Estimation of Commodity Group Expenditure Elasticities for the Indian Economy

Abstract

Elasticity is a number that tells us the percentage change that occurs in one variable in response to a one per cent increase in another variable, and hence, we need some accurate method of comparing elasticities of consumption expenditure for different commodity groups. An attempt is made in the present study to estimate the expenditure elasticities of commodity groups comprising of durables, non-durables and services in the Indian economy during the period from 1950-51 to 2007-08 with two sub-periods, viz. 1950-51 to 1989-90 (pre-reform period) and 1990-91 to 2007-08 (post-reform period) at 1999-00 prices. The expenditure elasticity estimated during the period of the study reveals that the demand for non-durables, primarily consisting of food commodity groups was found to be less than unity confirmed the well-known Engel's law. Very high elasticities of expenditure, with more than unity found in commodity groups consisting of durables and services have turned out to be luxuries or ultra-superior commodities. The proportion of expenditure incurred on these goods has increased as total expenditure increased and aligned with Engel's law.