CHANAKYA NATIONAL LAW

UNIVERSITY

BUSINESS ENVIRONMENTTOPIC: A STUDY ON INCOME AND EXPENDITURE PATTERN OF

HOUSEHOLDS IN INDIA

SUBMITTED TO

Dr. Manoj Mishra,

Faculty of BUSINESS ENVIRONMENT

SUBMITTED BY

Tanu Priya

4th Semester

1059

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INTRODUCTION:

With economic and social progression of the nation the minimal basket of basic human

needs which a society would expect for its citizen may be expected to keep expanding.

These changes in the basic needs of the society may be affordable by the level of income.

The level of income of the households ensures the minimum standard of living in the

society.

Household income and consumption expenditure are two direct monetary measures used in

assessing the economic well-being of a population. However, consumption expenditure is

preferred to income as it reflects long-term economic status of the household, particularly in

low income countries. It is important to note however that expenditures are not similar with

income, which may even be a better indicator of well-being, for various reasons. Among

them is the possibility of consumption without expenditures at least within the same period.

According to Atkinson, (1998), "Expenditures are thus supposed to better reflect "long-

term" or "permanent" income and are from this point of view considered to be a better

measure of economic well-being and respective inequalities".

Very little is known about the economics of household level activities in pastoral

production. Despite this, interventions are frequently proposed which call for increased cash

expenditures. The implications of this for different groups of households (poor, rich) needs

to be assessed. An intervention may require increased labour input. Will there be enough

labour and if so will sufficient food be available to sustain the energy requirements of

increased effort? An intervention may call for culling of non productive and old animals

from herds and flocks. What is the implication of this for the security and viability of

different groups of pastoral households (rich, poor)? What needs of pastoral households can

be manipulated to provide incentives for culling? It is in such a context that information on

household income and expenditures is required.

Besides, in developing countries, income estimates are under-reported, drawn from multiple

sources and vary across seasons. Though the consumption expenditure data are collected in

many developing countries including India, the process is time-consuming, expensive and

needs adjustment for household size, composition and for price level. Owing to these

difficulties, the economic proxies (consumer durables, housing quality and household

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amenities) are collected to measure the economic status of the households in both small-and

large-scale population-based surveys.

AIMS AND OBJECTIVES:

The aims and objectives of the researcher are as follows:

1) To know the levels and patterns of household consumer expenditure.

2) To know the levels and patterns of food and non food expenditures of different

societies in India.

3) To know the expenditure structures and consumption patterns in different Indian

societies.

RESEARCH METHODOLOGY:

The research methodology used in the project is:

-Doctrinal research methodology

HYPOTHESIS:

The income and expenditure pattern of households in India differ from place to place,

religion and also family structure.

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CONTENTS:

1) FACTORS AFFECTING CONSUMPTION PATTERN…………………………5

2) MEASURING INCOME AND CONSUMPTION…………………………………7

3) SOURCES OF LIVLIHOOD………………………………………………………..8

4) DEMOGRAPHIC CHARACTERISTICS………………………………………..10

5) SUGGESSIONS AND POLICY IMPLICATIONS………………………………16

6) CONCLUSION……………………………………………………………………..18

7) BIBLIOGRAPHY…………………………………………………………………..19

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FACTORS AFFECTING CONSUMPTION PATTERN:

Individual consumers are assumed to be in the best position to judge their own needs and

preferences and to make their own choices. It is unbiased to assume that people know what

they are looking for and have reasons for their preferences when they choose one

consumption pattern over another. Yet millions of people face too narrow a range of

consumptions, which prevents them from enlarging their capabilities. They may not be able

to get enough food, may lack health care services or may have little access to transport

beyond their own feet. There are many factors causing these constraints on consumption

options. Income is not the only one. Other factors include the availability and facility of

essential goods and services, time use, information, social barriers and the household

setting.

Income

Income gives people the ability to buy nutritious foods instead of eating only their own

crops, to pay for motorised transport instead of walking, to pay for health care and

education for their families, to pay for water from a tap instead of walking for many hours

to collect it from a well. The increasing dependence of much consumption on private

income means that changes in income have a dominant influence on changes in

consumption. When income rises steadily consumption rises for most of the population. But

for the same reason, when income decline, consumption also falls sharply, with devastating

consequences for human wellbeing.1

Social Barriers

Income cannot always remove barriers to access to opportunities. This is particularly so

when considerations of gender, class or ethnicity limit people’s freedom to consume the

goods and services they want. For example, people belonging to certain ethnic groups might

