argument put forward often on rural distress. In real terms, compound annual growth in MPCE in this period was 4.7 per cent while that in urban areas was just 2.7 per cent. Quite interestingly this data does not quite gel with the macro data of NSO on consumption which registered growth of 6 per cent.

Some of the reasons that could have led to rural MPCE doing better than urban would be the large cash transfers by the government in the form of PM-Kisan and NREGA, besides other subsidies. This has increased the effective spending power of households. Add to this the increase in the wage rate, which is typified by the NREGA, payouts have nearly doubled during this period. Further, with urban migration taking place there is a tendency for money to be sent back to the rural homes which increases consumption in these regions while reducing the same in urban areas. Last, the savings rate tends to be lower in the rural areas compared with urban as seen in concentration of bank deposits in the latter which will in turn account for higher growth in consumption. Therefore, any interpretation of higher MPCE in rural areas should be viewed with caution.

Relative performance

What is more interesting, this Survey relates to relative performance of States over the years. The MPCE for rural India was ₹3,773. Ten of the 18 major States listed had higher than mean MPCE with Kerala topping with ₹5,924. All the five southern States along with Punjab and Haryana in the North and the three western States of Maharashtra, Gujarat and Rajasthan did better than the national average. The disturbing part is that Chhattisgarh, Jharkhand and Odisha had MPCE of less than ₹3,000, which is way too low. The disparity is stark and reflects uneven rural development across States.

At the urban level too, a similar picture was seen with the national average MPCE being ₹6,657. Here Rajasthan slipped below the average. Madhya Pradesh, Bihar and Jharkhand were at the bottom tier, at less than ₹5,000. The picture is revealing as the former two States perform better in rural income but slide in urban reckoning. This reflects limited formalisation in these States which is a combination of both industrialisation and service industry.

The overall picture from these images is that the southern and western States have been the faster growing ones over the years and also attract more investment (both domestic and foreign). Punjab and Haryana have also leveraged the agricultural power to enhance income and consumption standards across both rural and urban regions.

Rural-urban divide

The same facet is witnessed when the rural-urban difference is examined where States like Andhra, Kerala and Punjab had variations of just 19-39 per cent as against national average of 71 per cent in nominal terms.

Ideally with faster economic growth spread evenly across States, this differential should come down to prevent high rates of migration. Presently the decline in differential is more due to affirmative action in rural India.

These results would be significant especially for consumer goods companies that need to have separate strategies for these two groups of States. The higher consuming States will be the ones that would typically be attractive markets especially for lifestyle products which are consumed by the higher income groups. In the other States, the products have to be more custom made as consumer spending is lower.

A broader issue raised here is whether such surveys are representative of the universe. The Survey covers 1.55 lakh households in rural areas and 1.06 lakh in urban. Assuming there are five members in a family this would mean data on around 13 lakh people. In India the population is around 140 crore. Total consumption of the 2.61 lakh households, would be around ₹8,000 crore on an annual basis based on the MPCE which is 0.05 per cent of nominal consumption of ₹164 lakh crore and less than 1 per cent of total households in the country in FY23.

The consumption pattern in the Survey shows that in case of rural India 46.4 per cent of the expenditure was on food while it was 39.2 per cent for urban households. The blended share would be 42.5 per cent. The NSO data for the country however reveals a share of just about 30 per cent for food items in total consumption. For most of the other components in the basket there are variations; the higher variations outside of food was for rent with a differential of almost 5 per cent and electricity, water above 3 per cent. Therefore, while extrapolating such data for use in, say, weights in the price indices, a blended approach would be required. This sample may be considered too small to fully capture the finer aspects of consumption howsoever much they present indicative patterns.

The overall drift of the results of the Survey do suggest what traditional economic theory dictates. With progressive economic development households would tend to spend more on non-food items. Further, even within food items, there would be a shift to manufactured as well as higher value products such as dairy and poultry. This change has come through with the more innovative steps taken by the consumer goods industry to reach consumers in all parts of the country.

The writer is Chief Economist, Bank of Baroda. Views are personal