Changing Patterns of Consumption

Changing Patterns of Consumption – Understanding PFCE

By: Dripto Mukhopadhyay
Consumption is one of the key indicators of the economy’s performance. Since India has been experiencing relatively higher growth and resultant change in household income distribution, consumption pattern too has altered over the last decade or so.
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Consumption is considered to be the fundamental determinant of welfare for any economy. It reflects several important characteristics of an economy including affordability, inequality and more. Consumption behaviour is one of the true measures of a society’s economic, political and social conditions at a given point of time or over time capturing various interconnected issues. Though research related to consumption has gained momentum worldwide in the last three to four decades, in India it is still at a nascent stage. Most of the consumption related research in India is still geared towards understanding inequality and poverty instead of looking at its implications on economy and decision making in businesses.  

One of the shortcomings for restricted research on consumption is certainly data paucity. However, it would be essential to define consumption before we enter into data related issues. Consumption is the largest component of demand generated within an economy—which can happen through various agents. Two broad components are private consumption and government consumption. In this article, we limit our discussion to private consumption only. Private consumption is a true reflection of economic condition and demand generation in an economy.

Fig, 1 Distribution of households of income groups
Fig, 1 Distribution of households across income groups

Analysis of consumption has become even more relevant since the household income distribution in India has changed significantly over time (Fig 1). The data clearly suggest that India has been experiencing a significant shift in household income distribution. The shares of households in the higher income groups have shown continuous increase, the share of the lowest income group (less than INR 75,000 per annum) has been declining significantly. This must have an impact on consumption pattern as affordability of the households changes.

With this background, this article focuses on understanding the changing household consumption pattern in India during the periods 2004-05 to 2014-15.

The concept of private final consumption expenditure

While understanding private consumption in a country, the term ‘private final consumption expenditure’ (PFCE) is most important. As defined by the Indian Government—PFCE is the expenditure incurred on final consumption of goods and services by the resident households and non-profit institutions serving households (NPISH). It is clear from the given definition that three key criteria need to be fulfilled to be counted for the PFCE:

  • Final consumption—the consumption for end use purpose. No intermediate consumption is included in the PFCE to avoid double counting.
  • Resident households—primarily the consumption by resident Indians is considered under the PFCE.
  • Goods and services—any and every goods and services a human being consumes by household is considered under the PFCE.

PFCE is defined as any and every consumption expenditure made by the Indian resident households anywhere in the world and the final consumption expenditure made by non-resident Indian households within India’s economic space.

Data on consumption

Consumption data in India may be found with two most critical and authentic data sources: the National Accounts Statistics (NAS) and the National Sample Survey (NSS) published by the Central Statistical Organisation (CSO). While the PFCE data from NAS are an aggregated data on several items, the NSS data are captured through primary survey of households (data.gov.in).

Although, the PFCE captures all sorts of consumption on goods and services in the country, however, a few broad categories have been selected to make it comprehensive as well as manageable. They are as follows:

  • Food, beverages and tobacco
  • Clothing and footwear
  • Gross rent, fuel and powe
  • Furniture, furnishing, appliances and service
  • Medical care and health services
  • Education
  • Transport
  • Communication
  • Restaurants and hotels
  • Recreation and cultural services
  • Miscellaneous goods and services

Apart from the above categories, one can also analyse PFCE in terms of durability—durable goods, semi-durable goods, non-durable goods and services.

With limited scope of this article and the visuals presented herein, this analysis has considered the former broad classification as mentioned above. Since presenting eleven categories in one visual is always a challenging task, the categories are broken based on the nature of their essentiality. Apart from food related items, clothing and footwear, rent, fuel and power categories, health and education all other items were put as “All Others”. Wherever, certain key trends emerged regarding categories included in All Others, they are analysed and presented separately. Though health and education are not strictly considered as essential items, we have considered those as crucial for the society and therefore did not include them in All Others.

A time series PFCE data from a period of 2004-05 to 2014-15 are used for the analysis. To adjust the data for inflation, entire data series have been converted into a constant price of 2011-12 to make them comparable over time.  

Trends and insights

Figure 2-3 private final consumption

Overall PFCE and the absolute change have shown a significant increase during the last 10 years (Figs 2 and 3). As can be seen from the figures, private consumption in India has increased substantially. However, the pace of change varied in each year. This reflects the variations we observed in country’s economic growth and as a result in household income generation. Absolute change in the PFCE as observed in Figure 3 suggests that perhaps we can divide the entire period of 10 years into two distinct periods, 2004-05 to 2009-10 and 2009-10 to 2014-15. Apparently, during the period after 2009-10 consumption in India has increased at a higher pace than pre- 2009-10 period. The impact of global economic recession can be noticed through substantial dips in consumption in the year 2008-09 and 2009-10.

