Sustaining Higher Growth Needs Consumer Spending Push

The economic data for the second quarter i.e. the period from July till September was published by the government on November 30. These are called quick estimates of the national economic output. They are provided for two broad sets of output numbers, namely Gross Value Added (GVA) and Gross Domestic Product (GDP). The former is a measure of value added by each individual producer, or sector or industry to the economy. It is of course measured across all producers, be they farmers, small entrepreneurs or large companies. GVA thus measures the value added in converting inputs to outputs. The latter, i.e. GDP is the value of goods and services produced within a given period, which could be annual GDP or quarterly GDP. It is measured in three different ways. Either as value of all production, or of all expenditure or of all incomes. All three give the same result, since the total value of what is sold also represents income to those producing what is sold. The only difference between GVA and GDP is taxes paid or subsidies received. Usually, GDP always exceeds GVA since the government imposes net taxes whose collection is higher than the subsidies that it pays out.

The GDP for the July to September period measured in current prices was 72 lakh crores compared to 66 lakh crores for the same period last year. GVA for the corresponding two quarters of this and the previous year was 64 and 59 lakh crores respectively. At this quarterly rate, the annual GDP in current prices will likely reach 300 lakh crore during this fiscal year. This would be three times, or 200 percent higher than what it was ten years ago in 2012.

These same numbers for GDP and GVA need to be examined by removing the impact of rising prices. Since inflation for the past four years on average has been clocking close to 5 percent, the expansion in GDP or GVA measured in current prices is not the “real” picture as it has an “inflated” component. Removing the inflation effect the real growth of GDP is 7.6 percent during the second quarter, which is higher than last year’s 6.2 percent. This is quite heartening.

If we take both the quarters of this year together, i.e. the period April to September, GDP has expanded by 7.7 percent in real terms. At this rate GDP growth for the full year would definitely cross 7 percent and put India among the fastest growing large economies of the world. To achieve this at a time of turmoil caused by wars, inflation, supply chain disruptions, geopolitical tensions and uncertainty is a very impressive achievement.

Hence, we need to examine three things. Firstly, what is driving this GDP growth. Secondly, whether it is sustainable in the medium to long term. And thirdly how are the benefits of GDP growth translating as gains for different sections of the people, their livelihoods, incomes and employment.

The answer to the first question is that government and investment spending has risen much faster than consumer spending. Keep in mind that government spending makes up 10 percent and investment spending (also called capital formation) makes up 30 percent. The rest is consumption spending, which has the lion’s share. Net exports are barely 1 or 1.5 percent currently. Government spending during the latest quarter of July to September grew at a rate of 19 percent compared to a year ago. These were 7 lakh crore this quarter as against 5.9 lakh crore in the same period last year. Similarly, investment spending rose at an impressive 13 percent over last year, growing to 21.5 lakh crore from 19.1 lakh crore last year. So clearly these two are driving the growth rate at a spectacular pace. On the other hand, consumer spending rose by just 8 percent this quarter compared to last year. All these are nominal numbers, not adjusted for impact of inflation and rising prices.

If you correct for inflation then consumer spending is rising only at around 3 percent, and this makes up 60 percent of GDP. If real GDP growth is to maintain a pace of 7 percent in the medium term, the consumer spending component has to grow at close to 6 or 7 percent itself. It means doubling the rate at which it grew (in real terms) during the latest quarter of July to September. Consumer spending momentum can be maintained if there is commensurate growth in employment, wages, and in retail loans. The latter includes housing loans which can be a significant contributor to growth. High inflation can adversely affect consumer sentiment, as people cut down spending on discretionary items. Investment spending is picking up which is a very good sign. It should have an increasing component of private capital spending and should not only depend on government spending on infrastructure. The government providing a fiscal fillip is constrained by the deficit situation. So that will need to be controlled. On a half yearly basis, the government component of GDP (at current prices) rose at 9 percent only slightly higher than the consumer spending component. Even then since we are approaching the national elections of 2024, the government’s capex push is likely to accelerate during this fiscal year which will provide additional strength to GDP growth.

Whether 7 or 7.5 percent can be sustained in the medium to long term depends on consistency of growth in consumer and investment spending. India is attracting large investment flows, and many sectors have a very positive growth outlook. Hence sustaining growth only needs price and policy stability and fiscal prudence. As for the third question of how the benefits of growth are translating to different sections of society, we will need more microeconomic data from surveys. The Periodic Labour Force Survey (PLFS) is indicating rising employment numbers and higher labour force participation rates, both by men and women. The growth in real wage rates needs to be confirmed.

Since the present rate of growth in consumer spending is low, it implies that incomes of workers are not rising fast enough, even if wages are rising. The RBI consumer sentiment survey is also a useful guide. Here too lowered inflation expectations will help boost consumer confidence. Typically, higher income households tend to have a much higher proportion of savings, and hence sustained growth in consumer spending requires the gains of growth to be spread across all income categories. This is something we need to watch. The news on the economy is getting better and it is imperative that economic policy ensures that the growth process is truly inclusive.

(Dr. Ajit Ranade is a noted economist)

(Syndicate: The Billion Press)