Higher rural incomes have raised demand for non-food items. And, why grudge a general improvement in living conditions?
One of the explanations often put forward for high food inflation is an untoward increase in rural demand due to higher incomes. This has been linked with the NREGA programme which put in around ₹25,000-30,000 crore on an annual basis. The moot point is: Can ₹30,000 crore of additional purchasing power actually lead to higher demand for food?
Typically, the wage programme is provided to farmers between two seasons, which means it is not really the destitute who receive this money. Hence, it supplements or enhances existing consumption as against addressing basic needs. In fact, it is more likely that households would migrate to better living standards when incomes increase. Also, given that agricultural GDP in FY14 is expected to be around ₹20 lakh crore (at current market prices), a sum of ₹30,000 crore works out to just around 1.5 per cent. Quite clearly this cannot be a driving factor for food inflation at a time when agriculture is growing at around 3.5 per cent.
A counter argument put out is: While this ₹30,000 crore per se may not be going towards food consumption, the NREGA wage has indirectly fuelled higher food consumption by lifting all wages, particularly in the unorganised sector. This view is questionable on two grounds: First, it is the responsibility of the system to provide food to all; and second, recent NSS (National Sample Survey) data on consumption in FY12 along with the CSO (Central Statistical Organisation) consumption numbers for FY13 actually show that the demand-supply imbalance theory does not quite hold.
Income effect
NSS provides data on shares of consumption for rural and urban households from FY05 to FY12. The observations are revealing.
First, the share of food in total consumption expenditure of rural households has actually come down from 55 per cent in FY05 to 48.6 per cent in FY12. More importantly, the shares of cereals, pulses, vegetables and fruits has either not changed, or come down. The components of egg, fish and meat (3.3-3.6 per cent) and milk products (8.5-9.1 per cent) showed an increase. Given that the poultry and dairy industries have never spoken of high demand but high input costs, quite clearly the cause of inflation lies elsewhere. Among the non-primary farm products, rural households spent more on beverages, which indicates better lifestyle. But these prices have been quite stable and in the realm of ‘manufactured goods inflation’.
Second, there was an increase in the share of clothing and bedding (4.5-6.3 per cent), footwear (0.8- 1.3 per cent), durable goods (3.4-6.1 per cent) and the miscellaneous category. This is indicative of rural households preferring to spend a greater proportion of their income on lifestyle. Similar trends have been observed even in urban households.
This corresponds with the CSO data for the entire economy up to FY13. Here too the observations are similar. The shares of food, beverages and tobacco have come down from 40 per cent in FY 05 to 35.2 per cent, with food declining from 33.8 per cent to 28.6 per cent — the trends are sharper than those revealed by the NSS. Components like milk products and dairy products show a marginal decline.
These studies do indicate a migration in consumption pattern away from food to non-food items. This is but natural in the income cycle of households when they move away from conventional food items to processed foods and later to non-food goods.
Why complain?
Are there any takeaways for the policy makers here? First, we must stop attributing higher inflation to a demand-led imbalance. Second, supplies have to be augmented, and often price increases have been caused by specific crop failures. Third, the change in consumption trends is positive for the economy, as households are moving up the consumption chain.
It partly reflects the trickle down effects of growth; a larger proportion of the population is able to access goods hitherto restricted to the upper classes. The manufacturing sector is forced by circumstances to align its future strategies towards the lower income households. Customising their products to these micro requirements has actually been a win-win situation for all segments. That is the good news.
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