Economics assignment II: Analysis of the

consumption pattern of average Nepali after

country turned republic

Submitted by: Bindu Gaire Sharma

Roll no: 20328
List of Figures

Figure 1 Gross National Income (in USD) 4

Figure 2 Trend in National Disposable Income from 2008-2019 5

Figure 3 Percentage change in Private Consumption Expenditure of Nepali from 2010 to 2019 6

Figure 4 Household (Private) Consumption of Nepal as a % of GDP 6

Figure 5 Average Per Capita Consumption as per Annual Household Surveys 9

List of Tables

Table 1 National Disposable Income (in Rs.) 5

Table 2 Consumption Pattern per capita as per Household Budget Survey 2014-15 8

Table 3 Annual Consumption Per Capita of Nepali as per Annual Household Surveys 8

Abbreviations

FY= Fiscal Year

GDP= Gross Domestic Product
GNI= Gross National Income

Introduction
Consumption function in economics is the relationship between consumer spending and the
various factors that are determining it. At the household or family level, these factors may
include income, wealth, expectations about the level and riskiness of future income or wealth,
interest rates, age, education, and family size. Consumption is an important concept both at
household and economic level. Household consumption is the spending of income to satisfy their
needs and wants. All durable and nondurable goods come under the category of the household
consumption. Consumption is considered as a fundamental determinant of welfare for any
economy. It reflects several important characteristics of an economy including affordability,
inequality and more. Consumer spending at macro level is an important factor that reflects the
growth environment and can stimulate the economic growth and development through the
multiplier process. Similarly, consumption behavior is one of the true measures of a society’s
economic, political and social conditions at a given point of time or over time capturing various
interconnected issues. In the context of Nepal, consumption expenditure has been increasing
rapidly. According to the NRB reports, the proportion of Nepal total consumption to GDP has
exceeded 85% on average over past 10 years and includes around 75% the household
consumption [ CITATION NRB19 \l 1033 ]. So, it can be said that Nepal is a country with
consumption as its man body.

In Nepal, May 28 marks Republic Day, commemorating the date in 2008 when an elected
Constituent Assembly brought an end to the country’s centuries-old monarchy and declared it a
federal, democratic republic. Following the declaration of the republic, Nepal’s GDP grew
slowly but steadily until 2014. The country faced an economic slowdown in 2015-16 due to an
earthquake that devastated rural areas, but growth has since rebounded with increased aid and
other spending for reconstruction. Similarly, Nepal has experienced growth in household income
over past ten years. This has been accompanied by both consumption growth and rise in the
saving rate. The consumption pattern in Nepal has improved over the years for various reasons
such as increase in incomes and more availability of different kinds of goods and services. A
growing number of Nepali migrants working abroad has significantly contributed to the
country’s Gross National Product (GNP) and has also become an important source of foreign
exchange earnings. Furthermore, remittance income has also significantly contributed to
maintaining household consumption and coping with economic shocks; Remittance income
seems to reshape the household demands without any effect of the total income[ CITATION
Tha17 \l 1033 ]

Income

Income is a key determinant of households’ consumption and saving behavior. If households’

propensities to consume and save vary with income, then aggregate consumption and saving at
any point in time will depend on the distribution of household income. In addition, changes in
the distribution of household income over time will affect the growth rates of aggregate
consumption and saving, relative to what they might have been had the distribution of income
remained unchanged. After the country became republic, disposable incomes in Nepal have
averaged annual growth of 14 per cent, and in 11 years (2007-2019) the disposable income has
increased by more than 300%. With the increase in the disposable income, the households now
have more money to either save or spend, which naturally leads to a growth in consumption.

Gross National Income per capita (in US $)

1200
1090
1000 970
860
800 770 780 770
750
700
600 610
540
480
400430

200

0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Figure 1 Gross National Income (in USD) (source: World Bank)

From the figure 1 we can see that, the per capita income of Nepalese has increased significantly
after the country became republic. The GNI per capita was around $300 before 2008, and at
present it has tripled to the income before 2008. This rising trend in per capita income has
contributed to increase in average consumption expenditure of Nepalese household and
individuals.
 Fiscal Year National Disposable Income ( Rs. in billion) Percentage change
2008/9 1252.552 24.5
2009/10 1485.444 17.2
2010/11 1684.838 13.4
2011/12 1962.407 16.8
2012/13 2203.422 12.3
2013/14 2605.880 18.1
2014/15 2864.67 9
2015/16 3,059.62 6.4
2016/17 3525.39 15
2017/18 3918.32 10.1
2018/19 4569.46 16.6
Table 1 National Disposable Income (in Rs.)

