Magazine 2012
Consumption and Savings Pattern In
India: An Empirical Study
Mr. Arvind Dhond
St. Xavierb s College, Mumbai.
1.1 ABSTRACT:
An individual is assumed to plan a pattern of consumption expenditure based on expected income in their
entire life-time. The present research paper is an attempt to study the relevance consumption pattern established
by Modigliani and Ando in their b Life Cycle Theory of Consumptionb and also Keynes b Psychological Law of
Consumptionb in the present scenario in India.
Key Words: Households, Consumption Pattern and Savings Pattern.
2.1 RESEARCH METHODOLOGY:
In order to get an understanding if not entirely comprehensive, more like empirical evidence to the theories and
statistics mentioned in this paper a primary survey was conducted. The aim of the survey, the methodology of
the survey and the subsequent end results are described in brief below. There are a few limitations to the survey
that was conducted it included incorrect information given by the respondents, incomplete information, hence
the final results that have been obtained will be not be pinpoint accurate.
2.2 Objectives of the Study:
An effort has been made to focus on the following aspects:
i.
To understand the concept of Consumption and Savings Pattern in India.
To study the select sample units on the basis of Consumption and Savings Pattern.
To draw conclusions based on the findings of the primary data analysis.
ii.
iii.
2
.3 Hypothesis: Null Hypothesis H0:B5= There is no relation between age and propensity to consume.
Alternate Hypothesis HA= There is a relation between propensity to consume and age.
.4 Primary Data: For the present study Primary Data was collected from 50 sampling units.
.5 Sampling Unit: Households i.e. all persons who occupy a housing unit. Within a household the unit
2
2
chosen included individuals, and family. 50 sampling units are selected for the present study within the city
limits of Mumbai.
t
h
t
h
2
.6 Time and Space Boundaries: The research was conducted from 20 September 2011 to 19 January
2
012 within the city limits of Mumbai.
2.7 Characteristics of Interest: Consumption pattern of household including its monthly expenditure for
food and non- food items, the savings rate, and its subsequent allocation into different financial products, the
propensity to consume, the model of consumption observed.
2
.8 Research Design: Descriptive cross sectional study.
.9 Sampling Design: Disproportionate stratified random sample.
.10 Statistical Tool Used: Mode, Chi-Square Analysis.
.1 DATA INTERPRETATION, ANALYSIS AND OBSERVATIONS:
2
2
3
Table-I and II below gives the age and income wise breakup of the 50 sampling units who took part in the
survey:
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3.1.1 Age-wise Analysis:
Table-I: Age-wise Analysis
AGE (years)
Total
12
20-30
30-40
40-50
12
13
>
50
Total
Source: Compiled by Author on the basis of Primary
Data.Data Interpretation: It was observed that, 12 households each were from the age group of 20-30 and 30-
13
50
4
0 and 13 households each were from the age group of 40-50 and 50 and above.
3.1.2 Income-wise Analysis:
Table-II: Income-wise Analysis
Income (in Rs.)
b 1,00,000
Total
5
<
b 1,00,000-b 3,00,000
b 3,00,000-b 5,00,000
b 5,00,000-b 8,00,000
12
17
7
b 8,00,000-b 10,00,000
3
>b 10,00,000
6
Total
50
Source: Compiled by Author on the basis of Primary
Data.Data Interpretation: It was observed that, out of the total households a maximum of 17 were in the
income group of Rs. 3,00,000-5,00,000.
3.1.3 Combined Analysis of Age-wise and Income-Wise:
Combining both the above Tables I and II the following cross-tabulation can be presented in Table-III:
Table-III: Combined data of Age-wise and Income-Wise Analysis
AgeIncome (in Rs.)
b 1,00,000
20-30
30-40
40-50
b
3
>50
1
Total
5
<
3
3
1
2
b 1,00,000-b 3,00,000
b 3,00,000-b 5,00,000
b 5,00,000-b 8,00,000
b 8,00,000-b 10,00,000
4
12
17
7
3
5
7
2
2
1
2
2
1
1
b
1
1
3
>b 10,00,000
b
12
2
3
6
Total
12
13
13
50
Source: Compiled by Author on the basis of Primary Data.
Data Interpretation:
Propensity to Consume: It was observed that, as the age of the household increased his propensity to consume
increased, whereas that to save decreased.
