Service economy, consumption and Ernst Engel

The composition of India’s GDP has been undergoing a subtle change. In terms of contribution, the share of services is much more than other two sectors put together (agriculture- 16%, and industry-29%). Services account for close to 55 percent of India’s GDP. However in terms of employment the scene is reverse, agriculture leads the pack on this count. It contributes approximately fifty percent to employment followed by services and industrial sector.
The changing composition of GDP has something to do with changing consumption pattern. In this context Engel’s law of consumption provides good explanation. This law explains how consumption and consumption pattern undergoes a change as income levels go up. First proposition made by this law is that the percentage of income spent on consumption shrinks with the increase in income levels. That is the rate of growth of income is not accompanied by a similar growth in consumption. For instance a 10% increase in income is likely to be accompanied by less than 10% increase in consumption. With the rise in income the share of expenditure on food declines (low income elasticity of demand for food) but percentage expenditure on services like education, health, recreation and luxury registers rapid increase. This causes shifts in employment pattern.
Rajesh Shukla of NCAER-CMCR explored how urbanization is changing household consumption pattern in India. It can cause changes in food demand and life style choices. A look at the consumption basket of rural and urban consumers throws up interesting findings. In the urban areas the proportion of non-food expenditure crossed the food expenditure sometime in last decade of twentieth century (sometime 1993-94 to 1999-2000). That is urban consumer began to spend a larger percentage of income on non-food than food items more than a decade ago. On the other hand, rural consumer still spends a larger percentage of income on food items that non- food items. The share of food expenditure for urban consumer and rural consumer was 56% and 64% in 1987-88 which changed to 41% and 54% (2009-10). On the whole there has been a percentage decline in food expenditure in both groups.
On the non-food front, the percentage of income spent which stood at 44% and 36% (urban and rural consumer respectively) in 1987-88 changed to 59% and 46% in 2009-10. The non-food expenditure registered an increase during the period in consideration for both consumer categories.
The proportion of income spent on nonfood category for urban consumer when up from 44% (1987-88) to 59% (2009-10). This means now urban consumer s spend more on nonfood category than food category. However the rural consumers’ spending as percentage of income on nonfood category has gone up from 36% to 46% (1987-88, 2009-10) yet is has not yet crossed the food spending. But the change in consumption basket is visible.
What nonfood items have experienced more consumption? These include are miscellaneous and services. The services which are finding way into consumption basket include education, healthcare, consumer services and transportation. The other category to register increase in proportion of expenditure includes fuel, durables, and electricity.
This subtle transformation is opening up new marketing spaces in emergent consumption areas, especially services. That is the reason why retailing, healthcare, transportation, communication, education, entertainment, hospitality and insurance have emerged as new drivers of growth for the Indian economy.

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3 thoughts on “Service economy, consumption and Ernst Engel

  1. Your blogs are mirror of the contemporary issues in world.

    I enjoy reading them . They are knowledge refreshers and eye openers as well!

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