5000
4500
4000
3500
3000
2500
National Disposable Income ( Rs. in
2000 billion)
1500
1000
500
0
/9 10 11 12 13 14 15 16 17 18 19
008
09/ 10/ 11/ 12/ 13/ 14/ 15/ 16/ 17/ 18/
2 20 20 20 20 20 20 20 20 20 20

Figure 2 Trend in National Disposable Income from 2008-2019

Average Consumption Pattern of Nepali as per the Economic Survey (2008-2019)

 % change in Private Consumption Expenditure of Nepal
22.6

15.0
9.9 10.3
6.1
3.9 4.6
2.0 1.5 1.7
0.0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Figure 3 Percentage change in Private Consumption Expenditure of Nepali from 2010 to 2019
(Source:CEIC)

Figure 3 shows the change in private consumption expenditure of average Nepali from previous
year. The consumption increased at increasing rate in 2010 but after that it started to increase at
decreasing rate in 2012. Then after, every year the consumption expenditure is either increasing
at increasing rate or increasing at decreasing rate.

Priv ate consumpti on as a % of GDP

84.41
79.79 78.56 76.46 78.25 79.51 77.8 79.88
75.36 71.73 69.46

2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/2020

Figure 4 Household (Private) Consumption of Nepal as a % of GDP

(Source: CEIC)

The figure above show that the household consumption of Nepal as a percentage of the GDP of
the country. We can see that almost each year the household consumption consist of at least 70
percent of the total GDP of Nepal. The consumption was highest on the FY 2016/17 and lowest
on FY 2019/2020 after the country became republic. Even though the consumption covers the
major chunk of GDP, in past few years we can see the decreasing trend in the consumption
expenditure of Average Nepali. This could be because as the per capita income is increasing,
people are relatively reducing the consumption expenditure over time.
In 2008, the private consumption was around 80% of the GDP with food occupying 60% of the
consumption expenditure. In 2009, 57.4% of consumption expenditure were spent on food.
Observation of consumption pattern of the government and the private sector during the past two
years shows no noticeable change in the consumption pattern in the private sector with food
items still heavily weighing on gross consumption. The consumption expenditure on food
declined to 54% on the FY 2010/11. The private consumption consisted of 55.6 % and 65.7% of
shares of food In FY 2011/12 and 2012/13. As per the Economic survey 2017/18, the food
consumption had covered almost two-third of the total private consumption (64.5%) of that fiscal
year. similarly, non-foodstuff and services accounted for 25.5% and 10% respectively in FY
2017/18. In FY 2018/19, the share of food items, non-food items and services in total private
consumption consists of 63.6 percent, 26.2 percent and 10.2 percent respectively. In the last few
years, the share of food consumption in the total private consumption has been decreased. But,
still the consumption pattern shows that an average Nepali uses more than half of his
consumption expenditure on food. Slowly, the private consumption basket of average Nepali will
consist of different items not just the basic goods and services.

Consumption pattern as per Household budget survey

The Fifth Household Budget Survey was conducted from February 2014 through February 2015
with a focus on identifying the consumption pattern of Nepalese households and to track the
consumption pattern of Nepalese household of past ten years. As per the Survey, by 2014-15, the
average monthly household income was Rs. 30,121 and per capita monthly household income
was Rs. 6,729. The main source for income were salary, wages, pension, business income and
remittance. At national level, the average monthly expenditure of Nepalese households was Rs.
25,928 of which Rs. 23,883 was consumption expenditure and Rs. 2,045 was non-consumption
expenditure. The food and beverage items accounted for 43.43 percent of consumption
expenditure and the share of non-food and service items was 56.57 percent. Under the food and
beverage, food and non-alcoholic beverage accounted for 39.46 percent of the consumption,
other expenditure included alcoholic and tobacco items and restaurant and hotel expenses. Under
non-food most expenditure consisted of clothing, housing and utilities, furnishing, health,
transportation, education and communication. Rural Nepal had higher expenses on food
consumption than urban area and on geographical basis mountain region people had
consumption expenditure of 57.58 percent.

