According to a report by JM Financial Institutional Securities, the decline in the share of food expenditure to 46.3 percent in the rural consumption basket could have significant implications for the next decade. This shift creates opportunities for increased discretionary spending.
The recent household consumption survey for 2022-23 in India presents an encouraging outlook, particularly for the rural economy. The decrease in the proportion of food expenditure in the rural consumption basket indirectly suggests an increase in rural income. This stands in contrast to corporate commentary over the past 4-6 quarters, which lacked substantial evidence of a resurgence in rural consumption, according to the report.
The rise in the proportion of durable goods (6.9 percent compared to 4.9 percent previously) aligns with a decrease in the share of expenditure on footwear and clothing. This trend clearly signals a rise in rural income, particularly driven by non-agricultural activities.
Continue Exploring: NielsenIQ forecasts 4.5-6.5% growth for FMCG sector in FY24; volume surges by 6.4% in Q4 2023 as urban-rural gap narrows
Effective fiscal policy measures ensured that the impact of fuel costs on consumption patterns remained stable, even amidst volatility in Brent crude prices.
The growing preference for beverages/processed food and toilet/household consumables aligns with the corporate commentary indicating heightened penetration by FMCG players in rural areas, according to the report.
Within the consumption basket, the increase in the share of conveyance has been even sharper than in urban areas. When compared with urban areas, consumption disparity is the lowest in lower fractile, indicating the effectiveness of public policies in reducing poverty, the report said.
As per the report, the change in consumption pattern is largely a by-product of increased income, as it is generally seen that the share of spending on food decreases as income increases.
Regarding policy aspects, with food comprising a smaller share of the consumption basket, governments will need to adjust their policy actions to address items that still burden consumers’ budgets. While initial analysis might suggest that government policies would prioritize subsidized electricity over free food in the future, it’s worth noting that food programs entail lower cash outlay and offer greater political advantage. Therefore, despite first-level thinking suggesting a shift, the report anticipates that food programs will likely persist.
Secondly, the findings within this report would necessitate a restructuring of the significance placed on food within the CPI basket, thereby mitigating the volatility linked to it accordingly.
Continue Exploring: FMCG firms optimistic about rural recovery amid macroeconomic improvements