Third, we examine the growth of income relative to that of consumption. We also consider nuclear and extended families separately. This is especially relevant for India where there are large rural-urban gaps. Second, while we are concerned with the aggregate, as with much of the macroeconomics research on consumption, we also consider heterogeneity. This provides a useful benchmark since research on life-cycle behaviour has largely used data from US households. First, we provide a comprehensive picture of the behaviour of Indian households in comparison to those in the US 3. 2021), we conduct, what we believe is the first in-depth analysis of life-cycle consumption and savings in India, covering the period 2014-2019, using a large longitudinal households survey – the Consumer Pyramids Household Survey (CPHS), conducted by the Centre for Monitoring the Indian Economy (CMIE). However with a few decades of relatively rapid economic growth accompanied by urbanisation and declining rural poverty (Chanda and Kabiraj 2020), as well as the availability of rich household data, it is worthwhile to investigate some of the aggregate patterns. The samples are smaller, do not always contain income data, and are concerned with specific questions such as consumption insurance against weather shocks, the role of marriages and caste networks in risk-sharing, etc 2. However, most of this work relies on rural, and usually agricultural, households. In the case of India, the absence of research may come as a surprise, especially given the amount of work that has been conducted using consumer expenditure surveys on poverty and inequality, risk-sharing strategies by households, and effects of microfinance. For China, some of the differences are also often attributed to the marriage market and the competitive savings motive (Du and Wei 2013) 1. Combined with the fact that individuals themselves cannot predict their future growth in incomes perfectly, this means that consumption expenditures tend to track incomes leading to positive savings. Uncertainty regarding future incomes, makes lending to households at early stages of their careers a risky prospect for financial institutions even in high-income countries. Researchers have pointed to factors such as the inability to borrow, combined with uncertainty regarding future incomes to explain the data vis-à-vis the predictions of the model. For example, Fernández-Villaverde and Krueger (2007) in their influential study note that even after controlling for family composition, consumption continues to rise with income in the US. However, rich empirical data from high-income countries have not supported the prediction of consumption smoothing. With incomes beginning at low values, subsequently rising until retirement, and followed usually by a drop (and reliance on pensions), this translates initially into negative savings, which then increases during working life, followed by a drawdown during retirement. Households are predicted to smooth consumption over their lifetimes. The canonical predictions of lifecycle models going back to Modigliani’s Nobel prize-winning work are well-known.
For India, we are unaware of any systematic study. Yet, outside of developed economies – except for China in recent decades – very little to nothing is known about how consumption and savings change over an individual’s lifetime. From an empirical perspective, the behaviour of consumption expenditure over an individual’s lifetime in relation to their income, has important policy implications – in terms of the adequacy of retirement savings, the ability of households to weather unexpected large negative shocks such as those related to extended unemployment, healthcare, and the ability to even out payments for large purchases such as houses and personal vehicles. Using 2014-2019 Consumer Pyramids Household Survey (CPHS) data, this article shows that in the case of India, consumption tends to be smoother despite comparable income growth to the US, largely due to expensive physical assets depressing non-durable consumption, and the inability to spread out these large expenditures.Ĭonsumption and savings behaviour over the life-cycle of individuals and households has been widely researched in developed economies. Conversely, empirical data from high-income countries have shown that consumption continues to rise with income. Canonical predictions of life-cycle models indicate that households will smooth consumption over their lifetimes.
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