Place Average monthly per capita Average monthly per capita Food (%) Non-food (%)
income expenditure (Rs.)
(Rs.)
Urban 6,041 5,449 40.48 59.52
Rural 7,332 4,118 47.82 52.58
Nepal 6,729 4,823 43.43 56.57
Table 2 Consumption Pattern per capita as per Household Budget Survey 2014-15

Average Per Capita Consumption on the basis of Annual Household Survey (2012-2017)

According to the Annual household survey 2015-16 by the Government of Nepal, the average size
of family in Nepal is 4.6 people. The changes in the structure and the level of consumption
expenditure of average Nepali as per the survey over past few years is shown in the table below:

Annual
Household survey Average Annual Consumption per capita (in
Rs.)
Urban Rural Ratio Total Food Non-food
2012-13 - - - 44,596 26,400 18,196
2013-14 122,145 50,173 2.4 62,432 31,008 24,341
2014-15 100,323 49,414 1.8 64,941 33,090 24,430
2015-16 1,01,659 52,207 2 70,680 33,085 24,137
2016-17 103,146 64,701 1.6 80,807 34,978 26,839

Table 3 Annual Consumption Per Capita of Nepali as per Annual Household Surveys
 an n u al ave r age P e r cap i t a co n su m p ti o n (i n Rs)
90000 80,807
80000 70,680
70000 62,432 64,941
60000
44,596
50000
40000
30000
20000
10000
0
2 0 1 2 /1 3 2 0 1 3 /1 4 2 0 1 4 /1 5 2 0 1 5 /1 6 2 0 1 6 /1 7

Figure 5 Average Per Capita Consumption as per Annual Household Surveys

Table 3 shows the various consumption data of average Nepali from 2012 to 2017. From above
annual consumption per capita data we can see that the average consumption of average Nepali
is in increasing trend. The average consumption which was Rs.44, 596 in year 2012-13 has
increased to Rs. 80,807 by year 2017 (81 percent in 5 years). Similarly we can see that the
average consumption of urban Nepali is in decreasing trend which means that the people in rural
area are reducing their consumption and may be increasing their savings. In context of rural
Nepali, the average consumption has an increasing trend. As year passes by, rural people are
spending more on consumption. Even though the average consumption pattern of urban Nepalese
is in decreasing trend it is still much more (on average around 1.5 times) than the average
consumption of the rural Nepalese. Talking about the composition of the annual consumption,
consumption of food accounts for more than half of the per capital consumption of an average
Nepali in almost all years from 2012—2017. The rural household tend to spend more on food
consumption compared to household in urban area.

From the annual household surveys of Nepal we can see that in food consumption expenditure,
the largest share is for grain and cereals followed by meat and fish and vegetable. Similarly, in
non-food largest spending on all these years goes for education expenditure and medical
expenditure. Taking about the adequacy of food consumption, on average 60 percent of the total
household still have inadequate food consumption and around 10 percent on average have poor
dietary diversity.
Conclusion

The analysis of consumption pattern after Nepal being republic shows that the consumption
expenditure of average Nepali shows an upward trend in past few years and also suggests that
Nepal is experiencing a significant transition in terms of consumption behavior of goods and
services as reflected from the Household and Economic Survey data. It is moving towards a
more mature consumption phase where the proportion of basic goods and services do not
constitute whole of the consumption basket any further. People are gradually reducing the
spending on food consumption and are likely to spend more on non-food stuff on coming days.
However, it is important to remember that this analysis does not reflect the exact reason why
people are changing their consumption pattern. The change in consumption may be due to the
increase in the per capita income of Nepalese as the per capita income of Nepali is rising
constantly over last 11 years. Another reason behind the rise in expenditure may be because of
large flow of remittance in almost every household of Nepal or may be due to political-economic
change bought by the republic Nepal. However, we can see the consumption pattern of Nepal in
last 2-3 years showing a declining trend

In the last few years, we can also see saving been increased among Nepali due to increase in
income level and attractive interest rate offered by banks and financial institutions for the
deposits. Over the last ten years, the annual average ratio of gross domestic saving and gross
national saving to GDP has been 12.4 percent and 42.9 percent respectively.
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