1 http://planningcommission.nic.in/reports/sereport/ser/sty_sercphc.pdf5 | P a g e

be denied equal access to education, employment and other basic social services by the

state, regardless of how much they earn.2

Globalisation and its Impact on Consumption Pattern

Due to globalisation the purchasing power and opportunity to purchase has increased and a

change has manifest in the activity of consumption. Globalisation is integrating not just

trade, investment and financial markets; it is also integrating consumer markets around the

world and opening opportunities. This has two effects- economic and social. Economic

integration has accelerated the opening of consumer markets with a constant flow of new

products. On the social side local and national boundaries are breaking down in the setting

of social standards and aspirations in consumption. As a consequence, a host of

consumption options have been opened for many consumers, but many are left out through

lack of income. Spending has shifted from striving to match the consumption of a next door

neighbour, to pursuing the life style of the rich.3

Household Decision Making

A great deal of household consumption decision making is in the hands of one person often

the mother or the father of the family. Although this may lead to good outcomes, it can also

be a source of inequity within the family. The education and background given to children

early in life play a critical part in establishing their ability to make good use of the options

available for living a full and fulfilling life.

Time Use

Opportunities to consume can be severely limited by lack of time. Women, spend many

hours a day meeting the household’s needs and have no time left for education, better health

care or opportunity activities. Similarly, overworked labourers may receive an adequate

wage, but they often work long hours and are denied the opportunity of regular leave.4

2 http://ihds.umd.edu/IHDS_files/02HDinIndia.pdf3 http://dyuthi.cusat.ac.in/xmlui/bitstream/handle/purl/51/Dyuthi-T0041.pdf?sequence=14 http://ethesis.nitrkl.ac.in/3163/1/MY_MA_Project.pdf

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Information

Information is the key to raising awareness of the range of consumption options available

and enabling the consumer to decide which choices are best. Without information, there is

no way of knowing that goods and services are available in the market, and what services

are being provided by the state and are, by right, available to all. Advertising and public

information campaigns play an important role in this respect.

Availability of Infrastructure for Essential Goods and Services

Many of the most basic essential goods and services like water, sanitation, education, health

care, transport and electricity cannot be provided without an infrastructure. Traditionally

these facilities have been provided by the community and then by the state. As markets

develop and the technology improves, the services increasingly are being provided by the

private sector in areas where profit can be made.5

MEASURING INCOME AND CONSUMPTION:

Incomes are not usually measured in developing-country surveys, and rarely in India.

Instead, surveys have measured consumption expenditures or counts of household assets

because they are less volatile over time, and are said to be more reliably measured. Survey

measures of consumption expenditures have their own problems and volatility (marriages,

debts, and health crises can create unrepresentative spikes for some households). By

measuring income and its sources, we know not merely the level of a household’s standard

of living but also how it achieved that level and, thus, we obtain a better understanding of

why it is poor, average, or affluent. Measuring income along with household expenditures

and possessions also reveals aspects of income volatility and provides an additional

measure of inequality. However, obtaining precise estimates of household incomes is

complicated because few households have regular sources of income. Where incomes are

irregular, such as in agriculture or business, considerable effort is

5 https://www.spc.int/PRISM/country/.../HIES05%20Report_FINAL.pdf7 | P a g e

required to obtain estimates of revenue and expenditure before net income can be

calculated. Measurement errors may be particularly large in agricultural incomes, since

seasonal variation in agricultural incomes is much greater than that in other incomes.6

SOURCES OF LIVLIHOOD:

A great advantage of using income data is our ability to examine the sources of livelihoods,

to identify the way in which these sources are related to income and poverty. In India, as in

most developing economies, households derive income from a wider range of sources than

is typically true in advanced industrial economies. Besides wages and salaries, farms and

other businesses are important for more families in India than in developed countries.

Transfers, from other family members working across the country or even abroad, are also

important for many areas. The IHDS recorded incomes from more than fifty separate

sources. Because some of these income sources are more reliable and more generous, they

determine the level of income that these households can attain. Most Indian households (71

per cent) receive wage and salary income. This accounts for more than half (54 per cent) of

all income. By far the most remunerative incomes are salaries received by employees paid

monthly, as opposed to casual work at daily wages. More than a quarter of households (28

per cent) receive some salary income, and these salaries account for 36 per cent of all

income. Businesses owned by the household are also fairly widespread and rewarding.

