The general perception about India’s rapid economic growth is that its main reason is government capital expenditure, but a recent report questions such rhetoric.
Besides, this also undermines the role of rapidly increasing consumer consumption in the country. Here are some facts related to the debate on government investment versus consumer consumption.
pace of economy
India is the fastest growing large economy in the world. Its GDP will grow at the rate of seven percent in the financial year 2022-23.
However, the country’s economy is growing at an even faster pace in the recently concluded financial year 2023-24. GDP expansion in the first three quarters stood at 8.2%, 8.1% and 8.4% respectively. The government estimates the growth rate for the full year to be 7.6%.
In comparison, other major economies are projected to grow much slower this year. According to the International Monetary Fund, China’s GDP is expected to grow by 4.6%, the US by 2.1%, France by 1%, Japan by 0.9% and the UK by 0.6%.
growth promoting factors
As three of the four engines of economic growth—public consumption, exports and private investment—slow down, the fourth engine, public investment, is powering India’s growth.
The Center has been spending heavily on capital expenditure to boost the economy and revive private investment.
Its budgeted capital expenditure has doubled from 1.7% of GDP in FY19 to 3.4% in FY24-25.
Apart from this, states have also been encouraged to spend more on capital expenditure. Experts say that due to this large-scale spending, GDP growth has accelerated.
He says that private investment is also showing signs of getting back on track.
How much agreement is there with this point of view?
Not at all, in a recent report, global financial services major HSBC argues that India’s strong GDP growth is not driven by public investment—it is largely capital expenditure.
Rather, it is due to consumption, which the study claims is much stronger than the GDP figures. It also raised questions on the issue that there are signs of revival in private investment.
basis of argument
The report says the impact of public spending has been overstated. While, the Centre’s capital expenditure has increased rapidly, investment by Central Public Sector Enterprises has declined.
Overall, capital expenditure by the Center and CPSEs has declined from 4.9% in FY20 to 3.9% of GDP in FY24.
It says that GDP underestimates data consumption. The rationale behind this is that imports of consumer goods are 30% higher than pre-pandemic levels, personal service consumption is strong and personal loans are growing faster than housing loans.
Impact on GDP figures
Increase in consumption will not increase GDP growth. Instead, there will be a reallocation between investment and consumption in future revisions of GDP data.
If this happens, the gap between investment and consumption will now reduce from six percentage points to two percentage points, in line with the long-term average.
This would be a better balance. The report also said higher consumption due to lower cost of imports from China and softening commodity prices did not trigger core inflation.