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3.1.4 Age-wise Analysis of Propensity to Consume:
Table-IV: Age-wise Analysis of Propensity to Consume
Propensity to <0.5
ConsumeAge
0.5-0.6
0.6-0.7
0.7-0.8
0.8-0.9
>0.9
2
3
4
0-30
0-40
0-50
1
5
b
1
2
3
1
1
1
4
1
2
b
3
3
2
3
5
b
b
b
7
>
50
b
5
Source: Compiled by Author on the basis of Primary
Data.Data Interpretation: It was observed that, as the age of the household increased his propensity to consume
increased, whereas that to save decreased.
3.1.5 Mode of Age-wise Propensity to Consume:
Based on Table-IV results the mode for each age group is given below in Table-V:
Table-V: Mode of Age Group wise Propensity to Consume
Age
Mode
0.5-0.6
0.7-0.8
0.8-0.9
>0.9
2
0-30
0-40
0-50
3
4
>50
Source: Compiled by Author on the basis of Primary Data.
Data Interpretation: Thus from the above observation it is seen that the consumption pattern was in fact
following the same pattern established by Modigliani and Ando in their b Life Cycle Theory of Consumptionb .
According to this theory an individual is assumed to plan a pattern of consumption expenditure based on
expected income in their entire life-time. It is further assumed that individual maintains a more or less constant
or slightly increasing level of consumption. A typical individual in this theory in his early years of life spends on
consumption either by borrowing from others or spending the assets bequeathed from his parents. It is in his
main working years of his life-time that he consumes less than the income he earns and therefore makes net
positive savings. He invests these savings in assets that is accumulated wealth which he consumes in the future
years. In his lifetime after retirement he dis-saves, that is, consumes more than his income in these later years of
his life but is able to maintain or even slightly increase his consumption in the lifetime after retirement.
3.1.6 Income-wise Propensity to Consume:
When the propensity to consume was recorded in terms of income the findings were as follows:
Table-VI: Income Group wise Propensity to Consume
Propensity to
Consume
<0.5
0.5-0.6 0.6-0.7 0.7-0.8 0.8-0.9
>0.9
Total
Income (in Rs.)
<
b 1,00,000
b
1
1
1
1
1
b
1
1
4
2
4
5
12
17
7
b 1,00,000-b 3,00,000
b 3,00,000-b 5,00,000
b 5,00,000-b 8,00,000
b 8,00,000-b 10,00,000
1
1
3
4
5
3
1
b
1
1
1
3
1
b
2
b
1
3
b
b
b
b
4
>b 10,00,000
3
b
6
Source: Compiled by Author on the basis of Primary Data.
22)
(
Data Interpretation: It can thus be inferred from the above table that as the income increases the propensity to
consume decreases.
3.1.7 Mode of Income-wise Propensity to Consume:
Based on Table-VI the mode for each income group was thus presented in Table-VII:
Table-VII: Mode of Income Group wise Propensity to Consume
Income (in Rs.)
b 1,00,000
Mode
>0.9
<
b 1,00,000-b 3,00,000
b 3,00,000-b 5,00,000
b 5,00,000-b 8,00,000
0.8-0.9 or >0.9
0.8-0.9
0.8-0.9
b
8,00,000-b 10,00,000
b 10,00,000
Source: Compiled by Author on the basis of Primary Data.
0.7-0.8
>
0.5-0.6
Data Interpretation: It can thus be inferred from the above table that as the income increases the propensity to
consume decreases and hence seems to follow Keynes b Psychological Law of Consumptionb .
But this similarity between the pattern of consumption and Keynes law was not as strong as was observed in
case of pattern of consumption and life cycle theory of consumption. What was the reason for this? The reason
for this is as follows:
1.)
The theory is based on the assumption that the various factors affecting the propensity to consume,
such as distribution of income, prices, population do not change which is not the case in the current
environment with inflation rates that are very much volatile. Also the constant influx of migrants too which
has led to increase in demand for goods could be in a way considered as increase in population.
2.)
The second assumption on which the Keynesb Psychological Law of Consumption is based is that, the
normal conditions should continue to prevail in the economy, that is, neither any war should break out
nor should occur any revolution, hyper-inflation, or any other extraordinary event. This is not the current
scenario. Our economy is just recovering from a financial crises which had seriously struck the whole
world economy and is currently in the high growth high inflation phase.
3.)
