SURABHI MITTAL

A

Past studies [Radhakrishna and Ravi 1992; Kumar 1997; Rao 2000] have shown that economic growth, rise in per capita income, urbanisation, changing tastes and preferences, market integration, etc, are the dominating factors for the change in the per capita consumption of cereals. Mechanisation of agriculture, improvement in infrastructure and medical facilities also contribute to the reduction in energy requirement and thus less cereal consumption [Rao 2000]. This goes with the arguments by Kumar and Mathur (1996) that the demand for food is not only influenced by income changes, but also by differences in urban and rural lifestyles, the development of more advanced marketing systems and occupational changes that are closely linked with increasing per capita income. Tastes and preferences are also moving towards high value commodities. With the availability of cash money and high value commodities in the food basket, the decline in calories by reduced cereal consumption is partly compensated by intake of highly nutritive and vitamin rich food products. Rao (2000) observes that a reduction in the intake of foodgrains on this account should not be taken as deterioration in human welfare.

In this context, the present paper attempts to develop a demand model to quantify the effect of change in cereal consumption. The paper investigates the variables like price, income or choice of the consumers that lead to change in the consumption of cereals. The present paper is a methodological contribution to the existing empirical literature in this field. It also examines the implications of change in cereal consumption.

Data and Methodology

The study uses the consumer expenditure household survey data of National Sample Survey (NSS) rounds number 38, 43, 50 and 55 pertaining to the periods 1983, 1987-88, 1993-94 and 1999-2000 to compute the demand parameters needed for decomposition. The data refers to the average per capita consumption over the 30 days recall in all the rounds. The paper decomposes the factors effecting cereal consumption in rural and urban regions and across different expenditure groups.

A multi-stage (two-stage) budgeting framework is used to model the consumption behaviour of households. Earlier this model has been applied by Dey (2000), Kumar and Dey (2004) and Kumar et al (2005) for fisheries. The model is an extension of the “Almost Idle Demand System”. The model gives away the assumption of linearity in the expenditure function and assumes there is a non-linear relationship between income and expenditure. A quadratic equation is used as a specific case rather than a non-linear function. The model is quadratic in per capita expenditure and is thus named as the QUAIDS model.

In the first stage, the household makes decisions on how much of its total income (expenditure) is to be allocated for food consumption, conditional on the consumption of non-food goods and household and demographic characteristics. In the second stage, the household allocates the total food expenditure among different items/ groups (rice, wheat, coarse cereals, pulses, milk, edible oils, vegetables, fruits, meat, fish, eggs, sugar, other food, and nonfood). Following Blundell et al (1993), Dey (2000) and Kumar and Dey (2004), the specific functional form used in the two stages are as follows:

Stage 1: Food Expenditure Function

Ln(M) =α + γ1Ln(Pf)+ γ2Ln(Pnf)+ β0Ln(Y)

+ β1(lnY)2 + ΣθjZ …(1)

where M is the per capita food expenditure; Y is the per capita total expenditure (income); Pf is the household specific price index for food; Pnf is price index of nonfood. Socio-demographic and conditioning variables (vector Z) include the ratio of adults in the household, family size, and urban dummy. Equation 1 was estimated by the OLS method, and homogeneity of degree zero in prices and income was imposed by restricting γ1 + γ2+ β0 +2β1 Ln(Y) = 0 at the sample mean of Ln(Y).

Stage 2: Quadratic-AIDS (QUAIDS) Model

In stage 2 of the analysis, the quadratic extension to Deaton and Muellbauer’s (1980) almost ideal model (QUAIDS) for the food demand system will be used. This model is quite popular and was adopted recently by Meenakshi and Ray (1999) for the India food model, Dey (2000) for the fish demand model of Bangladesh and Kumar and Dey (2004) for the fish

