Household Consumption Expenditure Survey 2023-24

Overview

The latest Household Consumption Expenditure Survey for 2023-24, released by the Ministry of Statistics and Programme Implementation (MoSPI), highlights a shift in the consumption patterns of Indian households amidst rising food prices. Notably, the share of spending on food items has increased in both rural and urban areas.

Overall Consumption Spending

• Rural average monthly consumption spending per person rose to Rs 4,122, marking a 9.3% increase from the previous year.
• Urban average monthly consumption was Rs 6,996, with an 8.3% rise over the same period.
• The gap between rural and urban consumption expenditure narrowed to 69.7% from 71.2% the prior year.

State-wise Consumption Patterns

• Western, northern, and southern states like Maharashtra and Tamil Nadu reported higher per capita consumption compared to national averages.
• Eastern and central states such as Bihar and Uttar Pradesh recorded lower spending.

Spending on Food and Non-Food Items

• The share of spending on food increased to 47.04% in rural and 39.68% in urban areas in 2023-24.
• Rural households spent Rs 1,939, while urban households spent Rs 2,776 on food monthly.
• Non-food spending accounted for 52.96% in rural areas and 60.32% in urban areas.

Popular Food Items

• Highest spending was on 'beverages, refreshments, processed food' in both rural (11.09%) and urban (9.84%) areas.
• Followed by 'milk and milk products' (rural: 8.44%, urban: 7.19%) and vegetables (rural: 6.03%, urban: 4.12%).
• Rural spending was higher on cereals, while urban areas prioritized fruits.

Trends in Food Spending

• Declining trend in spending on sugar and salt continues.
• Increased spending on 'beverages, processed food'.
• Rise in expenditure on vegetables and spices in 2023-24 compared to previous years.

Non-Food Expenditure Trends

• Rural spending focused on conveyance (7.59%), medical (6.83%), and clothing (6.63%).
• Urban spending emphasized conveyance (8.46%), miscellaneous goods (6.92%), and rent (6.58%).

RBI's Move to Attract Foreign Currency Deposits

The Reserve Bank of India (RBI) attempted to draw capital flows by allowing banks to offer higher interest rates on foreign currency deposits for a specific period. However, the initiative has not been widely adopted since its announcement.

Interest Rate Adjustments

• The RBI temporarily increased the interest rate ceiling on Foreign Currency Non-Resident (FCNR) accounts.
• Banks were permitted to raise deposits with a spread of 400 basis points (bps) over an Alternate Reference Rate (ARR) for one to three years, up from 250 bps.
• For deposits of three to five years, the spread increased to 500 bps over ARR, from 350 bps.

Challenges in Attracting Depositors

• The rupee's depreciation and narrowing interest rate gap between the US and India have made attracting depositors challenging.
• Most banks have not raised interest rates despite the RBI's leeway, maintaining rates below the previous ceiling.

Banking Sector Response

• Some niche private banks may benefit from the plan due to their focus on overseas Indians.
• Banks match such deposits with foreign currency loan requirements, but the falling rupee and forex risk make this less economical.

Foreign Exchange Reserves

The RBI's move aims to boost foreign exchange reserves, which have declined by $60 billion since their peak in September due to RBI's dollar sales to support the rupee.

Current Interest Rates and Trends

• The spread between US and Indian interest rates is at its lowest, making Indian foreign currency deposits less attractive to the diaspora.
• The State Bank of India (SBI) offers 5.35% on one-year dollar deposits and 3.90% on five-year FCNR deposits, both lower than the revised spreads.

Future Considerations

Revised caps on interest rates are applicable until the end of March 2025. The Cash Reserve Ratio (CRR) exemption on incremental FCNR deposits might encourage banks to raise rates and attract more foreign exchange flows.

Historical Context

The FCNR (B) plan, initiated in 2013 by then-Governor Raghuram Rajan, allowed banks to mobilize nearly $30 billion in overseas deposits by providing a cushion against currency movement risks.

Rupee's Performance and Economic Implications

The Indian rupee has experienced a significant decline against the US dollar, marking its seventh consecutive year of depreciation. This trend introduces import-fed inflation risks and complicates decisions on fund costs amidst slow economic growth.

Factors Influencing the Rupee's Decline

• The rupee's depreciation is common in emerging markets but this year witnessed a pronounced decline post a period of stability.
• The US Federal Reserve’s significant rate cut in September 2024, the first in four years, triggered increased volatility and depreciation of the rupee.
• Despite weathering a stock-market volatility earlier in the year, the Indian currency weakened after the Fed's rate reduction, aligning with global financial trends.

Comparison with Other Currencies

• The South Korean won has declined about four times more than the rupee at 13% on a weekly rolling basis.
• The Indonesian Rupiah fell 4.3% over the same period.
• Currencies of Mexico and Brazil experienced even steeper declines at over 16% and 21%, respectively.

Global Economic Outlook

• The IMF predicts a "stable yet underwhelming" global economy in 2025, with a growth rate of 3.2%.
• Potential risks include financial market volatility and the impact of new trade policies following the US presidential election.

Challenges and Policy Implications for India

• India faces challenges in maintaining export resilience amid potential tariff barriers and competitive devaluation in Asia.
• Despite a narrowing current account gap in September, expectations are for it to widen, increasing pressure on the rupee.
• Policymakers must address the potential inflation puzzle due to import costs in the fast-growing Indian economy.