The Indian culture is a little different from that observed in America where Keynes was based. A young
individual doesnb t necessarily move out his/her parents house once he/she moves out, hence may not
have to bear the expenses that he would have to if he was staying alone. Hence even if the income of
such an individual is less, the propensity to consume will still be less.
4.)
5.)
6.)
The cost of living that was not discussed by Keynes too could be one of the reason why a high propensity
to consume was observed.
Efficient Management of money in terms of allocation of savings into the right product with maximum
return minimum risk may have been absent.
The information collected from the survey questionnaire may not have been fully correct to deserve full
confidence.
3.1.8 Hypothesis Testing:
In order to test the relation between age and propensity to consume a chi-square analysis test was undertaken.
The results for which are as follows:
1
.) Formation of null hypothesis:
H0:B5=There is no relation between age and propensity to consume.
HA= There is a relation between propensity to consume and age.
2
.) Level of significance is assumed to be at 5%.
3
.) Table-VIII: Age and Propensity to Consume
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Propensity to Consume <0.5
Age
0.5-0.6
0.6-0.7
0.7-0.8
0.8-0.9
>0.9
Total
2
3
4
0-30
0-40
0-50
1
0
0
0
1
5
0
1
0
6
2
3
1
1
7
1
3
1
1
6
0
4
3
2
12
12
13
13
50
7
3
>
50
6
5
Total
17
13
Source: Compiled by Author on the basis of Primary Data.
.) Calculation of expected frequency:
Table-IX: Expected Frequency of Age and Propensity to Consume
4
Propensity to
Consume
Age
<0.5
0.5-0.6 0.6-0.7
0.7-0.8
0.8-0.9
>0.9
2
3
4
0-30
0-40
0-50
0.24
0.24
0.26
0.26
1.44
1.44
1.56
1.56
1.68
1.68
1.82
1.82
1.44
1.44
1.56
1.56
4.08
4.08
4.42
4.42
3.12
3.12
3.38
3.38
>
50
Source: Compiled by Author on the basis of Primary Data.
Table-X: Statistical Analysis of the Data using Chi-Square Test
Row
1
Column Observation
E
O-E
0.76
(O-E)^2
0.58
12.67
0.10
0.19
16.65
0.01
0.06
0.07
1.74
2.43
0.06
1.25
0.07
0.31
0.67
0.31
6.66
0.14
0.07
(O-E)^2/E
2.41
8.78
0.06
0.13
4.08
0.003
0.25
1.44
1.03
1.69
0.02
0.40
0.27
0.19
0.37
0.20
1.51
0.04
0.27
1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6
1
1
5
2
1
0
3
0
0
3
3
4
2
0
1
1
1
7
3
0
0.24
1.44
1.68
1.44
4.08
3.12
0.24
1.44
1.68
1.44
4.08
3.12
0.26
1.56
1.82
1.56
4.42
3.38
0.26
1
3.56
1
0.32
1
-0.44
-4.08
-0.12
-0.24
-1.44
1.32
1
1
2
2
2
2
1.56
2
-0.08
-1.12
-0.26
-0.56
-0.82
-0.56
2.58
2
3
3
3
3
3
3
-0.38
-0.26
4
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4
4
4
4
4
2
3
4
5
6
0
1
1
6
5
1.56
1.82
1.56
4.42
3.38
-1.56
-0.82
-0.56
1.58
1.62
2.43
0.67
0.31
2.50
2.62
1.56
0.37
0.20
0.57
0.78
Source: Compiled by Author on the basis of Primary Data.
(O-E) ^2/E=26.65
b
Degree of freedom= (row-1) (column-1)
Degree of freedom = (4-1) (6-1)
Degree of freedom = 15
Interpretation of Results and Conclusion of Hypothesis Testing:
The critical value with level of significance 5% and degree of freedom at 15 is 24.996 since the established value
is greater than the critical value our assumption of the null set is false, that is our assumption that there is no
significant relation between age and propensity to consume is disproved and hence there is indeed a significant
relation between age and propensity to consume.
3.1.9 Reasons for Saving:
To the question on, b Why they saved?b The response of the respondents were put into the following categories
as below:
Table-XI: Cross-Tabulation of Age-wise reasons for Saving
AGE
Future
Unforeseen Events
Vacation
Others
Total
12
2
0-30
0-40
0-50
3
3
7
5
1
4
1
4
6
2
4
3
1
2
1
2
b
1
3
4
12
b
b
13
>50
13
Source: Compiled by Author on the basis of Primary Data.
