In today’s Finshots, we tell you the importance of the latest Monthly Per Capita Consumption Expenditure (MPCE) survey that was released a decade after the previous one.

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In 2011–12, rural households used to allocate nearly 53% of their expenses to the food basket — for buying cereals, veggies, fruits, milk, eggs, etc. But that has fallen to 46.4% in 2022–23.

It’s actually the first time in the history of the survey that this number has fallen below the 50% mark!

Even in urban India, the share of food in overall spending has dipped from 42.6% to 39.2%.

But why does knowing these numbers even matter, you ask?

Well, the theory behind this dates back to at least 1857. A German statistician named Ernst Engel dove deep into how families — the poor, middle, and rich — managed their budgets. And he then concluded, “The poorer a family, the greater the part of total expenditures that must be spent on food.” Put another way, as the family income increases, the percentage of income spent on food decreases, although the actual amount increases.

And this observation is now popular in the economics world as “Engel’s Law”.

The thing is, this intuitive observation actually has far-reaching effects. Because if the poor end up spending most of their income on food, they’ll find it difficult to spend on improving their access to health and education. The end result is they’ll find it hard to break out of the cycle of poverty.

And as per Engel, one of the best ways to measure if the standard of living of a population is improving is by looking at the outgo for food. And judging by the declining share of food in the consumption basket, it certainly seems like India is heading in the right direction.

So it’s no wonder that the CEO of government think-tank NITI Aayog immediately jumped to say that only 5% of the country lives below the poverty line now.

But wait…how did he come to that conclusion, you ask?

Well, our official poverty line estimate is from way back in 2012. That’s when a committee calculated that rural MPCE below ₹816 would be classified as living in poverty. It’s popularly known as the ‘Tendulkar poverty line’ and gets its name from the person who led the committee.‌‌‌‌Yes, there are other Tendulkars in India.

So if we assume an average annual inflation of 6% over the years, we can make our own adjustment and say that in today’s day and age, the poverty line should be revised upwards. It should be at least ₹1,460.

Now if you go back to the latest survey numbers, you’ll see that the report splits the population into various consumption buckets. And only 5% of the rural population displays MPCE less than ₹1,460.

So that sort of backs up the claims of falling poverty.

But there’s still something we should point out here. While the average rural MPCE comes in at ₹3,773, remember that averages can be skewed. For instance, 5% of the rural folks have an MPCE above ₹10,500. So you could argue a small section of the population has bumped the average higher and that we need to keep an eye on inequality too.

Another thing to keep in mind here is that the per-capita spending between rural and urban India has narrowed. While urban India spent 84% more than their rural counterparts in 2011–12, it’s just 71% higher now. That means rural India is quickly catching up.

Why could this be happening?

Well, the survey doesn’t list the reasons behind it. But some reports speculate that it could be because as workers increasingly migrate to cities, they send a bigger chunk back home to help their families. In fact, as much as 30% of rural expenditure could be attributed to such domestic remittances.

And you could argue that people are migrating because we haven’t done a good enough job to increase incomes in rural areas. But, the fact of the matter is that various studies have shown that these remittances help in a lot of ways — they reduce poverty, help rural folks invest in business activities, and even help them get access to better healthcare and education.

All of which are good things, don’t you think?

But maybe knowing the exact reasons will help the folks in power devise better policies to help this segment of the population anyway.

Oh, and one more thing — the survey will also get our inflation numbers in order.

See, at the moment, we create the consumer price index (CPI) using a basket of stuff and weights we assigned in 2012. For instance, the weight assigned to food in the rural CPI is 54%. But the survey says that food is just 46% of the consumption basket now. And even within food, the divergence can be stark. CPI gives cereals in rural India a weight of over 12%. However, the survey reveals that cereals are less than 5% of the consumption basket these days.

And that makes sense because as economies develop, not only does the share of food in the consumption basket drop, but, even the food options are diversified. People move to a more protein-rich diet or often even resort to consuming more processed food. That’s exactly what the survey’s numbers indicate too.

But you can see why our monthly inflation declarations might not be in tune with the reality. And relying on the latest MPCE survey data will help us fine-tune the CPI too.

So yeah, that’s what we wanted to share about the MPCE survey with you. And we hope you found it interesting.

Until then…

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