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Consumption in India, and whether it is growing or shrinking, has been a hot topic in the stock market community lately. Investors have been trying to decipher what the aam consumer is up to, from the sound-bytes of listed companies.
However, just as the seven blind men could not picture an elephant from its tusk, trunk or ears, we cannot get a big-picture view of consumption by looking at what individual companies selling paints, bread or noodles are telling us. This calls for macro data.
Just before New Year, the National Statistics Office (NSO) published the results of its latest Household Consumption Expenditure Survey (HCES), which visited 2.61 lakh households pan-India to collect data on their consumption spends between August 2023 and July 2024. HCES is one of the largest consumer surveys in India, used to decide weights in the CPI basket and the base year for GDP. It is thus a credible source of macro insights on consumption.
In the past, HCES was conducted every five years. But after 2011-12, the survey was delayed for 11 years, with two back-to-back surveys done in 2022-23 and 2023-24. In this article, we compare HCES 2023-24 with HCES 2022-23 and 2011-12, to come up with trends useful for investors. Numbers cited here pertain to MPCE (Monthly Per capita Consumption Expenditure) in nominal terms, without including the imputed value of freebies.
It is a well-known fact that urban consumers are much bigger spenders than their rural brethren. The HCES confirms this. In 2023-24, the average urban consumer spent ₹6,996 a month. This was 69 per cent more than his rural counterpart who got by at ₹4,122 a month. This is why many consumer companies are city-centric and have barely any footprint in the hinterland.
But comparing HCES data over time shows that rural consumption is growing much faster than urban consumption. Between 2011-12 and 2023-24, rural spends per capita expanded at a 9.2 per cent compounded annual growth rate (CAGR), while urban spends grew more sedately at 8.5 per cent. This has led to the India-Bharat divide in consumption narrowing over time. If you rewind back to 2011-12, the average urban consumer spent 84 per cent more than the rural consumer.
The latest HCES shows that rural consumption continued to grow at 9.2 per cent in 2023-24, but urban consumption growth slowed to 8.3 per cent.
Lately, market narrative has been all about how food inflation is squeezing lower income consumers, while affluent folk are on a spending binge and driving premiumisation. Data from the latest HCES shows exactly the opposite trends. It shows consumers at the bottom of the pyramid sharply expanding their spending in 2023-24, while those at the top end were cutting back.
To gauge trends across income groups, HCES breaks down MPCE into different fractiles, the average spends for bottom 5 per cent, 5-10 per cent, 10-20 per cent and so on (see table). Comparing the data for 2023-24 with 2022-23, shows that it was the lowest spenders who expanded their consumption the most.
Folks who spent the least increased their spending by 22 per cent in rural India and about 19 per cent in urban India. In contrast, in the super-creamy layer (the top 5 per cent), rural consumers reduced their spending by 3.5 per cent and urban folks by 2.5 per cent. This trend was not restricted to outliers.
As the table shows, the bottom 50 per cent households were all on a spending spree, increasing their budgets by double-digits, while the top ones managed only single digit growth.
Consumption at the bottom of the pyramid has outpaced the top for a longer period too, though by a much smaller margin. Between 2011-12 and 2022-23, the lowest spenders grew their consumption at a 9.2 per cent CAGR while the creamy layer managed only 8 per cent. But the difference has dramatically widened in 2023-24.
The HCES does not offer rationale for its findings, so we can only guess why this transpired. But some conclusions are evident.
One, this questions the narrative about food inflation being the main cause of the consumption slowdown. Between August 2023 and July 2024 when this data was collected, CPI food inflation averaged 7 per cent. Poorer households spend a much larger share of their budget on food than affluent folk. Yet they expanded their spends by 22 per cent, while the rich cut back.
Two, it is possible that the proliferation of Kisan/Ladki/Behen yojanas across States sharply padded up incomes of lower income households. After all, cash transfers of ₹1,250 or ₹1,500 a month would be a very big deal to the bottom 50 per cent folk whose total monthly spends are only ₹1,600 to ₹5,600.
Three, as the HCES shows the consumption slowdown in 2023-24 mainly impacting affluent spenders, it is likely that it was not food inflation but the credit crackdown that slowed their spending. It is this subset of consumers after all, who are most likely to swipe their credit cards or take consumer loans for discretionary splurging.
The MPCE breakdown also helps settle the debate on what exactly is “middle class” in India. If we define “middle class” as the sandwich layer after excluding the bottom 20 per cent and top 20 per cent, these were rural folks who roughly spent ₹2,800 to ₹4,900 and urban folk who spent ₹4,300 to ₹8,300 a month.
This data is for individual spend, so what does the average middle-class household consume? PLFS data tells us that the average rural household had 4.4 members while the urban one had 4.1 members. Therefore, households who spent roughly ₹12,300 to ₹22,000 a month were middle class in rural India. In urban India, monthly household spends of between ₹17,600 and ₹34,000 qualify for middle class status.
Apart from highlighting the rich-poor divide, the HCES also draws attention to the stark differences in consumption between States. Sikkim topped the charts with the average urban consumer splurging ₹13,927 per month and the rural one expending ₹9,377. Chhattisgarh came last with its consumers spending less than a third of this — ₹4,927 in urban areas and ₹2,739 in the villages.
Among the larger States, the southern States of Telangana, Tamil Nadu and Karnataka were consumption powerhouses, with their urban folk spending ₹8,000-9,000 a month and rural folk, ₹4,900-6,000. Chhattisgarh, Bihar, Jharkhand and Uttar Pradesh, though populous States, displayed the least spending power, with urban spends at ₹4,900-5,400 and rural spends at ₹2,700-3,700.
The data also shows some States successfully bridging the urban-rural divide while others feature yawning chasms. Kerala (urban spends are just 18 per cent more than rural), Punjab (27 per cent), Jammu and Kashmir (33 per cent), and Andhra Pradesh (35 per cent) seem to be most equitable States. However, Meghalaya (104 per cent), Chhattisgarh, Jharkhand (over 80 per cent) and Assam (79 per cent) were the least equitable. The high urban-rural disparity in Maharashtra (78 per cent), Gujarat (74 per cent) and Karnataka (65 per cent) go to show that industrialisation and job opportunities in the cities don’t automatically trickle down to the hinterland.
Clearly, the rural economy needs to fare well too, for the consumption juggernaut to take off.
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