Data Interpretation:
The distribution showed that there was no category that took absolute majority. Though future needs like
retirement and events like buying a house, car had the major share with 36% and 30% respectively. One
comprehensible fact that can be seen from this is that it is only when individuals near the age of retirement i.e.
40-50 that they seriously take into account their future needs while saving, as it a human tendency to think short
term.
3.1.10 Allocation of Savings into Financial Products:
To the question on, allocation of the savings into the various financial products, the response was as below:
Table-XII: Cross-Tabulation of Age-wise Allocation of Savings into Financial Products
AGE
Fixed
Deposit
Share
Market
Mutual s
Fund
Public
Schemes
Others
Total
2
0-30
0-40
0-50
2
3
6
6
7
1
3
1
2
b
1
1
b
3
12
12
13
3
4
1
>50
5
1
2
4
1
13
Source: Compiled by Author on the basis of Primary Data.
Data Interpretation: The financial products of choice were fixed deposits and the share market with 32% and
3
0% respectively. 40% and 46% of those who selected share market were of the age bracket of 20-30 and 30-
4
0 years respectively, showing increased risk taking appetite for risk among the younger generation.
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4.1 CONCLUSION:
Companies like Nokia, Reebok, Coke, PepsiCo and major automobile giants like Toyota, Suzuki, Ford, Chevrolet,
Mercedes, etc. have made a market for themselves in India. How did they establish their own individual market
in a country like India which is prone to diverse cultures? Letb s take the example of Ford. Before establishing
their base in India, they engaged in a lot of researches. Their researches were made on the Indian peopleb s
social life, personal tastes and preferences, way of life, how they identify an effective product and what makes
them get attracted towards a product. The social and economic conditions were analyzed.
The general economy of India was also researched on. They had modified their product to suit the Indian
conditions. Their technology had to be adjusted and suited to such an extent that their car is adaptable to
Indian conditions. Indians are generally prone to be rough and tough customers and especially taking into
account the road conditions and other social factors they designed the product in such a way that itb s best
suited to the conditions and itb s received by the target customers. Today Ford is enjoying a huge market in
India. If an automobile company from a different country can make wonders why cannot our own manufacturers
adapt to these techniques.
A customerb s want has to be identified and his expectations must be matched with the other economic and
social factors so that their product is receptive. This can be related to any product. Reebok today is enjoying
a huge market in India even though they have hired a company which is phoenix to manufacture shoes and
operate under Reebok. How did they achieve this? Adapting to social conditions play the most important role
in establishing your brand in the market.
This also means that customers are open to new and different products from time to time. Itb s just that they want
the product to be flexible and adaptable to their needs and preferences. People are changing from time to
time, so do their tastes and preferences. Identifying those is the first step towards achieving success and the
rest depends on the performance of the product.
The future of businesses in an emerging India will depend on how well they analyze these changing demographics
like changing consumption pattern, rise of new consumer class, increasing demand for non-food goods, increasing
disposable income etc. The company that has studied the market thus can be capable of surviving in this highly
evolving market. The challenges that these companies face will definitely be more harsh and cumbersome and
way different than those faced a decade ago. It is only if the company is able to identify the pillars of the
economic structure of this changing Indian economy that it will be successful in drawing its business around
them so as to establish themselves as a company with good fundamentals or rather a company with a good
foundation.
BIBLIOGRAPHY: BOOKS:
1
2
3
4
.
.
.
.
H.L. Ahuja, Macroeconomics: Theory and Policy.
Dominick Salvatore, Managerial Economics in a Global Economics in a Global Economy.
Frances M. Magrabhi (e-book), The Economics of Household Consumption.
John Maynard Keynes, The General Theory of Employment, Interest and Money.
JOURNALS:
1
2
3
4
5
.
.
.
.
.
Prema Chandra Athulorala and Kunal, The Determinants of Private Savings in India.
McKinsey Global Institute, Tapping into the Indian Consumer Market.
Economic Survey Report 2009-10.
Angus Deaton, Savings in Developing Countries: Theory and Review.
Sangamitra Sahu, The Structure of Household Sector Asset Portfolio in India.
WEBSITE:
1
3
5
7
.
.
.
.
http://indiabudget.nic.in/
http://www.business-standard.com/
http://www.ncaer.org/
2.
4.
6.
http://www.business-standard.com/
http://www.business-standard.com/
http://www.mospi.gov.in
http://www.wikipedia.org/
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