Impact of Inflation on Consumption Pattern Project

IMPACT OF INFLATION ON CONSUMPTION PATTERN

By Debdoot Mukherjee, Forline De Fernanddo.X, Nagaraj P, Sarica.S, Dinesh Varma.M, Eveson Chella, Karin Basha, Parul Mukherjee, R.Jayanandhini, & Pavan

IMPACT OF INFLATION ON CONSUMPTION PATTERN

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CONTENTS A. ACKNOWLEDGMENT ………………………………………..

3

1. INTRODUCTION 1.1.

CONTEXT………………………………………………….

4

2. OBJECTIVES……………………………………………………….

6

3. SCOPE OF THE RESEARCH……………………………………...

6

4. LIMITATIONS OF THE STUDY………………………………….

7

5. METHODOLOGY………………………………………………….

8

6. REVIEW OF LITERATURE……………………………………….

9

7. DATA ANALYSIS 7.1.

PRIMARY DATA …………………………………………

12

7.2.

INFLATION GRAPH …………………………………….

19

8. ESTIMATED IMPACT OF INFLATION CONSUMPTION PATTERN 8.1.

WHO ARE AT RISK? ..........................................................

20

9. FINDINGS AND CONCLUSIONS…………………………………

21

10. SURVEY QUESTION………………………………………………

22

11. REFERENCES………………………………………………………

24

12. APPENDIX…………………………………………………………

25

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ACKNOWLEDGEMENT

We owe a great many thanks to a great many people who helped and supported us during the project. Our deepest thanks to Lecturer, Prof. G.SHARADA The Guide of the project for guiding and correcting various documents of mine with attention and care. She has taken pain to go through the project and make necessary correction as and when needed. I express my thanks to the Director of ITM Chennai, for extending her support. We would also thank Our Institution and my faculty members without whom this project would have been a distant reality. I also extend our heartfelt thanks to our well-wishers.

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1. INTRODUCTION Context

1.1.

I

n India, last two decades have recorded substantial economic growth and

improvements in livelihood among urban populations. High rate of development and urbanization results in the increase of middle class. Currently India has 31.4 million middle class households which represent 13 percent of India’s population. The percentage of middle class in the country’s total population will increase to 20.3 percent by 2015 and 37.2 percent by 2025 i.e. the number of middle class households in India is likely to more than double from the 2015-16 levels to 113.8 million households or 547 million individuals. As per the study, which uses 'household income' as the criterion, a family with an annual income between Rs 3.4 lakh to Rs 17 lakh (at 2009-10 price levels) falls in the middle class category. The middle class in low and medium income economies in the world is increasingly demanding higher value agricultural produce and due to supply constraint the price of commodity increases. Inflation is the persistent rise in the general price level of the commodity. Opinion survey in India reveals that inflation is the most important concern of the middle class people and it badly affects their standard of living and consumption. Inflation in food, by its very nature is the enemy of middle class consumers. These categories of people have to fight every day for their survival in metro cities as the cost of living is very high. Food inflation indicates higher prices of agricultural products. The primary articles contribute to 20.118% and food articles contribute to 14.337 % in Wholesale Price Index as per the WPI series 2004-05.

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

Inflation on Food Price Index (April 2004-December 2010)

Source: Ministry of Commerce and Industry

The increase in food prices is not homogeneous. The cereal prices (rice and wheat particularly) have increased quickly since 2006: monthly inflation rate is higher than 5% for wheat and rice (except for few months). The increase in cereal prices was higher than the increase in food prices before the beginning of 2009; after food prices have risen more quickly. In last quarter (from November 2010 to January 2011), wheat price decreased but this decrease didn't set the past increase. It is well-known that people are adversely affected by rising food prices which limit their purchasing power. In order to develop efficient policies to fight the negative impact of rising food prices, it is necessary to know which households are the most vulnerable, how food inflation affects them.

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2. OBJECTIVE Primary data  To study the impact of inflation on consumption pattern.

SECONDARY DATA  To explore the various issues related to food inflation and consumption pattern of the household. 

To understand the degree of impact of food inflation on middle class consumers.

3. SCOPE OF THE RESEARCH

 This research will help us to find out the impact of inflation on consumption pattern  Rise to scope for research in it gives impact of inflation on consumption pattern particularly with respect to middle class consumers.

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 This research is conducted in urban area; it can be extended further to rural areas of the country.