About 20 per cent of households engage in some form of business, and this income

accounts for 19 per cent of all income. Income from property, dividends, and pensions is

less common (only 10 per cent of households receive this kind of income), but the amounts

received can be significant (the typical receipt is Rs 14,400 per year), composing 5 per cent

of all household income. In contrast, both agricultural and non-agricultural daily wage

labour, while widespread, accounts for a relatively small portion of total household income

because the wages are so low (see Chapter 4). More than a quarter (29 per cent) of

households are engaged in agricultural labour, but this work tends to be seasonal and the

income accounts for only 7 per cent of total income. Similarly, 27 per cent of households

engage in non-agricultural wage labour, but it accounts for only 11 per cent of total income.

6 http://ihds.umd.edu/IHDS_files/02HDinIndia.pdf8 | P a g e

Farm incomes are even more common. More than half (53 per cent) of all Indian

households have some agricultural income. The income returns from farms, however, are

modest so agricultural income constitutes only 19 per cent of total income. Even in rural

areas, where agricultural income plays a more important role, total income from cultivation

is only 33 per cent of the total, with agricultural wage work adding an additional 12 per

cent. However, given the difficulties of measuring agricultural income, these results should

be treated with caution. Finally, private and public transfers are important for many Indian

households. Remittances from family members working away from home account for 2

percent of all household incomes, but 5 per cent of Indian households receive at least some

income from absent family members. Government support is even more common: 13 per

cent of Indian households receive some form of direct income supplement from the

government. The most common source of government support comes in the form of old-age

and widows’ pensions. This government assistance is usually quite small (the typical

reported payment is only Rs 750 per year), so it accounts for less than half a per cent (0.4

per cent) of household income. For poor households, however, this help can be significant.7

Multiple Income Sources:

Although much of the discussion on income sources tends to assume that households rely

predominantly on one source of income, the IHDS data suggest that more than 50 per cent

of Indian households receive income from multiple sources. For example, more than four

out of five farm households also have income from some other source, more often from

agricultural and non-agricultural wage labour and salaried work (40 per cent) but also from

private businesses (17 per cent). Similarly, 71 per cent of households with a private family

business also receive other types of income, for instance, from family farms (37 per cent).

This diversification implies significant interconnections between different sectors of the

Indian economy and suggests that policies that affect one sector of the economy could have

widespread impact on a large number of households. Some of these sources of income are

highly interconnected. It is quite common for farmers to work on other people’s fields when

their own fields do not require attention. However, as we show in Figure 2.4, a substantial

proportion of farm households rely on non-agricultural income, particularly in higher

income categories.

7 http://ethesis.nitrkl.ac.in/3163/1/MY_MA_Project.pdf9 | P a g e

DEMOGRAPHIC CHARACTERISTICS:

The demographic characteristics have an important bearing on the level of income,

consumption expenditure and saving of the society. Feature like rate of growth of

population, educational level of the head of the household and other members, their

occupation, the age of the members of the household, the size of the family are some of the

factors which have a direct effect on the saving of the community, especially in the rural

areas.

Different Occupation Groups:

The selected sample is a representation of the total population. As far as possible all the

different occupation groups are given proportional representation in the sample. As such,

the sample consisted of 41% non-agricultural labour, 14 % self employed having business

also, 11% owner cultivator, 5% agricultural labour, and 10 % salaried households as shown

in the chart 3.2. The occupation of the head of the household is considered as the main

occupation of the household.8

Percentage of Households falls under Different Occupation

45 40.7%

Hous

ehol

ds 40353025

Of

20

Perc

enta

ge

15 11.0%13.2%

10.4%10 5.5% 7.1% 7.1%

3.8%5 1.1%0

Occupation Groups

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Different Age Groups (Household Head):

The average size of the family is 4.96. As much as 85 % of the head of the household

belongs to the age group of 15-59 which may be natural in any population group as shown

in the chart 3.3 below. Population above 60 years and below 14 years are supposed to be

unproductive.9

Percentage of Population Falls under Different Age Groups

Chrstian10%

Muslim20%

Hindu70%

Religion:

Religion also plays an important role in affecting the consumption patter of the rural

households. The households belongs to the Christian community don’t spend more on

health check up as they much believe in god’s supernatural power for their treatment.

Similarly, throughout a year different religious community used to perform different

festivals which is not homogeneous neither in terms of believe nor in terms of expenditure.

The households belongs to Muslim community spend more during Eid. Out of the total

population 70% belongs to Hindu and 20% belongs to Muslim and rest 10% belong s to the

Christian community as shown in chart.

