India’s household consumption drives 60 per cent of its GDP. Two main government datasets measuring this show a large and growing difference. The Private Final Consumption Expenditure (PFCE) from National Accounts Statistics and the Household Consumption Expenditure Survey (HCES) from the National Sample Survey Office report conflicting figures. This gap has widened from 5 per cent in 1972-73 to nearly 45 per cent in 2022-23. The divergence raises concerns about economic policy and welfare targeting.
Two Key Consumption Measures
PFCE is a macroeconomic aggregate. It estimates the total value of goods and services consumed by households and non-profit institutions serving households. It uses the commodity flow method, drawing on production, trade, prices, and administrative data. PFCE includes free or subsidised services such as education and healthcare. HCES is a micro-level survey. It records self-reported household spending on goods and services. It does not fully capture free or subsidised consumption unless paid for. The 2022-23 HCES estimated monthly per capita expenditure at ₹3,773 in rural and ₹6,459 in urban areas. This survey forms the basis for poverty and inequality measurement.
Reasons for the Discrepancy
Methodology differs. HCES measures actual spending by households. PFCE captures the economic value of all consumed goods and services including those free or subsidised. For example, a government hospital surgery costing ₹25,000 may be recorded as ₹500 in HCES but fully valued in PFCE. Price and valuation differences exist. PFCE uses market or administrative prices. HCES calculates unit values from household reports, often diverging from market prices. Timing also matters. HCES surveys cover an agricultural year, while PFCE aligns with the financial year, causing a six-month lag.
Consumption Composition and Trends
HCES data shows food’s share in rural spending dropped from 53 to 46 per cent since 2011-12. Urban food spending fell from 42 to 39 per cent. Spending on non-food items like transport, healthcare, education, rent, and durables has increased. This shift marks changes in consumption patterns but also contributes to measurement challenges.
Implications for Policy
If HCES underestimates consumption, poverty and deprivation may be overstated. This risks misdirecting welfare schemes like the Public Distribution System and Direct Benefit Transfers. Conversely, if PFCE overestimates consumption, it may give an overly positive economic picture. Accurate data is crucial for effective policy design and evaluation.
Bridging the Gap
Improving HCES sampling is key, especially to include affluent urban households. Cross-checking with income tax data, payment app transactions, and scanner data can identify under-reporting. Revising HCES questionnaires to capture digital and app-based consumption is vital. PFCE’s foundational ratios need regular updating for accuracy. More surveys on non-profit institutions will improve PFCE coverage. A formal reconciliation mechanism combining PFCE’s broad scope and HCES’s detailed household data can yield better consumption estimates.
Questions for UPSC:
- Taking example of India’s consumption data, discuss the challenges in measuring household consumption and its impact on economic policy formulation.
- Examine the role of administrative data and surveys in national accounts compilation. How can their integration improve data accuracy?
- Analyse the implications of underreporting in household surveys on poverty estimation and welfare programme targeting in developing countries.
- Discuss in the light of digital economy growth, how modern consumption patterns challenge traditional economic data collection methods and suggest solutions.
