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GDP GROWTH ROBUST, BUT SLUGGISH CONSUMPTION IS WORRISOME

Relevance: GS 3 – Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.  Inclusive growth and issues arising from it.

 Why in the News?

• The growth rate of 4% of India’s GDP in the October-December quarter of the 2023-24 fiscal year has been widely celebrated by the country’s leaders.
• It is seen as a positive indicator of India’s strength on its path towards “Vikrit Bharat.”
• However, many statisticians and economists are advocating for a more nuanced interpretation of the data.
• They suggest avoiding a simplistic acceptance of the new data without deeper analysis.

Consumption Expenditure

• Private Final Consumption Expenditure (PFCE):
  • The overall private final consumption expenditure (PFCE), a crucial driver of demand, grew by only 3.5% during the quarter.
  • This growth rate is described as the slowest in a couple of decades, indicating subdued consumer demand overall.
• Government’s Consumption Expenditure:
  • The government’s final consumption expenditure saw a decrease of 3.2%.
  • This decline in government spending is concerning and contrasts with the growth in capital investment.

Overall Growth Figure

• The overall growth figure surpassed the expectations of many economists, including the Reserve Bank of India’s projection of 6.5% growth.
• The high figure of 8.4% growth was partly influenced by the lower base effect, as the growth rate for the same quarter of the previous fiscal year (2022-23) was revised downward by 0.2%.
• Revisions in the growth rate for the current year are anticipated, indicating that the full story of economic performance is yet to unfold.

Divergence in Growth Rates

• There is a disparity between two growth rates:
  • one calculated using the GDP route
  • other using the GVA (gross value added) route.
• While GDP grew by 8.4%, GVA grew by 6.5%, prompting questions about potential overstatement of the GDP figure.

Manufacturing Sector

• The manufacturing sector has shown remarkable growth, increasing by a record 11.6%.
• Historically lagging behind global leaders like the US and China, this performance suggests progress.
• The growth is attributed to the production-linked incentive scheme aimed at bolstering domestic manufacturing.

Construction Sector

• The construction sector has also performed well, growing by 9.5%.
• Strong construction activity translates to increased job opportunities, particularly for the least skilled workers.
• This is significant for farmhands who often migrate to urban areas in search of employment.

Agricultural Sector

• The agricultural sector, however, experienced a setback, contracting by 0.8%.
• Nearly half of the country’s workforce is engaged in agriculture and allied sectors, making this decline concerning.
• Negative growth in agriculture leads to reduced earnings in the farming community, affecting consumption demand and impacting FMCG companies.
• Agricultural Outlook:
  • Agricultural activity is currently lackluster, necessitating improvement.
  • The government is banking on a healthy rabi harvest and the anticipated decline of the El Nino effect, which should lead to a promising monsoon and advancement in the main kharif crop.

Capital Investment

• Gross fixed capital formation, indicating capital investment in areas like plants and machinery, grew by a healthy 10.6%.
• This suggests that while capital investment is robust, government spending on itself and subsidies has reduced, with a notable 54% drop in subsidies in the third quarter.

Calculation of GDP

• GDP is derived by adding taxes and subtracting subsidies from the total value of output (goods and services) measured by GVA.
• The high GDP figure was influenced by a significant increase in net taxes, estimated to have grown by 32% in the third quarter of the current fiscal year.
• Meanwhile, the reduction in subsidies was primarily due to decreased outgo on fertilizers.

Concerns about Weak PFCE

• Economists are troubled by the weak private final consumption expenditure (PFCE), indicating subdued demand.
• This is expected to lead to weak demand for micro, small, and medium enterprises (MSMEs), discouraging them from investing.
• Currently, most private capital expenditure is undertaken by the corporate sector, which has easy access to institutional finance, unlike MSMEs relying on non-institutional financiers or moneylenders.
• Government’s Expectations and Expert Views
  • The government anticipates the private sector to drive capital investment.
  • However, with investment growth rate around 32%, experts project an overall economic growth rate not exceeding 6-6.5%.

Role of PFCE in Investment

• To stimulate investment across various sectors, including infrastructure like roads and bridges, the critical factor is Private Final Consumption Expenditure (PFCE).
• Consumption acts as the driving force for growth, with investment following consumption trends.
• Together, investment and consumption constitute about 80% of GDP.
• Presently, both FMCG corporates and MSMEs are grappling with challenges arising from low PFCE, leading to weak demand for regular consumption items and high demand for premium products.

Challenges to Higher Investment

• The current economic scenario does not indicate a conducive environment for increased investment, which is crucial for achieving the goal of per capita income growth averaging 9.1% over the next two decades to propel India towards becoming a developed nation by 2047 (‘Viksit Bharat’).
• Addressing the issue of low gross value addition in Indian agriculture is imperative to enhance agricultural productivity, thereby improving rural private consumption.

Impact on Labor Dynamics

• Enhancing agricultural productivity not only boosts returns from agriculture but also frees up farm labor for employment in urban areas, particularly in low-skilled jobs like those in the construction sector.
• Skilled workers such as carpenters, plumbers, and electricians are exploring opportunities abroad, particularly in West Asia, contributing to India’s reliance on remittances from overseas workers.
• Additionally, there is a growing demand for skilled workers from countries like Taiwan, which are grappling with declining birth rates, further highlighting India’s potential dependence on remittances.

Source: https://www.tribuneindia.com/news/comment/gdp-growth-robust-but-sluggish-consumption-is-worrisome-597533

Mains question

In light of the recent economic trends in India, critically analyze the interplay between Consumption Expenditure of Private and Government and their impact on the nation’s path to economic development. (250 words)