The Consumption Story of India
Mapping Indian Consumption: Where Does the Money Go?
Historical Context: How has India's economic policy shifted consumption patterns over time?
India's economic policies have significantly influenced consumption patterns over time, with shifts observed across various sectors and demographics.
Early Post-Independence Era (Pre-1980s):
The initial decades after independence were marked by a socialist and redistributive approach. During this time, the focus was not primarily on consumption-driven growth.
There was an emphasis on public sector units and a more closed economy, which may have limited the availability of diverse consumer goods.
The economy was characterized by a focus on self-sufficiency and import substitution, which shaped the availability and types of goods consumed.
Liberalization Era (1991 Onwards):
The 1991 liberalization marked a paradigm shift, opening the Indian economy to the private sector and foreign investors. This led to an increase in the availability of consumer goods and services.
With the end of the 'license raj,' the private sector began to play a more prominent role, leading to increased production and variety of goods.
This era saw the rise of Indian IT service companies, which indirectly impacted consumption by increasing disposable incomes, particularly among the educated middle class.
The government's focus shifted from propping up public sector units to allowing private sector investment, further driving consumption and economic growth.
Impact of Digitalization and Technology (21st Century):
The rise of digital public goods has lowered transaction costs, reduced working capital cycles, and made access to financial funding easier. This has enhanced consumption by facilitating smoother transactions and better access to credit.
Increased internet access has enabled new forms of commerce, such as creator-led commerce, and empowered women to participate in the economy as both consumers and entrepreneurs.
The Unified Payments Interface (UPI) has revolutionized digital payments, further driving consumption by making it easier and more convenient for people to spend.
Digitalization has also led to the financialization of savings, moving savings from physical assets (like real estate and gold) to financial instruments. This has lowered the cost of capital and enabled companies to fund themselves, further impacting GDP growth.
The Now/Yesterday’s Context
Nirmala Sitharaman's Union Budget Address.
"Democracy, demography and demand are the key support pillars in our journey towards Viksit Bharat. The middle class provides strength for India's growth. This government under the leadership of Prime Minister Narendra Modi has always believed in the admirable energy and ability of the middle class in nation building. In recognition of their contribution, we have periodically reduced their tax burden," "If you always do what you've always done, you'll always get what you've always got."
Maybe India’s Finance Minister thought that way, and for now thought of ‘breaking out of recent-routine, even if it feels risky/tricky’. But it seems she wants to address India’s growth on a war footing. If change in RBI’s governor was part 1, this budget seems to be a massive part 2.
There are reports of stressed urban consumption due to high inflation, wage freezes, and unemployment. Fast-moving consumer goods (FMCG) sales in urban areas have also seen moderate growth, this lack of demand disincentivised private companies from investing in new capacities, projects, and people.
"The price of inaction is far greater than the cost of a mistake."
Presenting her eighth consecutive Budget (record), Finance Minister Sitharaman saved her biggest announcement for the end of her 75-minute speech: taxable income up to ₹12 lakh will now be tax-exempt.
Amidst rising inflation and muted salary growth in corporate India, this significant tax relief offers a welcome boost to the disposable income of salaried individuals. And, this will trigger How this saved money will be spend?
How Indian spend money?
Note: Most of the data is from Survey on Household Consumption Expenditure: 2023-24
The Household Consumption Expenditure Survey (HCES) collects data through multiple visits using questionnaires to gather detailed information on household consumption and expenditure patterns. The average monthly per capita expenditure (MPCE) is a key indicator of consumption patterns and economic well-being in India, and the sources provide some detailed insights into its trends and distribution.
While food remains a major expense for Indian households in both rural and urban areas, non-food expenses such as conveyance, medical costs, durable goods, and clothing also play a significant role in household expenditure. The specific proportions of these expenditures can vary across regions, income levels, household types, and social groups. For the lower middle class, expenses related to food and lodging make up a significant portion of their monthly expenditure.
Overall MPCE:
In rural India, the average MPCE increased from ₹3,773 in 2022-23 to ₹4,122 in 2023-24, without considering the value of items received free through social welfare programs. When including imputed value (value of items received free of cost through various social welfare programs), the average MPCE in rural areas rose to ₹4,247 in 2023-24. These imputed values include food items like rice, wheat, pulses and non-food items like laptops, mobile phones and school uniforms.
