The economic planning and welfare policies of India largely depend on good consumption statistics. However, new evidence shows that there is a remarkable discrepancy between the Private Final Consumption Expenditure (PFCE) and the Household Consumption Expenditure Survey (HCES). The two measures differed by almost 45 per cent in 2022-23 which casts a concern on the way consumption, poverty, and welfare are measured in the country.
PFCE vs. HCES
PFCE is an estimate in macroeconomics of all the goods and services that are consumed by households, even those that are offered free of charge or at subsidised costs by the government or NGOs. It is prepared based on commodity flow method which utilizes production, trade and administrative documents.
HCES, by contrast, is a micro-level survey which includes self-reported household expenditure. It documents real out-of-of-pocket cost and plays a vital role in poverty, inequality and nutrition analysis. Nonetheless, it does not frequently entail free consumption benefits and underreporting of some expenditures occurs quite frequently.
Why the Gap Exists
The differences emerge mostly due to differences in methodology. PFCE records all goods and services which have been consumed whereas HCES records the paid expenses only. Free healthcare or subsidised education, such as appear in PFCE but are not complete in HCES.
The price valuation differences also play a role as PFCE will involve valuation based on the market and HCES will be based on the figures as reported by the household. In addition, there are timing discrepancies--HCES is inhabited by agricultural year and PFCE is prepared on the financial year. This difference has increased over the years, as in 1972-73 to almost 45 per cent in the present day.
Altering Consumption Patterns.
HCES statistics point to changing household behaviour. The expenditure on food has decreased both in rural and urban regions and non-food spending on transport, healthcare, education and housing has increased. In food, there is a reduction in cereals and pulses in favor of milk, fruit, processed products and proteins. This complicates correct measurement due to these changes.
Policy Implications
In case HCES under-estimates consumption, the levels of poverty will be exaggerated, which will lead to inappropriate targeting of welfare. Alternatively, PFCE can make too rosy a picture when it exaggerates consumption. In cases where there are programmes such as the Public Distribution System (PDS) and Direct Benefit Transfers (DBT), proper estimation is important when it comes to resource allocation.
Bridging the Divide
Scholars indicate that sampling of HCES, particularly among high-income households is to be enhanced, and questionnaires should be revised to encompass digital and application based expenditures. PFCE requires the updated assumptions and improved coverage of non-profit institutions. A combination of survey data and tax records, digital payments, and retail scanner data might give a better and more accurate picture. In order to enhance India consumption statistics, a reconciliation mechanism that incorporates the scope of PFCE and the depth of HCES is required.