4. LIMITATIONS OF THE STUDY

 The research is limited to the certain part of Chennai city.  The data collected may not be sufficient to depict the real picture of the consumption pattern in middle class.  The study is based on subjective opinions of the respondents and their participation.  Due to time constraint it couldn’t possible to cover all the aspects.

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5. METHODOLOGY Primary data collection The present study is interdisciplinary (socio-economic); the data has been collected from secondary as well as from primary source. The secondary data comprises various references which already existed in the published form such as research papers, articles relating to food inflations or books and websites for the review purpose. Selection of the papers is done on the basis of their relevance and contribution to the body of knowledge. A sample size of 100 households has been drawn randomly from the population of Egmore, Nungambakkam, Navalur, Thoraipakkam, Thiruvanmiyur in Chennai. We conducted a survey among the middle class and lower class population of Chennai city and filled up the questionnaire from the head of the family through structured interviews. During the survey the class consumers were categorized on the basis of their household income.

S.No

Income Level

Class

01

More than 7 lakh/per annum

High income group

02

2.2 lakh to 6.9 lakh/per annum

Middle income group

03

Less than 2.1 lakh

Lower income group

People’s daily consumption pattern was also surveyed. And suggestion about inflation in the rate of commodities were asked to the people so as to view their different opinions.

Secondary Data Collection:

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The secondary data comprises various references which already existed in the published form such as research papers, articles relating to inflation in consumer goods and also in books and websites.

6. REVIEW OF LITERATURE However number of studies has been conducted in the form of surveys and research work done on food inflation. An attempt has been made by the researcher to understand and acknowledge the work of various researchers in the field of food inflation and consumption. 1. INFLATION In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time. 2. IMPACT OF INFLATION Inflation's

effects

on

an

economy

are

various

and

can

be

simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring that central banks can adjust nominal

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interest rates (intended to mitigate recessions) and encouraging investment in nonmonetary capital projects. Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth. Today, most economists favor a low, steady rate of inflation. Low (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control monetary policy through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.

Increasing trend in primary food articles:

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Source: NSSO Surveys

Decade wise average inflation

DEMAND AND SUPPLY OF MAIN COMMODITIES The food grains production has increased at the rate of 2.68 per cent per annum during 19601999 which was mainly because of productivity growth (2.44%). The share of superior cereals (rice and wheat) in total food grains production has shown an increasing trend whereas the share of coarse cereals and pulses has shown a declining trend during the last four decades. The study further reveals that the per capita cereal consumption showed a declining trend in both the rural as well as in the urban areas. The total per capita monthly consumption expenditure has increased by about six and seven times in rural and urban areas, respectively during this period. However, the expenditure on food items exhibited a declining trend during this period. The food basket was found to be diversified both in rural and urban areas with higher levels of per capita consumption expenditure on milk and milk products, fruits and vegetables and meat. A deficit of about 9 million tonnes of cereals is expected by 2009-10 but by 2029-30, India is expected to emerge as a surplus nation in cereals production. Pulses show a deficit of about 5 million tonnes in 2009-10 and quantum of deficit is expected to increase gradually to the extent of about 14 million tonnes by 2029-30. With the estimated food grains production there is no danger to food security but the estimated production can be achieved mainly through improvement in productivity. A high rate of increase in productivity calls for a priority in agricultural research system coupled with more capital investment stressing the development of new production technologies for main crops and farm products.

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7. DATA ANALYSIS 7.1.

Primary data

After collecting the primary data from the population of Chennai on the basis of questionnaire filled up by the head of the family. The following results come out. Graph 1

Type of house hold 80

74

70 60 50 40 30

Type of house hold 26

20 10 0 Joint family

Source: Survey data

Nuclear family

Type of house hold

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Analysis: - From this graph we can say that majority of the house hold are nuclear families. Graph-2

Occupation 1%

0%

22%

77%

Service

Source: Survey data

Business

Agriculture

Unemployed

Occupation of the Household

Analysis: - From this graph we came to know that 77% of household are service people. 22% are business people 1% is agriculture. Service household are again categorized into two type government services and private service 23% of house hold are in government sector and 54% are in private sector.