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Percentage of Population Falls under Different Age Groups

Chrstian10%

Muslim20%

Hindu70%

Earners and Non-Earning Dependents:

The ratio of earners to non-earning dependents indicates to the work participation ratio and

the division of the society into productive and unproductive members. The work

participation rate at younger ages is comparatively high which can be explained with the

help of table.10

Income Earners and Non-Earning Dependents in the Sample

Total Members 903Income Earners 270

Non-earning members 633Ratio of earners to non-earning members 1:2.34

Proportion of earners to total members 29.90Average number of earners in the

1.48Household

There are 270 income earning members in a total of 903 members and thus, the ratio of

earners to non-earning dependents is 1:2.34. The earning member per household is only

1.48 which leads to a fair dependency ratio. The irregular work participation rate of the

younger age groups and the proportion people above 60 probably explains this dependency

ratio. Number of income earners in the household, to some extent, determines the level of

income of the household. In the rural areas, where the income is low due to unavailability of

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works and lower wage rate, increase in the number of earning members will influence the

income level and thus the consumption pattern. As majority of the families are small

families there are only one or two earners in 83.34 per cent of households. There are certain

households where the members of different generations live together thus leading to more

number of earners. Households having more than two earners amount to 16.66 per cent.

Level of Education

The level of education of the head of the household and that of other members of the family

determines the nature of occupation they are involved in, the level of income that they get

and the motivations for saving. On the other hand the level of education of the female

members likely to have a positive influence on the saving rate. The percentage of

households and their level of education are shown in the table below.

Percentage of Households and their Educational Qualification

Perc

enta

ge o

f Hou

seho

lds 60

48.4%50

40

30 22.0%20

10.4%14.8%

10 3.3% 0.5% 0.5%0

ILLETERATE LOWER UPPER HIGH SCHOOL INTER GRADUATE ABOVEPRIMARY PRIMARY GRADUATE

Level of Education

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Around 48 per cent of the sample is illiterate. This shows very peculiar poor characteristics of

the sample which affects their nature and function over consumption expenditure. Only 14 per

cent reached high school, 22 per cent upper primary, 10 per cent lower primary and rest 1 per

cent possess graduation. As the level of education is one of the deciding factors of the occupation

in which one is engaged in. Generally those engaged in lower occupations have less of

educational qualifications where as those with higher education are engaged in higher income

occupations. Among the different occupation group, the salaried group have more education

compared to the groups with 32 per cent having primary education and those of illiterates. Some

of those who are employed in self- employment activities in non-farm sector have primary

education. Agricultural labour households are the least educated with 72.58 per cent illiterates

and 12.90 per cent having only primary education.

Sex of the Respondents (Head of the Household) :

Out of the total households 52.2 per cent households are headed by men and 47.8 per cent

households have female as shown in chart 3.7. As the sample covers most tribal people so in

most of their household, the female used to play a major role. The male used to only drink and

work.11

Sex of the Respondents

FemaleMale

48%52%

Size of Land Holding:11 http://ethesis.nitrkl.ac.in/3163/1/MY_MA_Project.pdf

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For any economic unit wealth reflects the net result of accumulated savings, revaluation of

assets and capital transfers ever since the unit came into existence. The size and pattern of assets

held by the households determine the income enjoyed by the household as also the amount of

income saved and the pattern of investment of saving. The size of land holding by the sample

households are shown in the chart.

In the distribution land there are great disparities. The average extent of land owned by all

households is .86 dismal. However, 42.3 per cent of households belongs to land less community,

only 20 per cent households have up to 50 dismal land, 13 per cent have up to 51 to 100 dismal

and the rest 23 per cent household have more than one acre land area.12

Value of Assets (All Sample Households):

The proportion in which assets are distributed between productive and unproductive items holds

the key for the level of income and consumption expenditure of households. The households

possess both physical assets and financial assets. In the rural areas a good portion of the assets

are held in the form of physical assets and very little in the form of financial assets. The physical

assets are land, buildings, livestock, agricultural tools and implements and other household

durable goods. Valuation of most of these assets involves a lot of problems. For the valuation of

land, consultation with local people been considered. Since land values change with changes in

locations, an average value of the area for each type of land has been worked out. For estimating

the value of buildings, the year of construction, type of construction, materials used are all

considered. Livestock is valued at the prevailing rates in the market whereas adequate

discounting is made in the valuation of agricultural equipment’s, consumer durables and other

assets. Financial assets considered include deposits, post office saving, claims on chit funds,

insurance and provident fund contributions, jewellery, shares and debentures and government

securities. However, currency has been left out since the households are reluctant to disclose the

same. Jewellery is included in the financial assets. The average value of all assets both physical

and financial for all households is to be around Rs. 66000 out of which 93.45 per cent in physical

assets and the rest in financial assets.