j

+ diUrban + ΣeikIMRk …(2)k

It is observed by different studies that the share of the budget allocated to food in total household expenditure has declined over time. The factors accounting for this change are explained through stage 1 of the decomposition model. The factors are decomposed for changes in per capita budget expenditure on food. The own price effect has a positive sign because as food becomes relatively expensive, the expenditure on food items increases. On the other hand, the substitution price effect sign is negative. This implies that as nonfood items become relatively cheaper than food items, consumers tend to shift some part of their expenditure on food to nonfood products. Table 2 shows that for very poor rural households, with a 1 per cent increase in the price of food, the budget expenditure on food increases by 0.21 per cent while with a decline in the price of non- food items, the budget allocated to food increases by 0.75 per cent. Thus as food becomes relatively expensive, its share in the budget expenditure increases. The income effect is positive for poor and very poor groups but negative for the upper two income groups. This is true for both rural and urban regions. The extra real income is net of the own price effect and substitution price effect. With an increase in real income, the poor and very poor groups increase their budget allocated to food while the non-poor and rich shift away budget expenditure from food as their income levels increase. As observed in Table 2, taste and preferences play an important role in favour of expenditure on food items for all the groups but its magnitude is much higher in poor groups than non-poor groups.

In stage 2 of the decomposition model, the factors affecting share of per capita cereal in total food expenditure is also decomposed into price effects, income effect and taste and preferences. Own price and substitution price have expected signs, thus as cereals become relatively expensive to their substitute, there is a shift away from cereal consumption.4 The food groups included as substitutes to cereals are pulses, fruits and vegetables, milk, edible oil, sugar and meat, fish and egg. The substitution effect is the net effect of all these food items. For the very poor group, the magnitude of own price effect and substitution price effect is same, thus the net change in share of cereals in total food consumption remains same for this group in spite of price change. Income has a positive effect on the share of cereal consumption in lower expenditure groups. In the poorest expenditure group extra income will lead to purchase of more cereals. The income effect is negative for non-poor and rich groups. This implies that as income rises, the poor continue to consume more cereals but after a certain income level they shift away from cereals to their substitutes. With time, the taste and preferences of households change, which leads to the decline in the share of cereal consumption in total food expenditure by all expenditure groups. The change in the share of cereals may tend to be zero with time but total cereal consumption would not be zero. The magnitude of this decline is higher for the poorest group, which implies that with time, preferences are shifting away from cereal consumption. This is due to the increased availability of cereal substitutes in nearby markets, urbanisation and demonstration effect. In the last two decades, with the development of rural markets, rural regions as well as the poor sections of society have found that various cereal substitutes are available at relatively cheaper prices. There are factors like urbanisation, development of market infrastructure, demonstration effect, eating out, etc, which cannot be quantified in the total estimated change. The total estimated change might not be equal to the observed change in consumption. Thus the difference in the estimated changes and observed changes gives the magnitude of these unexplained factors.

Implication

There is an ongoing debate that the decline in cereal consumption is an indicator of the lack of purchasing power and increasing poverty. The analysis presented above contradicts this argument. Studies have shown that over time, the decline in cereal consumption in the consumption bundle is accounted for by an increase in the consumption of high value commodities like fruits and vegetables, meat products and milk [Rao 2000; Kumar and Mathur 1996]. Thus, when a complete food consumption picture is taken into view, it is very well evident that a decline in cereal consumption is due to the diversification of the consumption bundle. This diversification has made even the poorest

Table 2: Stage Decomposition of Change in Cereal Consumption, 1983-99

(In per cent)

Economic and Political Weekly February 3, 2007

household better off, due to the addition of high value food in the basket. This diversification can also be taken as an indicator of improvement in the quality of life. At the household level, food security refers to the ability of the household to secure adequate food to meet the dietary needs of all the members of the household. Thus, a lack of purchasing power would not have enabled very poor households to consume non-cereal high value food items. It is the taste and preferences as well as the non-price unexplained factors that are really responsible for the decline in cereal consumption for poor households.

If the decline in cereal consumption is taken as a measure of increasing poverty and malnutrition, then this effect is more due to the increase in relative prices of cereals vis-a-vis other food commodities, rather than worsening income levels. Ravallion (1990) states that the positive correlation between food prices and poverty is not an income distribution effect. Rather it appears to be due to covariant fluctuations between average consumption and food prices due to other variables including food supply, bad agriculture year, lower rural living standards and increase in food prices. In other words, rural poverty increases when foods prices rise and not because rural income distribution worsens, but rather, because rural average income declines. Thus, as income increased and non-cereal food items became relatively cheap in the last few years, the consumption of high value commodities increased. This can also be viewed as an increase in the welfare of the very poor group, due to the diversification of their consumption bundle with the addition of food items that were considered almost luxury commodities for them earlier.