Lower inequality amid slower growth: A mixed bag

What other broad macroeconomic implications can be inferred from the household consumption expenditure survey factsheet?

The government of India published “The factsheet of household consumption expenditure survey (HCES) 2022-23”, the first HCES after a gap of 11 years. Not surprisingly, it garnered a lot of attention, which will increase further after the detailed data/report is released.
 

There are two important facts that emerge from the factsheet: 1) the (consumption-based) inequality measured by the Gini coefficient has declined in the past 11 years (i.e., between 2011-12 and 2022-23) at a much faster pace than the fall witnessed in the past; and 2) the average consumption growth in the past 11 years has weakened compared to the growth seen in the previous episode.
 

Rather than looking at these two in isolation, we must acknowledge the fact that India has achieved lower inequality amid slower growth in the past decade. It is neither totally disheartening nor the best possible scenario. However, such surveys reveal a lot more when we combine other macroeconomic data with them.
 

Our calculations suggest that the Gini coefficient for the rural areas was down to 26.3 per cent in 2022-23 from 27.9 per cent in 2011-12 and 26.2 per cent in 2004-05. It means that rural Gini coefficient declined at an annual rate of 0.15 percentage point (pp) during the past 11 years, compared to a rise of 0.25pp and 0.16pp per annum during the previous seven-year and five-year episodes, respectively.

 

In contrast, the urban Gini coefficient fell by as much as 0.43pp per annum during the past 11 years, marking the first decline at least since the 1990s. India’s consumption-based inequality, thus, has certainly fallen in the past decade. However, it was largely driven by the urban areas (Chart 1). This is very surprising considering the fact that many income schemes – MGNREGA, fertiliser subsidy, Jal Jeevan mission, PM KISAN etc – are totally dedicated to the rural sector.
 

The rural-urban inequality has also fallen in the past decade, as rural MPCE (monthly per capita consumption expenditure)  in 2022-23 was 59.7 per cent of that of urban MPCE, compared to 54.4 per cent in 2011-12, 54 per cent in 2004-05 and 53.8 per cent in 1999-00. Nominal (real) rural MPCE grew at an average of 9.2 per cent (3.1 per cent) during the past 11 years compared to 8.5 per cent (2.7 per cent) average growth in the urban MPCE. It is notably slower than the average nominal (real) growth of 13.8 per cent/13.2 per cent (4.3 per cent/4.4 per cent) in the rural/urban MPCE during the previous seven-year period. Overall, there is no doubt that consumption growth has weakened and (consumption-based) inequality has fallen in the past decade. This is a mixed bag.
 

What other broad macroeconomic implications can be inferred from the HCES factsheet? First, the share of food in average MPCE has declined to 46.4 per cent in 2022-23 from 52.9 per cent in 2011-12 for the rural sector, and to 39.2 per cent from 42.6 per cent for the urban areas. There was a negligible fall in the share of food in the rural sector between 2004-05 and 2011-12, while it actually increased in the urban areas. It means that if 2022-23 is accepted as the new base year for the consumer price index (CPI), the share of food in the new CPI will be much lower than what happened during the previous revision (when it was revised down to 45.9 per cent from 47.6 per cent).
 

Second, a comparison of the increase in rural and urban MPCE vis-à-vis private final consumption expenditure (PFCE) reveals some interesting and confusing facts. Rural/urban MPCE has increased 2.64x/2.46x in the past 11 years, while the private final consumption expenditure, or PFCE, (from GDP components) has increased at a higher multiple of 2.95x during the period. This is perplexing since there was not so much difference in the previous surveys and PFCE data (Chart 2). Is this a case of over-estimation of PFCE or does the changes in the methodology of the 2022-23 HCES explain this? In case of the latter, we must be cautious about its comparison vis-à-vis earlier HCES surveys.
 

Third, MPCE growth at the lower decile population is higher than at the top deciles. While this certainly reduces consumption-based inequality, one wonders if such trends – higher growth at the bottom deciles vis-à-vis top deciles – are also reflected in income data. Our understanding suggests that it is unlikely. Income/wealth growth at the top deciles is likely to have been much higher than at the bottom deciles, especially after the pandemic. If so, lower savings and higher leverage may have played an important role in helping to reduce the inequality by supporting higher MPCE growth at the lower deciles. Is this a sustainable and desirable way to achieve the objective of lower inequality?

Lastly, HCES confirms slower household consumption growth during the past 11 years vis-à-vis the previous seven-year period. Combine this fact with rising leverage and falling household (total) savings, and one tends to get the complete picture of how weak the financial position of the household sector has become in the past decade. We already knew this but recent data cements this assertion further.
 

All in all, whenever any new data/publication comes in, it obviously generates a lot of interest and thus, analysis, especially if it comes after more than a decade. This time is no different. More analysis with different perspectives will be available once the unit level data and details are released. Time to get into healthy and creative macroeconomic discussions.

The writer is Senior Group Vice President, Motilal Oswal Financial Services Ltd