1. Studying Consumption

Studying Consumption

The 2015 economics-Nobel winner’s work could help India determine its number of poor

By: | Published: October 13, 2015 12:26 AM

The focus of the work by Angus Deaton—the 2015 winner of the economics Nobel—is consumption, poverty and welfare. Thus, Deaton’s work should interest governments that must gear policies to address these concerns, given these have a bearing on future growth. Deaton’s work, of course, will find several practical applications outside of government policy. For instance, the various sets of data on consumption across goods can be used by corporates to make projections for the future. But government policy is where his work would have the greatest import. In the case of India, his theories will enable the Central Statistical Office and the ministry of finance to translate National Sample Survey data into consumption data at the macro-level; this will facilitate evaluation of possible increases in tax revenue once the GST regime is in place. But where India can benefit the most is poverty calculations—given how controversial our own poverty calculations have become, Deaton’s linkage of income with calorie intake will set us on the right track.

The Nobel laureate’s work is about linking a micro phenomenon—of how individuals’ spending decisions affect their savings—with the macro challenges of investment and growth. The Deaton paradox shows consumption remains remarkably smooth even when income becomes uneven through shocks. This is because individuals adjust their savings to consumption, and as we have seen in the Indian context, high inflation with minimal changes in income has led to a fall in savings as households have retained consumption of food items. This, in turn, has affected the savings-investment gap. Deaton’s focus is more on the development economics aspect of consumption and its impact, and hence, is different from the usual reason for studying consumption, i.e., demand forecasting.

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