Is India overestimating food inflation?
More expenditure on food means more weight assigned to it. However, newly released data shows the weightage assigned to food is inaccurate
India may be misreading retail inflation data after the most recent Household Consumption Expenditure Survey (HCES) 2022–23, released on February 23, 2024, revealed that the percentage of expenditure on food and cereal consumption of an average family has declined sharply.
Spending on discretionary items such as durable goods like televisions and refrigerators has risen dramatically over the past decade or so, the consumption data showed. At the same time, Indians are spending less on food, particularly cereals like rice and wheat.
The share of food in rural Indians’ household budgets dipped below the 50% mark for the first time in 2022–23 since 1950-51, when the data began to be collected, the results of the long-awaited HCES 2022–23 revealed.
People are spending less on cereals and pulses, but more on beverages, refreshments and processed food items. In the non-food category, consumers are spending more on transport, services and durable white goods.
These findings are in line with what is known as Engel’s law in economics. As people move up the income ladder, their spending on food, as a proportion of their overall monthly spending, decreases.
The HCES 2022–23 shows that average rural consumer spending rose to an estimated ₹3,773 a month per person for the 12 months through July 2023 from ₹1,430 in the previous survey in 2011–12. Urban spending rose to ₹6,459 from ₹2,630.
The new survey will now have to form the basis of a review of India’s Consumer Price Inflation Index, or CPI, which measures retail inflation. One key reason for this is that food accounts for roughly half of the CPI.
“The latest consumer expenditure survey gives insight into spending patterns of Indian households and is key to gauging demand in the economy. The data will also be used by the government to readjust items considered for calculating retail inflation and gross domestic product data,” the survey report stated.
The latest survey shows that overall food consumption as a proportion in rural regions has decreased from nearly 60% in 1999-2000 and 53% in 2011-12 to 46% currently. The spending patterns in cities show a similar trend: food consumption fell to 39% from 43% in 2011-12.
“The CPI will need to be readjusted and recalibrated to represent current consumption patterns,” said BVR Subrahamanyam, CEO of the central government think tank, Niti Aayog. This means the share of food and cereals will go down in it.
To calculate retail inflation, economists assign weights to different commodities in the CPI basket to reflect spending patterns. More expenditure on food means more weight assigned to it. In the current CPI, therefore, the weightage given to food expenditure is outdated.
This means inflation in India has been overestimating food inflation, Subrahmanyam said. When the CPI is readjusted to reflect newer spending patterns, food will contribute less to CPI inflation.
To be sure, the Niti Aayog will conduct one more survey round to get a more accurate picture of consumption habits before heading to the drawing board to rebalance the CPI, said economist Pronab Sen, the head of a government committee on statistics.
The government will conduct another HCES between August 2023 and July 2024, which will then be used to make changes in the CPI index. The new CPI index will be closer to the spending patterns and consumption habits and price changes in the larger economy, he said.
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