In urban India, the average MPCE increased from ₹6,459 in 2022-23 to ₹6,996 in 2023-24, excluding imputed values. Including imputed values, the average urban MPCE was ₹7,078 in 2023-24. The urban-rural differences in MPCE decline marginally with the inclusion of these imputed values.
The gap between urban and rural MPCE is narrowing. In 2011-12, the urban-rural gap in MPCE was 84%, which has decreased to 70% by 2023-24. This suggests that consumption growth in rural areas is catching up with that of urban areas.
In rural areas, households with regular wage/salary earnings in non-agriculture tend to have a higher average MPCE (₹5,005) compared to those in casual labour in agriculture (₹3,652).
For both rural and urban areas, conveyance has been found to be a major contributor to the total non-food expenditure, closely followed by durable goods, medical, clothing, bedding & footwear and miscellaneous goods, and entertainment.
The gap in MPCE between the bottom 5% and top 5% of the population is more pronounced in urban areas than in rural areas. The average MPCE of the top 5% of the rural population is ₹10,137, which is about six times the average MPCE of the bottom 5% at ₹1,677. In urban areas, the top 5% average MPCE of ₹20,310 is about 8.5 times of the bottom 5% at ₹2,376.
The largest growth in average MPCE between 2022-23 and 2023-24 was seen among the bottom 5-10% of the population in both rural and urban areas. The bottom 5% of the rural population experienced a 22% increase in MPCE, while the corresponding urban segment saw a 19% growth. This pattern indicates that welfare policies of the government and social sector initiatives have contributed to reduced inequality.
The gap between the top and bottom 5% is more pronounced in urban areas, with the top 5% having 8.5 times the MPCE of the bottom 5% compared to 6 times in rural areas.
In rural areas, the average MPCE for the bottom 5% of the population was ₹1,373 in 2022-23, which increased to ₹1,677 in 2023-24. In contrast, the top 5% had an average MPCE of ₹10,501 in 2022-23, which decreased to ₹10,137 in 2023-24.
In urban areas, the average MPCE for the bottom 5% was ₹2,001 in 2022-23, rising to ₹2,376 in 2023-24. The top 5% in urban areas had an average MPCE of ₹20,824 in 2022-23, decreasing to ₹20,310 in 2023-24.
Expenditure Distribution:
The major contributors to a household's average monthly expenditure in India vary between rural and urban areas, but some common trends are evident.
Rural Areas
Food is a primary expenditure, accounting for approximately 47% of the average rural Indian household's consumption.
Within the food category, beverages, refreshments, and processed foods have the highest contribution. In 2023-24, this was 9.84% of the total MPCE.
This is followed by milk and milk products, which was 8.44% of the total MPCE.
Vegetables also contribute significantly, accounting for 6.03% of the total MPCE.
Cereals and cereal substitutes contribute a smaller share, accounting for about 4.99% of the expenditure.
Non-food items also constitute a significant portion of household spending. Key non-food expenditures include:
Conveyance, which accounts for 7.59% of the MPCE.
Medical expenses make up 6.83% of the MPCE.
Clothing, bedding and footwear account for 6.63% of the MPCE.
Durable goods account for 6.48% of the MPCE.
Other expenses include fuel and light, education, and miscellaneous goods and entertainment.
State Variations: The share of food in total expenditure of rural households varies across states, ranging from 40.32% in Kerala to 53.22% in Assam. The share of cereals in total expenditure in rural India varies from 2.56% in Punjab to 7.90% in Jharkhand.
Urban Areas
Food accounts for about 40% of the MPCE in urban areas.
Similar to rural areas, beverages, refreshments, and processed foods have the highest contribution within the food category, accounting for 11.09% of the total MPCE.
This is followed by milk and milk products at 7.19% and vegetables at 4.12%.
Non-food items represent around 60% of the MPCE in urban India, which is about 7% more than in rural areas. Major non-food expenditures include:
Conveyance, accounting for 8.46% of the MPCE.
Miscellaneous goods and entertainment, which make up 6.92% of the MPCE.
Durable goods, which account for 6.87% of the MPCE.
Rent, accounting for 6.58% of the MPCE.
Other significant non-food expenditures are medical, and clothing, bedding and footwear.
State Variations:
State variations in monthly expenditures in India reveal diverse consumption patterns influenced by regional factors, economic conditions, and social structures.
Variations in Food Expenditure:
Overall Food Consumption: The share of food in total consumption expenditure varies significantly across states. In rural areas, this ranges from 40.32% in Kerala to 53.22% in Assam. In urban areas, it varies from 36.14% in Maharashtra to 48.79% in Bihar.
