Madan Sabnavis: Rapid shifts in consumption patterns

The share of expenses on food has fallen by more than a fifth in five years.

Have our consumption habits improved over the years? Critics argue that what we see in urban India is quite different from that in rural areas. The FMCG companies vouch for the wealth at the bottom of the pyramid and believe that even the less privileged have access to the goodies. An objective way of getting around this issue is to examine changes in the composition of private final consumption expenditure to gauge whether or not there have been shifts in the consumption patterns.

Considering that just over half of our GDP still emanates from the rural sector, it is reasonable to assume that the changes in the structure is reflective of both rural and urban India for it cannot be driven entirely by the urban population. The period chosen is financial year 2000 to 2005 and the focus is on private final consumption expenditure. During this five year period, consumption grew by 49.3 per cent, while GDP grew by 58.7 per cent.

Six major changes in the consumption pattern stand out. The first is that people are spending proportionately less on food items, which have become what microeconomic theory terms "inferior goods", which is indicative of a progressive society. A fall by 10 percentage points is significant.

The second highlight is that we are spending more on transportation, which is a combination of running our own vehicles as well as making use of civic transport services. The share of the combined two has gone up from 11.1 to 14.5 per cent. This means that we are not only traveling more but also have incurred higher costs due to the constant raising of petrol and diesel prices as well as the rates on all kinds of transportation: road (buses, taxis, autos), rail and air.

The third point is quite a revelation. We are spending more on health and well being. The cost of medical care has gone up, while there has been an increase in life expectancy, which in turn means, people stay alive longer with greater need for medical care. Further, urban pressures have also caused a higher incidence of ill-health, which leads to greater dependency on the medical system, which is disturbing.

The fourth feature is that we are also spending more on fuel and power at our homes. The cost of electricity has gone up (mostly unnoticed) along with greater consumption of electrical goods. While the share of expenditure on refrigerators, air conditioners has not gone up, the cost of using these appliances has increased because there are more people using these goods, which entail higher power bills.

The fifth interesting change witnessed in the consumption pattern is that we are spending less on tobacco and related items and more on beverages. The government would be both pleased and displeased as people are kicking off the bad habit, but this would affect its coffers as taxes on tobacco products are always effective revenue raisers. Also, the Pepsi-Coke culture has surely caught up across the country. But, what is worrisome is that this same yuppie culture is also into alcoholic beverages, which may not be good news except for probably the liquor industry.

Lastly, the share of communications has gone up mainly due to greater use of private services including cellular phones in urban and rural areas. This has pushed up our communication expenses even though the cost of the same has been coming down due to competition.

The second table takes another look at consumption expenditure from the view of use. The share of durable goods has gone up on account of news users as well as replacement users. We must remember that we do not change our durable goods too often: a motor vehicle or television set is not replaced for at least three to five years. The higher share is encouraging as it means that more people are actually spending on these goods, which have permeated a wider cross-section of society.

The shift to services is again expected as is also the trend in our GDP, which is originating progressively in larger quantities from this sector. The shift from non-durable goods to services is hence reflective of the lower share of food items and rising share of medical services, education, hotels, communications and so on.

Therefore, the sum picture which emerges is that Indian society is evolving and so are our preferences. We are all shifting our consumption pattern to comforts, luxuries and better services rather than sticking to necessities. This is not an unmixed blessing. The worrisome news is the higher shares of beverages and health. The good news is that all of us, and not just the rich, are seeing this transformation "" and the pace is quite satisfactory.

The writer is Chief Economist, NCDEX Limited