SUGGESTIONS AND POLICY IMPLICATIONS:

12 http://planningcommission.nic.in/reports/sereport/ser/sty_sercphc.pdf

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On the basis of the collected information in the survey and on the basis of results derived from

the analysis of consumption expenditure pattern in the sample rural households one can draw the

following suggestions and policy implications.

(i).The review of regression results shows that majority of the items (Clothing, Education,

Health, Milk & Milk Products, Edible oil, Mutton, Pulses) of consumption of different categories

of rural households seems to be costly.13 Therefore, the policy makers have to consider these

results in framing the rural development programmes and planning strategies.

(ii). In order to increase the incomes and standard of living of rural households, the government

should consider and announce remunerative prices for agriculture output, especially for paddy

and the unscrupulous activities of the private traders in the agricultural-markets need to be

regulated.

(iii). In all rural sample households, the magnitude of expenditure elasticity for Milk and Milk

products is more than one except cultivator sample households which implies that Milk and Milk

products are very costly in family budgets of rural households.14 The government should supply

milk to these groups through cooperative diary firms with subsidiary rates.

(iv). As the expenditure on Health has a considerable higher share in the expenditures of all the

rural families, suitable health insurance programmes should be implemented to these sections.

(v). As the expenditure levels on Alcoholic drinks and Narcotics like tobacco are very high in

the case of both agricultural labourers and cultivators, they should be counselled against

alcoholism.

(vi) Nearly 45 per cent of the heads of the sample rural households are illiterates15 and their

decisions are very crucial in household decision making and hence they have to be provided

compulsory non-formal or adult education programmes which are very much relevant to rural

economy.

(vii) It is noticed from the study that the drop-out rates of the school going children is

considerably high in both agricultural labourers and cultivators because of chronic social and 13 http://ijmer.in/pdf/volume1-issue1-2012/237-245.pdf14 http://planningcommission.nic.in/reports/sereport/ser/sty_sercphc.pdf15 http://ethesis.nitrkl.ac.in/3163/1/MY_MA_Project.pdf

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economic problems.16 The government should formulate specialised programmers and

implement properly for rural families in order to attain one of the millennium development goals

of compulsory primary education for all especially for rural households.

CONCLUSION:

16 http://ethesis.nitrkl.ac.in/3163/1/MY_MA_Project.pdf

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The study presents different facets of the variation in the level and pattern of household

consumer expenditure and related aspects of the standard of living of the urban as well as rural

households. It covers socio-economic and demographic characteristics of sample households

such as Annual average per capita consumption expenditure, Literacy status of heads of sample

households, Per cent of drop outs in school going children of sample households, Average age of

the heads of sample households, Share of food expenditure in the total household expenditure,

Share of non-food expenditure in the total consumption expenditure and average household size

over different rural occupational groups. This project has focused on the livelihoods of Indian

families and identified some sources of vulnerability. Some of the findings presented echo well

articulated themes. Poverty and low incomes are concentrated among Dalits and Adivasis,

followed by Muslims and OBCs. Poverty also tends to be geographically concentrated in the

central states. One of the most striking findings presented in this chapter is the great diversity of

income sources within Indian households. Nearly 50 per cent of the households receive income

from more than one source. Implications of this diversification require careful consideration. On

the one hand, income diversification provides a cushion from such risks as crop failure or

unemployment. On the other hand, the role of income diversification may depend on the nature

of diversification. Where households are able to obtain better paying salaried jobs, diversification

may be associated with higher incomes. Where poor agricultural productivity pushes household

members into manual wage work, such as construction, the income benefits may be limited.

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BIBLIOGRAPHY:

1) http://ihds.umd.edu/IHDS_files/02HDinIndia.pdf

2) http://planningcommission.nic.in/reports/sereport/ser/sty_sercphc.pdf

3) http://ijmer.in/pdf/volume1-issue1-2012/237-245.pdf

4) http://ethesis.nitrkl.ac.in/3163/1/MY_MA_Project.pdf

5) http://www.ijbmi.org/papers/Vol(2)2/Version-1/J226873.pdf

6) http://dyuthi.cusat.ac.in/xmlui/bitstream/handle/purl/51/Dyuthi-T0041.pdf?sequence=1

7) http://ageconsearch.umn.edu/bitstream/152075/2/7-P-Kumar.pdf

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