Cereal Consumption: The share of cereals in total expenditure also exhibits substantial inter-state variation. In rural India, the share ranges from 2.56% in Punjab to 7.90% in Jharkhand. In urban India, the share of cereals varies from 2.75% in Haryana to 5.84% in Jharkhand.
Specific Food Items:
Rural Areas: In rural areas, the percentage of total expenditure on milk and milk products ranges from 6.96% in Punjab to 14.17% in Odisha. The expenditure share on vegetables ranges from 5.37% in Uttar Pradesh to 18.78% in West Bengal.
Urban Areas: In urban areas, the percentage of total expenditure on milk and milk products ranges from 6.04% in Assam to 11.98% in Rajasthan. The expenditure share on vegetables ranges from 4.70% in Maharashtra to 12.36% in Jammu & Kashmir.
Expenditure on Pulses: Expenditure on pulses and pulse products also varies across states. For instance, in rural areas, this expenditure ranges from 0.81% in Manipur to 2.58% in Punjab. For urban areas this ranges from 1.04% in Meghalaya to 2.11% in Delhi.
Expenditure on beverages, refreshments, and processed foods: In rural areas, this expenditure ranges from 8.19% in West Bengal to 30.72% in Punjab. In urban areas this expenditure ranges from 8.49% in Jammu & Kashmir to 16.53% in Delhi.
Variations in Non-Food Expenditure:
Conveyance: Expenditure on conveyance is a major contributor to non-food expenditure in most states. In rural areas, the percentage of total non-food expenditure on conveyance ranges from 10.86% in West Bengal to 24.03% in Punjab. In urban areas, the expenditure on conveyance ranges from 10.51% in West Bengal to 20.13% in Punjab.
Durable Goods: Expenditure on durable goods also varies significantly across states. In rural areas, the percentage of non-food expenditure on durable goods ranges from 12.45% in Andhra Pradesh to 26.61% in Himachal Pradesh. In urban areas, this range is from 13.79% in Odisha to 19.23% in Haryana.
Medical Expenses: In rural areas, the percentage of total non-food expenditure on medical expenses ranges from 10.98% in Haryana to 17.49% in Kerala. In urban areas, the percentage of expenditure on medical ranges from 9.04% in Chhattisgarh to 17.94% in Kerala.
Clothing, Bedding, and Footwear: The percentage of non-food expenditure on clothing, bedding, and footwear in rural areas ranges from 6.95% in Odisha to 11.08% in Telangana. In urban areas, it ranges from 6.88% in Jammu and Kashmir to 11.77% in Delhi.
Miscellaneous Goods and Entertainment: Expenditure on miscellaneous goods and entertainment varies across states, reflecting diverse spending habits. In rural areas this expenditure ranges from 9.51% in Odisha to 17.38% in Kerala. In urban areas this expenditure ranges from 11.81% in West Bengal to 19.26% in Kerala.
Other Expenditure Patterns:
Education: Expenditure on education also shows variation. In rural areas, expenditure on education ranges from 4.97% in Punjab to 7.89% in Tamil Nadu. In urban areas this ranges from 3.94% in Assam to 7.56% in Kerala.
Fuel and Light: The expenditure on fuel and light in rural areas ranges from 3.89% in Punjab to 12.89% in Odisha. In urban areas, it ranges from 2.70% in Haryana to 6.51% in Assam.
The inclusion of imputed values: this increase varies across states. For example, the average MPCE in rural Andhra Pradesh is ₹5,327 without imputation and ₹5,539 with imputation, while in urban Andhra Pradesh it's ₹7,182 without imputation and ₹7,341 with imputation.
Ok, let’s pause here. But you have read till now, we will encourage you to read the report on your own and draw your own trends, patterns and insights. We will conclude our take with a buzzword that is very common in the investing word.
Investment Perspective:
A larger working-age population with higher incomes is driving consumption and leading to rapid evolution in consumer preferences. This with availability of credit through UPI, credit cards and EMI options is making it easier for consumers to make larger purchases. We all are calling it as Premiumisation of Indian Consumptions. The premiumisation trend presents investment opportunities in sectors such as consumer discretionary, retailing, auto, and real estate.
Argument for this thesis.
L'Oréal has been operating in India since 1994. Here is how they have done in recent 10+ years.
