Consumption is limping, Investment is crying; can government spending propel economic growth?

The two major components of economy are Private Final Consumption Expenditure & Gross fixed capital formation or Investments which account for 88 per cent share of GDP. Both are in a sorry state

Photo Courtesy: Social Media 
Photo Courtesy: Social Media
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V Venkateswara Rao

In economics, the final users of goods and services are divided into three main groups: households, businesses and the government. One way Gross Domestic Product (GDP) is calculated - known as the expenditure approach - is by adding the expenditures made by those three groups of users. Accordingly, GDP is defined by the following formula:

GDP = Consumption + Investment + Government Spending + Net Exports or more succinctly as GDP = C + I + G + NX where consumption (C) represents private consumption expenditures by households and non-profit organisations, investment (I) refers to business expenditures by businesses and home purchases by households, government spending (G) denotes expenditures on goods and services by the government, and net exports (NX) represents a nation’s exports minus its imports.

The idea behind the expenditure approach of calculating GDP is that the output that is produced in an economy has to be consumed by final users which are either households, businesses or the government. Therefore, the sum of all the expenditures by these different groups should equal total output i.e. GDP.

The recently released advance estimate of GDP for FY 2019-20 by the Central Statistical Office (CSO) has estimated that the economy will grow at 5 per cent in real terms (deflated for the base year prices) during the current fiscal year. This estimated 5 per cent real GDP growth rate can be fitted in the above formula of expenditure approach, as per the break-up given below.

GDP = C + I + G + NX

5% = 5.8% + 1% + 10.5% + 1.1%

Private Final Consumption Expenditure (C), which is the prime driver of the economy with about 60 per cent share in GDP, is likely to grow at 5.8 per cent in this fiscal year, down from 8.1 per cent recorded in the previous year.

Gross fixed capital formation (I), a measure of investments, is estimated to rise by less than 1 per cent in FY'20, a collapse from near about 10 per cent rise recorded in FY'19. Gross fixed capital formation or investment consumption is another major component of economy with almost 28 per cent share in GDP.

Government Final Consumption Expenditure (G) is the only engine of growth for the economy, showing 10.5 per cent growth in FY'20 against 9.2 per cent growth recorded last year. Government Expenditure has a significant share of 12 per cent in the total GDP. This is the only engine which is firing the economy. But it is a borrowed engine as government is funding its expenditure with more and more borrowings.

The share of Net Exports (in fact Net Imports, as imports are higher than exports) (NX) in the economy is insignificant.

The estimated real GDP growth rate of 5 per cent in this fiscal, is the lowest in last 11 years since the global financial crisis in 2008-2009, and is down from 6.8 per cent growth rate recorded in the last year. Government Expenditure (G) has contributed a significant 1.3 per cent to this 5 per cent GDP growth rate. In view of lower tax receipts and disinvestment proceeds, some analysts expect that the government may significantly curtail its expenditure in the last quarter of this fiscal year.

Hence Government Final Consumption Expenditure (G) may grow at lesser than the projected 10.5 per cent rate in this fiscal year and the overall GDP growth rate may be much lesser than the estimated 5 per cent.

The estimated Nominal GDP growth rate for the current fiscal year at 7.5 per cent is the worst since 1978, lowest in 42 years. It is substantially lower than the 12 per cent Nominal GDP growth rate the government had factored in while projecting tax collections in the Union Budget.

The Per Capita Income in real terms (at base year 2011-12 prices) during FY 2019-20 is likely to attain a level of Rs 96,563 as compared to Rs 92,565 for the year 2018-19. The growth rate in Per Capita Income is estimated at 4.3 per cent during 2019-20 (much lower than the GDP growth rate of 5 per cent, due to higher growth rate contributed by government expenditure), and also much lower than the 5.6 per cent growth recorded in the previous year.

The two major components of economy are Private Final Consumption Expenditure (C) and Gross fixed capital formation or Investments (I), which together account for 88 per cent share of GDP.

'C' is limping, 'I' is crying and 'G' is in a celebratory mood.

(V Venkateswara Rao is a retired corporate professional and a freelance writer)

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