The following analysis considers the distinct time points that are identified from the PFCE trends. To make it comprehensive and reader friendly, I have avoided full names of each category. The names as given under data section should be considered while going through the analysis. The consumption by the broad categories during three time points are presented in Figures 4 and 5. Food constitutes a significant proportion of total consumption basket of Indian residents. However, the chart shows a drastic change in composition of consumption basket. The primary trend says that consumption has increased for each of the broad categories. However, the key point as shown in the chart, consumption expenditure in items under All Others or non-essential category has increased much more compared to the essential goods and services.

Figure 4 year wise pfce
Figure 4 Year-wise PFCE by major categories (at 2011-12 constant prices)

To make it further clear, the proportions of all these items in Indian households’ consumption basket is presented in Figure 5. It indicates a distinct direction on how the consumption pattern is changing in the Indian context. Consumption of foods, beverages and tobacco related product has declined 8 percentage points during the last 10 years from a proportion of 39 per cent in 2004-05. Expenditure on house rent etc. has declined by about 3 percentage points whereas clothing and footwear expenditure has gone up by 3 percentage points. Significant surge in consumption has occurred in case of other goods and services. From 37 per cent in 2004-05, which was lower than that of foods etc. it has reached to 46 per cent in the last 10 years. This shows that Indian households are increasingly spending on non-essentials creating a demand for goods and services that were not as important earlier. This depicts a transition of the society from one stage to another. It is a reflection that Indian households do have higher disposable income in hand at present at an aggregate level compared to the earlier years. Therefore, they can spend on non-essential goods and services after fulfilling the requirements for essential commodities and services.

Figure 5 changes in proportion
Figure 5 Changes in proportion by various categories

To look into it at a greater depth at a category-wise share in consumption basket is presented in Figure 5. Critical points that can be highlighted are:

  • Enormous increase has been observed for share of communication, which is primarily relating to telecom and IT. Considering the extent of requirements of households for communication, the increase in expenditure and its current
    share in households’ consumption basket is extremely noteworthy.
  • In real term, share of expenditure on education in total consumption basket has seen a decline.
    The same is true for recreation and culture category too.
  • Expenditure on travel and eating out has also increased in real terms in the consumption basket.
  • An increase has also been observed in the category of miscellaneous goods and services. This constitutes of expenditure on personal care goods and effects, personal goods and various other personal services.

 

Figure 6-7 consumption

When the trends at the aggregate level are analysed, it is also important to consider the population. Population is a critical factor of consumption demand. Since population changes every year, one needs to consider per capita consumption to understand the dynamics better. Per capita consumption is presented in Figures 6 and 7. To make the analysis more comprehensive, the following charts present the trend in form of an index. This allows us to compare the consumption trends on a similar scale. The index values for each of the category have been computed considering the consumption expenditure of 2004-05 on that item as 100. Following points can be highlighted from the charts:

  • Per capita consumption on clothing and footwear has accelerated the most. It has increased by about 2.6 times, but with significant ups and downs, in the last 10 years.
  • Food etc. and house rent and related categories experienced a steady increase in terms of per capita consumption, but at a significantly lower level compared to the one mentioned above.
  • Another important fact is that per capita expenditure on healthcare services has increased by about 2 times. It is also important to understand how  All Others have changed in terms of per capita consumption expenditure (Fig. 7). We come across some revealing findings in terms of per capita consumption of Indian households regarding these items. Those are as follows:

Per capita expenditure on communication has shown a hoofing increase of more than 5 times in the last 10 years. The steep increase was seen till 2011-12. It has been flattened marginally showing a steady increase since then.

  • Per capita consumption of miscellaneous goods and services has increased by 4 times.
  • Per capita consumption on furnishing etc., travelling and eating out has been increased by more than 2 times.

Endnote

The analysis certainly suggests that India is experiencing a significant transition in terms of consumption behaviour of goods and services as reflected from the PFCE data. It is moving towards a more mature consumption phase (Banerjee and Esther, 2011) where the proportion of basic goods and services do not constitute the majority of the consumption basket any further. However, it is important to remember that this analysis does not reflect a few key issues of consumption in the country. Those are:

The variations from state to state as well as rural and urban sectors, which may have drastic differences when the spatial dimensions in consumption dynamics are included; and

The distinct differences across social and economic strata of the society in consumption behaviour across income groups as well as social groups.

It is important to analyse these aspects not only to help the policy makers, but also businesses immensely in formulating their strategies across location and across target segments.

References

Banerjee, A. V. and D. Esther. 2011. Poor Economics. 

Author is Director, Economic Research, Nielsen, New Delhi. Dripto.Mukhopadhyay@nielsen.com

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