Shamika Ravi, Member of the Economic Advisory Council to the PM, at a session on Research and Information Systems (RIS) at the Delhi School of Economics, shared her observations on the Indian economy, including changes in household consumption patterns and the decline in consumption inequality. She also pointed out the need for customized frameworks for emerging economies like India, the importance of data transparency, the effect of declining food expenditure on inflation, and more.
Inequality is a great concern, especially among democracies, as it is fundamentally unjust and often impacts social stability. Reforming inequality is important but applying frameworks developed for OECD nations like India would not provide accurate or actionable insights. The detail remains crucial when interpreting economic data, especially in the context of cross-country regressions. The microeconomic dynamics of nations like India and China are fundamentally different. The idea that lower inequality directly causes growth is appealing from a theoretical perspective but lacks empirical evidence.
Raising labor productivity is one of the concerns that have been influencing the Indian economy across industry sectors. The gap between returns to capital investment and national growth feeds inequality. Although the appeal of taxing the rich is evident, it is still uncertain how such taxation will directly affect productivity improvement. Stagnant wages have been observed in many emerging markets as well as in OECD nations and are often a reflection of stagnant labor productivity.
An area of major interest has to be the recent India's Household Consumption Expenditure Survey which brings important insights after ten years. Consumption inequality significantly declined as indicated in the data. The Gini coefficient of rural India moved from 0.283 to 0.266, while urban India dropped from 0.363 to 0.314. This shows the same conclusion, which is the ratio of the monthly per capita consumption expenditure, now being lesser for the top compared to the bottom 20 percent. This ratio has declined from 3.5 to 3.3 in rural areas and 5.5 to 4.4 in urban areas. Consumption patterns also reveal important gains, especially among the bottom quintile.
Expenditures on fresh fruits have risen almost two-fold among the poorest households over the past decade; average fruit consumption has risen by 43 percent, and for the bottom 20 percent, it has increased by 86 percent with the quantity consumed rising by 87 percent. The average quantity has increased by 42 percent for average Indian from 1.9 to 2.7 kg. Milk and milk products account for 16 percent on average, with 34 percent for the bottom 20 percent. Overall, milk consumption increased by 10 percent, resulting in a 45 percent increase in per capita liters for bottom 20 percent. Consumption of eggs, fish and meat witnessed 25 percent increase overall, 36 percent increase in terms of households that are reporting increase in the bottom 20 percent.
Moreover, the ownership of assets in the bottom 20 percent has also surged. The share increased from 13.9 percent to 15.5 percent, in a trend that calls for systematic empirical research to understand these drivers. This provides a possibility of reversing trends related to inequality through targeted policies or structural reforms. However, questions remain about data quality. Studies suggest that autocracies, such as China, tend to inflate their GDP numbers by up to 35 percent. Adjusting for this discrepancy drastically reduces the apparent difference between India and China.
India has also seen a significant improvement in female labor force participation in recent years, reversing what had been a long-time trend of decline. Within the last 7-8 years, rural participation among females has risen by 69 percent, and among the urban areas, 25 percent. Much of this improvement relates to structural changes and the cumulative impact of programs has brought tens of millions of women into the labor force. The positive structural changes in India's consumption inequality and increased female labor force participation signal the country's improvement. Data-driven developments have shown the nation's capacity to handle micro-economic issues effectively, leading to stability and growth.
Growth in emerging markets with a per capita income below $3,000 per year is non-negotiable. Talking of de-growth, as seen in Europe for reasons like climate or social inequality, wealth inequality, is almost immoral in this context. Decades of effort have reduced absolute poverty to below 3 percent, and growth has been the driving factor. India's decentralized structure with 28 states ensures diverse, ground-level actions, unlike China, where domestic demand is controlled. The inequality and international comparisons require more data. Transparency is assured by the use of publicly available data. Surveys are also independent of government sources, which make the replication of findings possible. Other datasets are also available nowadays. Even though more administrative data is required, labor force participation data, which was released only after five years, is now available annually. The National Family Health Survey, which was conducted once every 10 years, has now been increased to every five years and soon to every three years. The National Sample Survey is also being shifted from a five-to-ten-year cycle to every two years. These improvements reflect an important increase in the frequency of data, though better analytics can still influence policymaking more effectively.
Over the past decade, Indian consumption patterns have changed dramatically. Food expenditure, one of the major expenditures, has diminished as a percentage of total consumption. Presently food expenditure constitutes only 35-36 percent of expenditures in urban areas, while it has fallen to 47-48 percent in rural areas. While conveyance has been gaining more shares under other categories, the inflation framework measurement has yet to adjust for these new changes. This disconnection shows the need to update the measurement of inflation so that it aligns with the changes in consumption patterns that are bound to affect monetary policy. It focuses on inflation targeting, but these shifts highlight the importance of changing core indicators to make fiscal and monetary policies more responsive to ground realities. A solution to these changes would render a more accurate and contextually relevant approach toward economic management.
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