Table 1

Particular

Household assets

Assets

Percentage

Television

100%

Motorcycle/scooter

100%

Four-wheeler vehicle

55%

Owned house

100

Source: Survey data Analysis: - From this table we come to know that majority of the income group has all the main house hold assets only the

Lower income group do not afford to have

four – wheeler vehicle. IMPACT OF INFLATION ON CONSUMPTION PATTERN

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Graph

3

What is your household income per month 3 10

20

below 5000 5000-10000 10000-20000 above 20000

67

Source: Survey data Analysis: - From the above graph we come to know that 67% of the incomes of house hold lies above 20000 per month. Whereas 20% lies between 10000-20000per month, and 10 % lies between 5000-10000per month. Income group only 3 % lies below 5000 income per month. Table2

Particular

COMMODITIES FOR DAILY CONSUMPTION

Commodities Rice Wheat Pulses Oil

Sugar

Refine Mustard Oil Palm oil Castor oil

No of Household 100 100 100 67 10 20 3

Average Quantity / Household 21 Kg 5 Kg 4 Kg

100

3 Kg

4 Lts

Source: Survey data

Analysis: - From the above Table we come to know that all the house hold income group consume all the basic commodities for their daily use.

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Graph 4

90

78

80 65

70

75

62

60 50 40

30

30

35

38

40

34

Rice

25

Wheat

20

Pulses

10

Oil

0

Before Inflation

After inflation

Rice

30

38

Wheat

25

34

Pulses

65

78

Oil

62

75

Sugar

35

40

Sugar

An Average Household Spend on Monthly Commodities* (in terms of money)

Source: Survey data

* Rs per Kg

Graph 5

25 21

21

20 15 Rice

10 5 5 0

4

4

5 3

Wheat 4

4

Pulses

3

Oil Before Inflation

After inflation

Rice

21

21

Wheat

5

5

Pulses

4

4

Oil

4

4

Sugar

3

3

Sugar

An Average Household Spend on Monthly Commodities* (in terms of Kg )

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Source: Survey data

Analysis: - From the above graph no 4 & 5 we came to know that there is a huge change in price of commodity but the consumption pattern did not change. They have adapted to the change in price of commodity. The average number of house hold consume same PARTICULAR

ITEMS

CONSUME LOWER INCOME GROUP

MIDDLE INCOME GROUP

Vegetables

Daily

Daily

How frequently did an

Milk

Daily

Daily

average family consume

Fruits

Weekly

Daily

the following items?

Eggs

Weekly

Daily

Meat / Fish

Weekly

Weekly

amount of commodities that they use to consume before inflation. Table 3

Source: Survey data

Consumption Pattern of Selected Commodities

Analysis :- From the above table 3 we came to know that middle income group consume all the secondary item in a daily manner except meat and fish whereas the lower income group consume vegetable and milk in daily manner and rest in weekly manner. Graph 5

Did increase in food price affect your monthly saving 8

Yes No

92

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Source: Survey data

Change In Savings

Analysis :- From the above Graph 5 we came to know that yes there is a change in

monthly saving in all the income group.

Graph 6

Does everyone in your household get at least three meals a day throughout the year 3

Yes No

97

Source: Survey data

Household Get At Least Three Meals A Day throughout the Year

Analysis: - From the above Graph 6 we came to know that yes the average house hold gets

the three meals a day throughout the year. Graph 7

Does your household have a Ration Card 3.2

Yes No 82

Source: Survey data

Ration In House Hold

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Analysis:- From the above Graph 7 we came to know that majority of the household have

a ration card Graph 8

Do you use ration card to get monthly com

27

Yes No

73

Source: Survey data

Use of ration card

Analysis :- From the above Graph 7 we came to know that majority of the house hold do

not use the ration card as because they do not get anything from the ration. And even if they get something the quality of the commodities is not up to the mark.

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INFLATION GRAPH

7.2.

Graph 9

Inflation Graph 18 16 14 12 10 8

RATE

6 4 2

Source: - NSSO

JAN-12

NOV-11

SEPT-11

JULY-11

MAY-11

MAR-11

JAN-11

NOV-10

SEPT-10

JULY-10

MAY-10

MAR-10

JAN-10

NOV-09

SEPT-09

JULY-09

MAY-09

MAR-09

JAN-09

NOV-08

SEPT-08

JULY-08

MAY-08

MAR-08

JAN-08

0

Graph For Inflation From Jan - 2008 To Feb-2012

Analysis :- From the above graph 9 (source from NSSO website) we came to know that the inflation start from the month of Jan 2008 and it was in the peak at the period for 14 months from march 2009 to May 2010. Then after the inflation come down to 7.57% which continues till now.

