Sanjeev Ahluwalia | The politics behind India’s rural and urban spending

Household consumption expenditure (HCE) estimates are based on a national survey of 0.1 per cent of the 194.9 million rural and 89.5 million urban households/families. It offers insights into the economic well-being of families across the rural-urban divide, with disaggregated data to assess the performance of income distribution policies and the efficacy of social investments made to enhance wellbeing and incomes.

The Union government, which conducts this large survey, has chosen to release a short factsheet of the HCE survey for 2022-23 on the eve of the Lok Sabha elections, thereby inviting a comparison with the income distribution policies of previous governments. The survey was overdue. The 2017-18 survey results were never disclosed. The brevity of this factsheet also inhibits analysis beyond the tabled headline messages.

This survey includes, for the first time, the “imputed value” of consumption goods provided free by the Union and state governments, which have been on the rise recently -- food, laptops, mobiles, bicycles, motorcycles, school uniforms, shoes, etc.

The average increase in non-food consumption is muted at 0.2 per cent and 0.6 per cent in rural and urban areas respectively, but more so in food at 4.7 per cent in rural areas and 2.3 per cent in urban areas. The corresponding share of expenditure on food increases from 46.4 per cent in rural areas to 47 per cent and from 39.2 per cent in urban areas to 40 per cent. Non-comparability across previous survey results inhibits time-trend analysis, though the long-term trend of a declining share for food, in both the rural and urban consumption basket, is not disrupted.

India had five governments since 1998-99 – Atal Behari Vajpayee’s NDA for a single term, Dr Manmohan Singh’s UPA over two consecutive terms from 2004-05 and Prime Minister Narendra Modi’s NDA since 2014-15, dominated by the BJP since 2019-20. The HCE survey outcomes of 1999-2000, 2004-05, 2009-10, 2011-12 and 2022-23 broadly span the working life of all five governments. Increase in family spending power on daily necessities (food, clothing, education, medical, travel and

entertainment expenses) relative to GDP growth becomes the obvious performance metric to assess how much of the growth dividend was passed on to families.

Comparing the consumption expenditure of rural and urban families shows whether governments are putting their money where their votes come from. Over two-thirds of India is rural. The urban population was just 31.2 per cent per according to the last available 2011 census. The Vajpayee government grew the economy at 9.9 per cent annually in current terms. But income distribution was skewed in favour of cities. Rural consumption expenditure declined as a proportion of urban consumption expenditure from 57 to 52 per cent (1999-2000 to 2004-05). India’s cities shone bright, but the government was ousted in the 2004 elections, punished for ignoring redistribution whilst focusing on growth-oriented infrastructure investments.

Under Prime Minister Manmohan Singh (2004-2014), the UPA -- an economist’s government -- had similar instincts as the Vajpayee government to spur growth, which increased to an eye-watering annual average of 15.5 per cent (current terms). But it also had income distributional genes which, wisely, ensured that increases in rural and urban consumption expenditure reflect the fiscal space created by higher economic growth. Rural consumption, as a proportion of urban consumption, increased from 52 to 54 per cent -- an improved sharing of the growth dividend versus the Vajpayee government. The strategy of distributional equity bought the government a second term in office in 2009, but loose management of government resources cost them the 2014 elections.

Mr Modi’s decade in power began with him demonstrating his election smarts by promising to deliver an annual report card to the public. He has walked the talk on distributional policies. Against an annual economic growth in current terms of 10.9 per cent 2014 to 2023 (despite the horrific economic impact of Covid-19 in 2020-21), rural consumption, as a proportion of urban consumption, increased from 54 to 58 per cent -- thereby emulating the UPA strategy of ensuring income distributional benefits for rural households.

This should serve the Modi government well in the coming elections. But serious thought must also be given to changing trends in the composition of consumption.

The share spent on food is a metric of income resilience. At lower income levels, about one-half is spent on food. As income increases this share reduces. The good news is that there was a near secular decline (1999-2000 to 2022-23) in the proportion spent on food, from 59.4 to 46.4 per cent in rural areas and from 48.1 to 39.2 per cent in urban areas. The only exception is a temporary spike in 2009-10 at the end of the UPA government’s first term due to high double-digit food inflation driven by high edible oil prices and weather stress.

A happy trend is the diversification of diets away from cereals. Their share within the food basket declined from a high 37 per cent in rural and 26 per cent in urban areas to 11 and nine per cent respectively by 2022-23. Sadly, beverages and packaged food are now the largest, single expenditure component with larger shares within the food basket of 21 and 27 per cent in rural and urban areas respectively -- good for corporate top lines but not for sustainability proponents of mission LiFE.

Family expenditure on medical care (in and outside hospital) in 2022-23 at 7.13 per cent in rural areas was the fourth highest family expenditure outlay and at 5.91 per cent in urban areas, the seventh highest family expenditure outlay, which points to urgent policy action to tackle both the source (poor quality air, water and overuse of fertiliser/pesticides) and the efficacy of preventive and palliative care beyond Ayushman Bharat.

A segmented analysis reveals that families in the lowest five per cent are closer in consumption behaviour across the rural-urban divide. Here, rural consumption equals 69 per cent of urban consumption versus the average of 58 per cent. The reverse is true in the highest five per cent consumption segment, where rural elites consume just one half of urban elites – an illustration of inequity.

This illustrates the potential for substantial political capital in mobilising support around poverty and inequity -- the continuing farmers’ agitation is a good example.

The Aam Aadmi Party has consciously and successfully focused on such political mobilisation, but has yet to scale up. The BJP faces the risk of having reached the end of the happiness ladder -- pleasing all and displeasing few. It must now shoulder the political risk of putting growth and economic resilience ahead of debt-funded distributional equity. How well it pivots will determine India’s future.