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8. ESTIMATED IMPACT OF INFLATION ON CONSUMPTION PATTERN 8.1.

WHO ARE AT RISK?

After conducting the study we come to know about the consumption pattern of the house hold and from that we conclude that middle class house hold has adapt in live hood as an when price change due to inflation. There is no change in their consumption pattern but there was a vast change in saving pattern the middle class family can save more as because of the rise in commodities prices. Whereas the lower income group is concern the scenario is very bad . Due to increase in the price of basic commodities they are facing very difficult time. As there did not get basic commodities in ration and even if they get the basic commodities in ration the quality is very bad to consume. Most of the lower class people do not have ration card in there house. So in our opinion the lower income group are in risk of inflation.

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9. FINDINGS & CONCLUSION 9.1.

Findings

1. Most of the household consumes all the commodities all the commodities like rice wheat etc. but there is variation in their quantity. 2. The quantities consumed by middle class families before inflation and after inflation is the same but for the lower income group price as well as consumption pattern has changed. 3. Monthly saving gets affected for the majorities of the income group due to increase in rate of food prices. 4. Majorities of the middle income group have ration card but lower income group does not hold a ration card 5. Only 27% use ration card for purchase monthly commodities because it does not fetch them quality food .

9.2.

Conclusion

From the above information gathered we came to conclude that the consumption pattern of middle income group has not changed much even through there is inflation but there is a little change in saving pattern. Lower income group has a major problem in consumption & saving pattern due to increase in the rate of inflation.

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IMPACT OF INFLATION IN CONSUMPTION PATTEN Name of respondent: /_______________________________/ Date: /_________________ Respondent's Details Age (years): Household Details Number of household members:

Gender:

Education level:

Type of household

Main occupation(s) of the household:

Joint family Nuclear family

Marital Status

Household assets    

Service Govt

Television Motorcycle/scooter Four-wheel vehicle Owned house

Private Business Agriculture Unemployed

1. What is your household income? a. Below 5000 b. 5000 - 10,000 c. 10,000 – 20,000 d. Above 20,000 2. Can you tell us what commodities you buy for daily consumption? Rice

Wheat/atta Pulses

Pulses (type 2)

Oil (type 1)

Oil (type 2)

Sugar

Other

3. In an ordinary month, how much commodities do you normally consume?

Rice

Wheat/atta Pulses

Pulses (type 2)

Oil (type 1)

IMPACT OF INFLATION ON CONSUMPTION PATTERN

Oil (type 2)

Sugar

Other

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4. How much amount do you spend on monthly commodities? COMMODITIES

BEFORE INFLATION Quantity Amount

AFTER INFLATION Quantity Amount

Rice Wheat/atta Pulses Pulses (type 2) Oil (type 1) Oil (type 2) Sugar

Other:-

5. How frequently did your family consume the following items? Vegetables

Milk

Fruits

Eggs

Meat or fish

Daily Weekly 6. Does everyone in your household get at least three meals a day throughout the year? Yes:-

No:-

7. Has it ever happened, during the last three months that some people in the household had to skip a meal or sleep hungry because there was not enough grain in the house? Yes: -

No:-

8. Does your household have a Ration Card? Yes:-

No:-

9. Do you use ration card to get monthly commodities? Yes:No:10. Suggestion (if any)

…………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………… IMPACT OF INFLATION ON CONSUMPTION PATTERN

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10. 1.

REFERENCE

Study of impact of food inflation on middle class consumer’s household consumption of milk with reference to Thane city Dr. S. B. Kishor1al and Dinesh Gabhane

2. Food and prices in India: impact of rising food prices on welfare by Nathalie Pons Centre De Sciences Humaines (Delhi) 3. Wikipedia (about inflation ) 4. NSSO website for secondary data about inflation 5. Department of Commerce and Science website (Govt of India ) 6. Family and welfare website (Govt of India ).

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11.

1. 2. 3. 4. 5. 6. 7.

ITM NSSO FPI GDP FCI WPI CPI

APPENDIX

Institute for Technology And Management National Survey And Statistics Organization Food Price Index Gross Domestic Product Food Corporation Of India Wholesale Price Index Consumer Price Index

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